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Countdown to the Companies Act 2014: Day8


Wednesday, May 27, 2015

There are now 3 working days until the Companies Act 2014 (the “Act”) comes into force in Ireland. The Act will radically change the existing legal framework for companies in Ireland. Each day, we will provide you with a snapshot of key changes to consider in advance of the Act commencing on June 1st.

 

The Summary Approval Procedure

The Summary Approval Procedure (‘SAP’) contained in Chapter 7 of the Companies Act 2014 (“the Act”) is a new streamlined procedure which permits a company to carry out certain restricted activities, which would otherwise be prohibited. The procedure draws together elements from ‘whitewash’ procedures contained in earlier acts. The specified restricted activities can be validated by means of a members’ special resolution, together with a declaration of solvency given by the directors and in the case of certain activities, the report of an independent person. There are civil and criminal sanctions where directors make statutory declarations as to the company’s solvency based on unreasonable grounds.

Companies entitled to use SAP

The SAP is available to private limited companies, designated activities companies, and companies limited by guarantee. A private company which is a subsidiary of a public limited company cannot avail of the procedure. Public limited companies can only use the SAP in respect of some of the specified restricted activities.

Restricted activities affected

The SAP can be utilised to authorise the following “restricted activities”:

  1. the giving of financial assistance for the acquisition of the company’s shares;
  2. the reduction in share capital;
  3. the variation of share capital on reorganisation;
  4. domestic merger of certain Irish companies;
  5. loans to directors or connected persons;
  6. the treatment of pre-acquisition profits as profits available for distribution by a holding company; and
  7. the commencement of a members’ voluntary winding up.

 

The Procedure
The SAP varies depending on the restricted activity in question, but for the majority of restricted activities, it requires the following:

  • a declaration of solvency made in writing (the content of which varies depending on the restricted activity) by the directors at a directors’ meeting not earlier than thirty days before the meeting of members to approve the resolution or within thirty days of the last member signing a written resolution to approve the activity;
  • the declaration is sent to the members with notice of the meeting (or is appended to a written resolution where this is used);
  • the members must authorise the directors to carry out the restricted activity by way of special resolution (unanimous resolution for mergers), passed not more than twelve months prior to the commencement of the restricted activity. This twelve month period is reduced to sixty days where the restricted activity concerns the treatment of pre-acquisition profits, and to thirty days where the restricted activity concerns the treatment of pre-acquisition profits and the resolution is a unanimous written resolution; and
  • a copy of the declaration is delivered to the Registrar of Companies within twenty one days of carrying out the restricted activity (otherwise the activity is invalidated).

 

In addition to the above, the report of an independent person is required to authorise some restricted activities (reduction in share capital, variation of capital, treatment of pre-acquisition profits and a members’ winding up). The independent person must be qualified as an auditor and he/she must declare that the directors have not acted unreasonably (a departure from earlier legislation wherein the auditor had to declare that the directors acted reasonably).

 

Directors’ liability and sanctions
A liquidator, creditor, member of a company or the Office of Corporate Enforcement may apply to court to have a director made personally liable without limitation for any and all of the debts of the company where a declaration as to solvency is made without reasonable grounds. There is a presumption of unreasonableness where the company is wound up within twelve months of the date of a declaration and has unpaid debts twelve months after commencement of the winding up.

Moratorium on proceeding with restricted activity
Unless one or more members who together hold more than ninety per cent in nominal value of each class of issued shares of the company and entitled to vote at meetings of the company have voted in favour of the special resolution authorising the restricted activity, then the company shall not proceed to carry on the restricted activity until the expiry of thirty days after the passing of the resolution or until any court challenges taken under 211(3) have been dealt with. This mirrors the existing law procedures except under the existing law all of the members must have voted in favour of the resolution and not just ninety per cent.

Commentary
The new SAP streamlines a number of validation procedures contained in earlier enactments into one procedure. The new procedure should reduce the complexity, and in some cases, the cost involved for companies in approving certain corporate activities. The removal of the requirement for an auditor’s report to validate certain transaction involving directors (e.g. loans and guarantees) is a welcome reform. Under the equivalent provision of the current legislation (sections 31 and 34 of the Companies Act 1990) the whitewash procedure was effectively unavailable in practice as auditors were advised by their respective professional bodies not to give such reports.


Author

Eoghan Doyle

PARTNER


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