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It is perhaps not surprising that when faced with the choice of carrying on business as a sole trader or in partnership, the majority of business proprietors choose to carry on their business through the medium of a limited company. After all, it is very reassuring to know that if trouble looms, the liabilities of the business will belong to the company rather than the shareholders and directors.
The obvious advantages of incorporation and the minimal compliance cost undoubtedly helped fuel a considerable surge in company formations in the Celtic Tiger era - the number of companies stands at 143,000. This growth took place in an environment where the Irish government's focus lay predominantly on the economic and social advantages of promoting corporate expansion and inward investment, rather than on the enforcement of the strict letter of company law. But all this is about to change.
The majority of the provisions of the Company Law Enforcement Act 2001 came into force on 1 March. It is the third company law reform act of the past three years and introduces the most far-reaching overhaul of company law administration in 40 years.
The benign approach to law enforcement, which has prevailed to date, is set to become history. The 114 sections of the new act introduce a comprehensive range of measures that will ensure that shareholders and directors who benefit from the advantages of limited liability become far more accountable and responsible for the conduct of their companies. The act also has significant implications for auditors, liquidators, company secretaries, receivers and others who are involved in the administration of companies.
Prompted by the success of the Criminal Assets Bureau, the act establishes another multidisciplinary corporate law enforcement agency comprised of lawyers, police and accountants, who are presided over by the Director of Corporate Enforcement. The Director's mandate is to enforce company law and to specifically investigate and prosecute infringements of company law, or refer them to the Director of Public Prosecutions where required. The Director is being assisted in this task by a division of accountants whose task is to evaluate all reports of liquidators and receivers submitted to the Director under new requirements. This is with a view to identifying cases where proceedings will be taken against defaulting officers.
Various powers formerly vested in the Minister for Enterprise Trade and Employment under companies legislation have been transferred to the Director, together with enhanced powers of detection and prosecution.
A new concept of 'officer in default' is also introduced. Company directors will no longer be able to hide behind the defence of not knowingly or wilfully authorising or permitting their company to be in default of company law obligations. The burden of proof is now placed fairly and squarely on directors to establish that they took steps to prevent default.
A statutory duty is now placed on directors and secretaries to ensure that company legislation is complied with.
Insolvency and liquidations
All liquidators of insolvent companies are required to issue a report to the Director within six months of their appointment. This will alert the Director of any breaches of law by defunct companies. In addition, unless relieved by the Director, liquidators must make an application to court for the directors of an insolvent company to be restricted for five years from acting as directors or secretaries or being concerned in the formation of a company unless the company satisfies certain requirements. A liquidator's failure to apply for a restriction order is a criminal offence.
The much discredited rule in voluntary winding up proceedings, in which the liquidator nominated by the directors could be overturned only by a majority vote of creditors in value and in number, has been repealed. This rule was often manipulated by directors of the company to serve the personal interests of the directors. Now a majority of the creditors in value alone can overturn the directors' nominee.
Receivers to a company are required to file a statement of opinion regarding the company's solvency after the receivership.
The loophole under which abandoned companies could not be investigated has been closed. The Director may now intervene in such companies with a view to investigating the circumstances in which assets were dissipated and take action against those responsible of wrongdoing.
At present, a company must make its annual return up to a date within 14 days of its annual general meeting (AGM). However, the return is not required to be submitted to the Companies Registration Office until 60 days from the date of the AGM. In view of the fact that the law permits an AGM to be held up to nine months from the end of the financial year and allows up to 15 months to elapse between AGMs, there was considerable scope for postponing the final return date.
The link between a company's AGM and the date for filing its annual return is now abolished. From 1 March, companies have to file their annual return within 28 days of the 'annual return date'. For companies incorporated prior to 1 March the annual return date is the anniversary of the date of the most recent filed annual return. Where a company has not filed an annual return by 1 March the annual return date is six months after the anniversary of the date of incorporation, and subsequently every anniversary of that date. Companies incorporated after 1 March will have an annual return date that is 6 months after the date of incorporation and subsequently every anniversary of that date.
Accounts can no longer be affixed to an annual return if they predate the annual return by more than 9 months.
The act also introduces on-the-spot fines for late delivery of annual returns and graduated fees for filing documents in the Companies Registration Office, including daily default fees for late filing.
Auditors are required to notify the Director if there are reasonable grounds for believing that the company, officer or agent has committed an indictable offence (one to be tried before a jury) under the companies legislation.
Auditors are also required to notify the Director if, in their opinion, a company is not maintaining proper books of account.
All auditors must hold a valid practising certificate from a recognised body of accountants. And the Director is now vested with powers of supervision over auditors' conduct.
Conflicts of interest between directors and their companies
The act reforms some of the provisions of the companies legislation which prohibit a company from the following: making loans and quasi-loans to directors and connected persons; entering into credit transactions for directors and connected persons; and entering into guarantees or providing security in connection with loans, quasi-loans or credit transactions.
These provisions catch many ordinary and legitimate transactions such as property transactions between directors and their companies, and have given rise to difficulties in enabling companies and their directors to properly structure and finance their activities. But the act provides greater clarity and introduces a useful validation procedure. A company can give a guarantee or security in respect of loans, quasi-loans and credit transactions, provided that the shareholders authorise the transaction and the directors make a statutory declaration that the company will remain solvent after the event.
Company law reform
The act places the Company Law Review Group on a statutory basis. The group is charged with the task of reporting to the Irish government on company law reform. In its first report, published in February, it proposed 195 reform measures, including the abolition of the ultra vires rule for private companies (for further information consult www.clrg.org). It is anticipated that reform measurers will be enacted during the next few years, together with a consolidation of Ireland's companies legislation.
In light of the above, companies should review their affairs and ensure that they are compliant in all respects. Otherwise they should not be surprised if they receive a knock on the door from the Director.
In March, the Director published two consultation papers on the duties and powers of companies, officers, members, auditors and others and the new duty of auditors to report suspected indictable offences. These shed light on the Director's approach to how the act will be policed and enforced.
Sean Nolan is a partner at Kenny Stephenson Chapman