The Draft Companies Bill - Summary of Key Provisions
By Dr Tom Courtney, Chairman of the Company Law Review Group and partner in Arthur Cox
The Minister for Jobs, Enterprise and Innovation, Mr Richard Bruton TD recently launched the Draft Companies Bill. The proposed changes will revolutionise Irish company law and provide a state of the art company law code to users. The heads of Bill were drafted by the Company Law Review Group (CLRG) and its innovations based on its recommendations.
The publication of this first of two volumes, which is divided into 15 Parts and focuses solely on the private company limited by shares - reflecting the CLRG’s first recommendation in its First Report (31 December 2001), that "The private company limited by shares...should be the primary focus of simplification" - is a very significant step.
The private company has been the work-horse of commercial life in Ireland since that form of registered company was first permitted under the Companies Act of 1907 and today almost nine out of ten registered companies are private companies. Ironically, the current Companies Acts view the private company as a peculiar variation of the public company, giving rise to a classic case of the tail wagging the dog.
(The Companies Bill has now been published and available from www.oireachtas.ie).
Significant Changes to the Law of Private Companies
The draft Bill proposes many significant changes to the law of private companies. The main features of the new model private company and reforms provided for in Volume 1 include:
- It will be limited by shares - private companies limited by guarantee will be permitted but will be subject to the legal regime which will be prescribed for designated activity companies (DACs);
- It will have the same contractual capacity as a natural person - private companies will not have an objects clauses and so will not be subject to the doctrine of ultra vires, making it easier to transact with confidence with private companies;
- It can have only one director - in reducing the statutory minimum number of directors to one, accountability in governance will be increased as the need for passive nominee directors to make up the numbers will fall away.
- It can have up to 149 members - whilst many will be single member companies, private companies can have up to 149 members.
- It will not be permitted to list any securities, whether shares or debts - in so providing the law relating to the model private company can be kept simple; other types of private company such as DACs will continue to be allowed to list debt securities.
- It will have a one-document constitution - the memorandum and articles of association will be replaced by one document.
- The necessity for each company to have detailed specific internal regulations (in the form of articles of association) will be removed as most of the provisions commonly provided for in articles of association on the internal administration and governance of companies will be contained in the Bill and will apply to all private companies (unless their constitution provides otherwise).
- All private companies will be permitted to have "written" AGMs - where the members consent, the need for an annual physical meeting can be dispensed with.
- Directors’ common law and equitable duties will be codified - the Bill codifies directors’ duties as they have been developed by the Courts over the last one-hundred and fifty years making the law more transparent and accessible.
- One omnibus validation procedure will apply to regulated activities (e.g. transactions with directors, financial assistance, capital reduction and solvent windings up).
- Offences created by the Bill have been categorised on a scale of 1 to 4 (where 1 is the most serious) and the punishment for those found guilty of each category clearly specified - this will facilitate a far greater transparency in the criminal dimension to breaches of company law and facilitate enforcement since a clear and rational regime should be a prerequisite to zero-tolerance.
- The directors of private companies meeting certain thresholds will be required to make compliance statements in line with the more proportionate and reasonable regime recommended by the CLRG in its 2005 Report on Directors’ Compliance Statement.
- Private companies will be permitted to engage in domestic mergers along the lines which are currently only capable of being used in the case of cross-border mergers.
Other Company types
Of course there are other types of companies and the CLRG’s recommendation is that the law relating to each distinct type of company will be set out in a separate Part of the Bill. These Parts will form the basis of Volume 2 of the Bill. In those Parts, appropriate provisions from the law applicable to private companies in Parts 1 to 15 will be applied to each company type as will distinct provisions relevant only to that type of company. So public limited companies, guarantee companies, unlimited companies, designated activity companies, unregistered companies and investment companies will each have their own Part. Work continues on Volume 2 and it is expected that this will be published in approximately 12 months. (The Companies Bill has now been published and available from www.oireachtas.ie).
Part 1 - Preliminary and General
This Part is largely concerned with house-keeping, defining terms used throughout the Bill.
Part 2 - Incorporation and Registration
Part 2 fundamentally changes the law, establishing the new model private company and providing for the conversion of existing private companies.
The new model private company will have a one-document constitution rather than a memorandum and articles of association and will have "full and unlimited capacity". If people wish their private company to have a memorandum and articles of association, and objects clause, they will have to use the alternative private company to be provided for in Volume 2, the designated activity company ("DAC").
Part 2 will require that certain officers and senior employees authorised to bind the company to facilitate the conclusion of contracts be registered as being so authorised.
Part 3 - Share Capital, Shares and Certain Other Instruments
Part 3 consolidates in one place the law relating to shares and share capital.
The model private company may not offer securities, whether equity or debt, to the public in any circumstances. Private companies wishing to do this will have to re-register as DACs, having an objects clause. Thus, as it cannot make public offerings, the model company can be the subject of a less complicated regime.
A central concept in the Bill is that where a company’s constitution is silent, its internal regulations default to what is in the Bill, reducing the need for detailed provisions in companies’ constitutions.
Other significant changes include reforms relating to: the giving of financial assistance; reducing share capital; and own-share acquisition. A form of merger relief is also provided, enabling distributions of amounts that would otherwise stand as share premium following an acquisition.
Part 4 - Corporate Governance
This Part sets out in one place the law relating to the appointment and proceedings of officers (directors and secretaries) and members. In addition, it sets out the new Summary Approval Procedure whereby restricted activities can be carried out when validated.
Again, Part 4 sets out standard provisions as adopted by most companies in their articles of association, and provides that these shall apply "save to the extent that the company’s constitution provides otherwise".
Other proposed changes include permitting private companies to have only one director, and permitting majority written resolutions rather than requiring unanimity.
Part 5 - Duties of Directors and Other Officers
Under the proposed new regime, directors’ duties and requirements will apply whether directors are formally appointed or are de facto or shadow directors. The Bill will confirm that it is the duty of directors (and not company secretaries) to ensure compliance with the Companies Act, and codifies fiduciary duties deriving largely from common law and equitable principles.
Directors of private companies meeting certain thresholds will be required to prepare directors’ compliance statements, and enforcement measures are also revised and updated.
As well as largely retaining restrictions on loans, quasi-loans, credit transactions (and certain guarantees and security), new provisions seek to encourage that any loans between directors and companies be put in writing. A welcome reform provides that de minimis share interests of less than 1% need not be notified.
Part 6 - Financial Statements, Annual Return and Audit
This Part consolidates statutory provisions regarding the keeping of accounting records, and the preparation, audit and filing of financial statements
The Part clarifies key terms, and gives greater prominence to terms such as "realised profits" and "true and fair view". In addition, the obligation to deliver an annual return is removed while a company is being wound up, or being voluntarily struck off (unless it is then restored to the register). Also, thresholds for a company to qualify as small or medium-sized have been raised.
Finally, the Part will for the first time allow the preparation, audit and filing of revised financial statements, where a deficiency becomes apparent in a filed set of statutory financial statements.
Part 7 - Charges and Debentures
Part 7 consolidates and reforms the law relating to security. One change relates to the definition of "charge", in that a charge over cash will not have to be registered. A significant proposed change relating to registration is that there will be two separate procedures.
Another significant change is that where the priority of charges is not governed by some other regime (e.g. charges over land will be governed by a separate regime), priority will be determined by reference to the date of receipt by the Registrar of the prescribed particulars.
Part 8 - Receivers
The law relating to receivers will also be consolidated and reformed; one proposed change is that the powers of receivers will be enumerated in a non-exhaustive list, without prejudice to powers which may be granted by a debenture.
Part 9 - Reorganisations, Acquisitions, Mergers and Divisions
In this Part, existing means for reorganizations - Court-sanctioned schemes of arrangement and compulsory purchase of minority interests - sit alongside two new means: mergers and divisions. For the first time, a statutory mechanism is provided whereby two Irish companies (i.e. without the need for a cross-border element) can merge so that the assets and liabilities (and identity) of one are transferred to the other, before the former is dissolved. Moreover, it will be possible for an Irish company to be "divided" and its undertaking split between two other Irish companies.
It is proposed that mergers may be effected through the Summary Approval Procedure, without the need for a High Court order, saving time and money.
Part 10 - Examinerships
Part 10 follows closely the current regime on examinerships.
Part 11 - Winding Up
Part 11 consolidates and modernises the law on winding up, and reorders it in a more logically coherent way.
The Bill seeks to introduce greater consistency between the three different methods of winding up (members’ voluntary, creditors’ voluntary and official). One objective is to align Court-initiated liquidations with creditors’ voluntary windings up, to reduce the Court’s supervisory involvement.
Some other proposed reforms include: that the Director of Corporate Enforcement will have the right to petition to wind up a company on the grounds that such is in the public interest; the minimum amount of indebtedness to entitle a creditor to serve a statutory demand will be increased to €10,000; liquidators will be required to be qualified; a provisional liquidator will only have such powers as are provided for by the court order appointing him or her etc.
Part 12 - Strike Off and Restoration
The law relating to strike off will be consolidated and radically overhauled, and for the first time a statutory distinction drawn between voluntary strikeoff and involuntary strikeoff.
No significant changes are proposed in relation to restoration.
Part 13 - Investigations
The Bill proposes to substantially re-enact the law relating to the appointment of inspectors.
Part 14 - Compliance and Enforcement
This Part gathers together provisions relating to compliance and enforcement, consistent with a stricter and more transparent approach in these areas.
The Court can order that a company or officer comply with a provision of the Act; that directors not reduce their assets or remove them from the State; and that the beneficial ownership of shares be disclosed.
A significant proposed change to restriction of directors is that it will be necessary to satisfy the Court that the director has cooperated with the liquidator as far as could reasonably be expected in relation to the conduct of the winding up. The Part facilitates the giving and acceptance of restriction and disqualification undertakings from directors, which will facilitate the saving of cost and Court time.
One of the most far-reaching reforms provided for in the draft Bill concerns the streamlining of criminal offences.
Part 15 - Functions of Registrar and of Regulatory and Advisory Bodies
Provisions relating to the Registrar, the Irish Auditing and Accounting Supervisory Authority, the Director of Corporate Enforcement and the CLRG are contained in Part 15.
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