Part 5 – Duties of Directors and Other Officers

6 Chapters – Sections 219 to 271

Part 5 Chapter Overview

Chapter 1 – Preliminary

Chapter 2 – General duties of directors and secretaries and liabilities

Chapter 3 – Evidential Provisions concerning loans and other transactions involving directors

Chapter 4 – Prohibitions or Restrictions on loans and transactions involving directors

Chapter 5 – Disclosure of interests in shares and debentures

Chapter 6 – Responsibilities of officers and being “in default”

Part 5 Summary

Part 5 of the Act deals with the duties and responsibility of directors and other officers of the company. It is important to understand the relationship between the owners of the company, the members/shareholders, and those charged with its management, the directors. The members delegate power to the directors to run the company on their behalf. However, the director’s duties are owed to the company itself rather than to the members/shareholders in their capacity as such. In agreeing to act as a director an individual acknowledges that they have legal duties and obligations imposed by the Companies Act, other enactments and at common law.

What is new?

Under the current regime directors duties have derived from the various Companies Acts, Statutory Instruments and from Court rulings. The Company Law Review Group indicated that “inaccessibility and incomprehensibility of the law concerning directors can be remedied by their being stated in statute law”. Under S.228 of the new Act the director’s fiduciary duties have been codified for the first time. This is a significant development in the promotion of increased corporate governance and should ensure that directors will be fully aware of what is expected of them. The 8 fiduciary duties of a director owed to the company as listed in the Act are:

1. To act in good faith in what the director considers to be the best interests of the company
2. To act honestly and responsibly in the company’s affairs
3. To act in accordance with the constitution and exercise powers only for lawful purposes
4. Not to use company property for their own or other’s use unless approved by members in the constitution
5. Not to fetter discretion unless permitted by constitution or entered into in the company’s interests
6. To avoid conflicts of interest unless released by members
7. To exercise care, skill and diligence
8. To have regard to interests of members

The Act also sets down the general duties of directors including:

• 223- To ensure compliance with the Companies Act
• 224 – To have regard to employees’ interests
• 225 – To prepare and include a director’s compliance statement in the director’s report for relevant company types
• 231 – To disclose any interests in contracts made by the company
• 258 – To notify the company of any interests in shares held in the company or a parent or subsidiary company above 1% of the share capital
• 232 – Directors may be required to account to the company for any gains made or indemnify it against any losses incurred for a breach of their duties

In addition to allowing the constitution to restrict a director’s power to exercise independent judgement the Act goes a step further and allows such a restriction when authorised by resolution of the company in a general meeting.

As noted above in the list of general duties, director’s compliance statements are back for certain types of companies under S.225:

(a)      All public limited companies (PLCs)

(b)      Large private limited companies (LTDs) with a balance sheet total exceeding €12.5 million and a turnover exceeding €25 million

(c)      Large designates activity companies (DACs) with a balance sheet total exceeding €12.5 million and a turnover exceeding €25 million

(d)      Large guarantee companies (CLGs) with a balance sheet total exceeding €12.5 million and a turnover exceeding €25 million

Directors’ compliance statements were originally brought in under the Companies (Auditing & Accounting) Act in 2003 but the relevant section was never actually commenced as it was viewed to be far too onerous. The new Act has re-introduced a version of the compliance statement but in what is regarded as a more appropriate and targeted manner. Under this obligation directors must make a statement annually in the Director’s report, acknowledging that they are responsible for ensuring the company is in compliance with its obligations under the Companies Acts, the Tax Acts, the Market Abuse Directive, the Prospectus Directive and the Transparency Directive. Failure to include a compliance statement is a category 3 offence.

The appointment of the Company Secretary is a matter for the Board and S.226 provides that the company secretary must have the relevant skills or resources necessary so as to enable him or her maintain (or procure the maintenance of) the statutory records of the company. The other duties of the Secretary, along with statutory and legal duties are such as are delegated by the Board. Secretaries must consent to their appointment and acknowledge their legal duties.

What is different?

S.220, S221 and S.222 are the sections of the Act that define Connected Persons, Shadow Directors and De facto director.

A de facto director is defined by S.222 as “a person who occupies the position of director of a company but who has not been formally appointed as such shall be treated, for the purposes of this Part, as a director of the company and be referred to as a de facto director”. It is worth noting that a person shall not be a de facto director of a company by virtue of the fact that he or she gives advice in a professional capacity to the company or any of its directors.

A shadow director under S.221 is defined as “a person in accordance with whose directions or instructions the directors of a company are accustomed to act shall be treated as a director of the company unless the directors are accustomed so to act by reason only that they do so on advice given by him or her in a professional capacity”.  It should be noted that a body corporate is not to be regarded as a shadow director of any of its subsidiaries.

In S.220 a connected person is defined as “a person is connected with a director of a company if, but only if, the person (not being himself or herself a director of the company) is –

(a) that director’s spouse, civil partner, parent, brother, sister or child

(b) a person acting in his or her capacity as the trustee of any trust, the principal beneficiaries of which are that director, the spouse (or civil partner) or any children of that director or a body corporate which that director controls

(c) in partnership with that director

(d) a body if it is controlled by that director or by another body corporate that is controlled by that director.”

The Companies Act seeks to defend against directors’ use of corporate assets for their own benefit and to the detriment of the company. Procedures for dealing with transactions between the company and directors have been legislated for in this regard.  While the restrictions on loans to directors have existed since the 1990 Companies Act, the new Act is the first time that an evidential provision requirement has been put in place, where such loans are permitted. It may be difficult to prove that such loans are not repayable on demand if no such evidential proof exists. Such loans will bear an interest rate as set by statutory instrument.

The evidential provision requirements under S.236 and S.237 will apply on loans by directors to the company or its holding company as well as from such companies, and loans from persons connected with directors of such companies. Note that loans and quasi loans will not be considered such unless there is unambiguous evidentiary proof.  Consequently the onus will be on the provider to prove that the transaction was not in fact a gift. Furthermore it will be assumed that it does not bear interest and is subordinate to all other creditors, unless evidential proof exists to the contrary.

The Companies Act 1990 introduced regulation on substantial property transactions between the company and its officers or connected persons. The new Act has increased the thresholds for these transactions in S.238.

Section 31 of the 1990 Act contained the prohibition on a company making loans, quasi-loans, entering into credit transactions or guarantees and the provision of security except under certain circumstances. The new Act preserves this prohibition of loans etc to directors and connected persons in the form of S.239. The related exceptions (the 10% exception and the business transaction exception have been broadened to include guarantees and security in connection with loans, quasi-loans and credit transactions). However the Companies Act 2014 brings an administrative innovation, in the form of S.242, whereby the new Summary Approval Procedure as set out in S.203 can be utilised to authorise such transaction. This will operate in a similar manner to the Section 34 whitewash which is currently used, but without the requirement for an independent person’s report under S.208.

Current law on compensation payable to Directors on loss of office contains a prohibition unless such a payment is pre-approved by the members in an AGM. The new Act offers a more precise wording for this and extends it to cover shadow and de-facto directors and also when the payment is for the loss of a management office where the individual losing office is also a director. S.232 provides for the remedies where a breach is made under this section. In such a scenario the director will be liable to:

• account to the company for any gain which he/she makes
• to indemnify the company against any loss or damage
• both of the above if such circumstances occur

What are the Key Points?

• Directors duties codified
• Shadow and de facto directors defined
• Return of directors compliance statements
• Evidential provision requirements for directors loans
• The ability to use a Summary Approval Procedure to permit otherwise prohibited loans

What do accountants need to do?

Consider the obligations regarding director’s compliance statements and which of their client companies they will apply to for periods commencing on or after 1^st of June 2015. Advise company directors in relation to their duties and the impact of the codification of fiduciary duties.Consider the evidentiary provision requirements and how they relate to transactions between directors and companies.

What do companies need to do?

Ensure all officers are aware of their duties and obligations under the Act. Review board composition and arrange training where necessary. Determine if the provisions in relation to the company secretary are being adhered to. Review internal procedures regarding transactions with directors and ensure appropriate evidentiary proof is in place for any relevant transactions. Determine whether directors’ compliance statements will be necessary. All transactions with directors should now be appropriately documented and approved. Should a director’s compliance statement be required it will be necessary to implement the assurance measures prescribed by the Act, or explain why they have not been done. This is referred to as the “comply or explain approach” These are:

• the preparation of a compliance policy statement
• making sure that there are appropriate arrangements or structures in place to secure compliance
• an annual review of these arrangements and structures

The company secretary should arrange for a review of the composition of the board to identify any lack of experience or qualifications. Companies should facilitate director training and make appointments where additional expertise is required on the board. It may also be prudent to employ an experienced compliance professional or hire a consultant to advise the company on obligations regarding the director’s compliance statement.