Directors Duties: Part 5 of the Draft Companies Bill. Dr Thomas B Courtney Partner

Transcription

1 Directors Duties: Part 5 of the Draft Companies Bill Dr Thomas B Courtney Partner

2 Contents of Presentation 1. Background to the Draft Companies Bill The design of the Companies Bill 3. Key features of the model private company 4. Key innovations in the Bill 5. Part 5: duties of directors and other officers 6. Chapter 1 - application of Part 5 7. Chapter 2 general duties 8. Chapter 3 evidential Provisions concerning loans 9. Chapter 4 transactions involving directors 10.Chapter 5 disclosure of interests in shares 11.Chapter 6 officers in default 1

3 Background to the Companies Bill The publication by the Department of Enterprise Trade and Innovation of the draft Companies Bill is a landmark development in a process conceived by the McDowell Group on Compliance & Enforcement in 1998 and begun by the Company Law Review Group (CLRG) in a programme should be undertaken to incorporate the provisions of the existing Companies Acts and the substantive company law now set out in regulations...into one single comprehensible companies code. (McDowell Report at para 5.4.1) 2

4 Background to the Companies Bill The CLRG was established as a statutory advisory group to the Minister for Jobs, Enterprise and Innovation by the Company Law Enforcement Act 2001, having been established on an administrative basis in January CLRG s purpose is to monitor, review and advise the Minister on matters concerning the Companies Acts and in so doing to seek to promote enterprise, facilitate commerce, simplify the operation of the Companies Acts, enhance corporate governance and encourage commercial probity. 3

5 Background to the Companies Bill The CLRG s First Report (to 31 December 2001) made 195 recommendations, all unanimously endorsed by its widelybased membership which included the social partners (e.g. ICTU and IBEC etc); users of company law (e.g. CCABI, Law Society, Bar Council, Courts Service, Revenue Commissioners, ISE, Institute of Directors, ICSA etc); and regulators and administrators (e.g. CRO, AGO, the Department etc). Membership has since been enlarged to include ODCE, ISME, SFA, IAASA, Central Bank etc. CLRG s First Report was the blueprint for the draft Companies Bill. 4

6 The design of the Companies Bill The private company limited by shares should be the primary focus of simplification (para 3.2.3) the law should be clear and accessible...the legislation should be structured in such a way that the provisions apply to small companies are easily identifiable (para 3.2.8) The private company limited by shares should be established as the model company (para 3.6.5) The consolidated Companies Act should be sub-divided into two groups of law: the first group will define the private company and contain all company laws that apply to it and the second group will define the remaining types of company and the provisions that apply to each (para 3.7.2) 5

7 The design of the Companies Bill The draft Bill contains 15 Parts (952 sections) and applies exclusively to the private company limited by shares. The remaining 10 Parts will be published in 12 months time and will deal with the DAC (designated activity company also private), PLC/SE, Guarantee company, Unlimited Company, Unregistered Company, Investment Company and converting from one type of company to another. All 25 Parts likely to be published formally as a Bill in late Enactment likely in 2013, but possibly going into

8 Key features of the model private company Can have between 1 and 99 shareholders (Part 2 - s 17); Can have 1 or more directors (Part 4 s 125); Must have a company secretary (Part 4 s 126); Liability of shareholder(s) is limited to the amount, if any, unpaid on the shares registered in their name (Part 2 - s 17) Must have a one-document constitution (Part 2 s 19) Name must end in Limited or Ltd (Part 2 s 26) Cannot have an objects clause because it has full unlimited capacity (Part 2 s 38) Must register persons (other than officers or persons with limited authority) authorised to bind the company (Part 2 s 39) Must have a common seal (Part 2 s 43) 7

9 Key innovations in the Draft Bill Activities that might otherwise prejudice shareholders or creditors are permitted where the company complies with the Summary Approval Procedure which requires a special resolution, a declaration of solvency which, in some cases, must be supported by the report of an independent person (Part 4 Chapter 7) All offences are categorised as being either Category 1, 2, 3 or 4 offences and the penalties applicable to each type set out in one provision (Part 14 s 861) Directors common law fiduciary duties have been codified and together with all diverse statutory duties assembled as a comprehensive code (Part 5) 8

10 Part 5 Duties of Directors and Other Officers All law relating to the duties of directors and other officers will be codified in Part 5. Consists of 6 Chapters, Contain 52 sections of law. Contains recommendations of CLRG reports including the first report, the Heads of Bill Report and the subsequent 2007 Report s provisions on loans to directors 9

11 Chapter 1 - application of Part 5 Chapter 1 contains 4 sections (ss ): Definitions relevant to Part 5. Persons connected with directors will be defined (no major change); Shadow directors will be defined note, that all of Part 5 shall apply to shadow directors; De facto directors will also be defined (persons who occupy the position of director although not formally appointed as such) all of Part 5 will apply to them too as to the meaning of de facto director, see Re Lynrowan Enterprises Limited [2002] IEHC 90 10

12 Chapter 1 - application of Part 5 In Re Lynrowan, O Neill J said of the application of s 150 CA 1990 to de facto directors: 1. Where there is clear evidence that that person has been either the sole person directing the affairs of the company or 2. Is directing the affairs of the company with others equally lacking in valid appointment or 3. Where there were other validly appointed directors that he was acting on an equal or more influential footing with the true directors in directing the affairs of the company. 4. In the absence of clear evidence of the foregoing and when there is evidence that the role of the person in question is explicable by the exercise of a role other than director, the person in question should not be made amenable to the Section 150 restriction... 11

13 Chapter 2 general duties Chapter 2 (ss ) sets out the following matters under the heading of general duties Director s duty to ensure compliance with the Companies Act, consent to act and acknowledgement of duties (s 220). Duty to have regard to employees interests (enforceable by the company as is currently the law) (s 221). The directors compliance statement incorporating the recommendations of the CLRG in its 2005 report (s 222). The secretary s duties will be expressed to be such duties as are delegated by the board of directors (s 223). 12

14 Chapter 2 general duties Section 222 reintroduces' the directors compliance statement: Obligation to prepare applies to private companies where both the balance sheet > 12.5m and turnover > 25m; Directors Report must confirm that the following three things have been done or if not done, specifying the reasons why not (i.e. on a comply or explain basis): Drawing up a compliance policy statement setting our policies concerning compliance with relevant obligations; Putting in place appropriate arrangements/ structures designed to secure material compliance with relevant obligations; and Conducting a review in financial year of arrangements and structures that are in place. 13

15 Chapter 2 general duties Directors Report must include a statement that acknowledges that the directors are responsible for securing compliance with its relevant obligations (Categories 1 & 2 Companies Acts offences, a serious Prospectus offence or serious Market Abuse offence and Tax Law) Significantly more proportionate than 2003 model; comply or explain provides an out where it would be entirely inappropriate; however, the reintroduction may be expected to exercise clients minds. 14

16 Chapter 2 general duties Directors will be obliged to ensure that the person appointed secretary is suitable; secretaries will have to consent and acknowledge their legal duties (s 223). Directors fiduciary duties will be set out in the Act and will be: Owed to the company and the company alone; Enforceable like any other fiduciary duty; Based on common law rules and equitable principles and to be interpreted and applied in same way. Eight duties are set out which have been drawn, in the main, from existing common law and equitable duties. 15

17 Chapter 2 general duties 1. Act in good faith in what the director considers to be the company s interests; 2. Act honestly and responsibly in the company s affairs 3. Act in accordance with the constitution and exercise powers only for lawful purposes 4. Not use company property for own or others use unless approved by members or in the constitution 5. Not to fetter discretion unless permitted by constitution or entered into in the company s interests 6. Avoid conflicts of interest unless released by members; 7. Exercise care, skill and diligence (subjective test); 8. Have regard to interests of members. 16

18 Chapter 2 general duties Where a director considers in good faith that it is in the interests of a company for a transaction or engagement to be entered into, the director may restrict his or her power to exercise an independent judgment in the future by agreeing to act in a particular way to achieve this (section 225(2); A director may have regard to the interests of a particular member where the director has been appointed or nominated by that member under the constitution or shareholders agreement: but this is subject to the overriding obligation to act in good faith in what the director considers to be the interests of the company (section 225(3) and (4)). 17

19 Chapter 2 general duties Directors will continue to be required to disclose interests in contracts (s 228), however there is now a materiality proposed so that it does not apply in relation to an interest that cannot reasonably be regarded as likely to give rise to a conflict of interest (s 228(2)) Provision will be made for directors to be made liable to account for gains and indemnify for losses resulting from a breach of any duty under Part 5 (s 229) Provision will also be made for the courts to grant relief to directors who have acted honestly and reasonably (s 230) The prohibition on companies indemnifying directors is maintained but recast (s 232). 18

20 Chapter 3 evidential Provisions concerning loans Chapter 3 contains two sections concerning evidence of loans made to directors and by directors. Where a loan or quasi-loan is made to a director etc by a company and the terms are not in writing, there is a presumption until the contrary is shown that it is (a) repayable on demand and (b) that it bears interest (s 233(2)); If the terms are in writing or partly in writing and there is an ambiguity as to when a loan is to be repaid, there is a rebuttable presumption it is to be repaid on demand and likewise any ambiguity as to whether it bears interest will give rise to a similar presumption that it does (s 233(3)) 19

21 Chapter 3 evidential Provisions concerning loans ODCE have found that often, in windings up, directors will claim to be creditors by having made often unsubstantiated loans to their companies. Section 234 proposes to address this. Where a loan or quasi-loan is alleged to have been made by a director etc to a company and the terms are not in writing it shall be presumed that it was not a loan or quasi-loan (i.e. that it is a not repayable advancement) (s 234(2)) Where it is proved that such a loan was made, if the terms are ambiguous there will be a rebuttable presumption that the loan bears no interest, that it is not secured and that it is subordinated to all other creditors (s 234(3)) 20

22 Chapter 4 transactions involving directors Chapter 4 contains provisions regulating certain transactions and arrangements between directors and their companies: Substantial property transactions (s 235); Loans, quasi-loans, credit transactions and the provision of guarantees and security in connection therewith (s236), subject to certain exceptions: <10% of relevant assets (s 237); The summary approval procedure (s 239); Inter-group transactions (s 240) Directors expenses (s 241) Business transactions (s 242) 21

23 Chapter 4 transactions involving directors Other provisions in this chapter include: Directors contracts of employment (s 246); Approval of compensation for loss of office (s 248) Contracts with sole members (252) 22

24 Chapter 5 disclosure of interests in shares Chapter 5: Replaces in substance Part IV of the CA Directors and others are required to disclose to their companies interests they have in the company s shares or debentures. Completely re-written continues to be complicated law but is certainly more intelligible. Main change is that de minimis interests (<1%) can be disregarded Another very useful change is that where directors are given options by a company they will not be required to tell the company that they have options in its shares! (s 262(3)) 23

25 Chapter 6 officers in default Offences will in some instances be committed by what are termed any officers in default. An officer who is in default is any officer who authorises or who, in breach of his or her duty as such officer, permits the default mentioned in the provision (s 267(1)) There will be a presumption that officers permitted default where there is evidence that they took no steps to prevent the default (s 268(2)) 24

26 For Further Information Contact Dr Tom Courtney, Partner Arthur Cox Direct line Tom is Chairman of the CLRG, author of The Law of Private Companies (2 nd ed; 2002) and head of Arthur Cox s Company Compliance & Governance Group 25

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