Please see the attached slides from my recent presentation to the Institute of Chartered Accountants of Ireland concerning the regime on Directors Compliance Statements under the Companies Act 2014. A very interesting topic, which should be required reading for directors of Irish companies who aren't yet familiar with these obligations.
2. BACKGROUND: WHO IS A DIRECTOR?
• The definition of ‘director’ includes any person formally appointed to and
occupying the office by whatever name called.
• As before, the definition also includes ‘shadow director’ – i.e. a person in
accordance with whose directions and instructions the official directors are
accustomed to act – Section 221.
• A person does not become a ‘shadow director’ merely because he gives the
directors professional advice upon which they act.
• In a change of the law, a holding company is not to be regarded as a shadow
director of any of its subsidiaries.
• A new extension of the definition is that it now also includes a ‘de facto
director’ – i.e. a person who occupies the position of a director without being
formally appointed – Section 222.
3. BACKGROUND: THE NUMBER OF DIRECTORS
• Previously every company was required to have at least 2 directors.
• Now, in the case of a private company limited by shares (“LTD”) it is possible
to have just one director – Section 128.
• In the case of a Designated Activity Company (“DAC”) there is still a
requirement to have at least two directors.
• Every company must still have a company secretary – Section 129.
• In the case of a LTD, if it has only one director, that person may not also hold
the office of company secretary – Section 129(6).
• In practice therefore, many LTD’s may continue to have at least 2 directors,
one of whom will also be the company secretary.
4. BACKGROUND: DIRECTORS’ DUTIES - SOURCES
Memorandum
and Articles of
Association
Companies Act
1963 – 2012
16 Acts
Other Statutes
Common Law
Fiduciary
Duties
ISE / EU
Regulation /
Corporate
Governance
Codes
Market Abuse
Regulations
Prospectus
Regulations
Transparency
Regulations
Best interests of
Company and its
Members
Due Care & Skill
Due Regard to
Employees
Environmental
Protection Act
Health and Safety at
Work Act
Corporate
Manslaughter Bill
Restriction on
Director Loans /
Transactions
AGM, Annual Return
Keep proper books
and records
Competition Act
5. BACKROUND: DIRECTORS’ DUTIES
Act in good faith in
interests of the
Company
Act honestly,
responsibly in
conduct of
company’s affairs
Act in accordance
with company’s
constitution and the
law
Not use company’s
property, information
or opportunities for
own/other third party
benefit
Do not restrict
director’s power to
exercise independent
judgement
Avoid any conflict
between director’s
duties and own
interests
Exercise the care,
skill & diligence that
would be exercised by
reasonable person
with knowledge &
experience a director
expected to have and
that director actually
has
Have regard to
interests of members,
in addition to general
duty to employees
6. BACKGROUND: DIRECTORS’ DUTIES - OTHER STATUTORY DUTIES
New
• Duly to appoint a company secretary with the skills necessary to discharge
his/her statutory duties.
• Duty to prepare and deliver a ‘Section 19’ constitution.
• Duty to prepare a directors’ compliance statement.
Existing
• Duty to procure compliance with the Companies Act.
7. BACKGROUND: DIRECTORS’ DUTIES - ENFORCEMENT
Consequences of breach of fiduciary duties
• Duty to account to the company for the gain.
• Indemnify the company in respect of any loss or damage resulting from the
breach.
• Discretionary relief is available.
8. DIRECTORS’ COMPLIANCE STATEMENT
• Precursor - Section 45 of the Companies (Auditory and Accounting) Act 2003.
Never Commenced.
• The provision has, following a CLRG recommendation, now been amended
and is to be found in Section 225 of the 2014 Act.
• The requirement for a compliance statement applies to the following types of
companies:
• All PLCs
• LTDs, DACs and companies limited by guarantee where the balance
sheet value exceeds €12.5 million and the turnover exceeds €25 million.
• Does not apply to investment companies or unlimited companies.
9. DIRECTORS’ COMPLIANCE STATEMENT
• The directors’ compliance statement must be included in their annual directors’
report which is appended to the financial statements.
• The statement shall not be prescriptive. In the statement the directors must:
• Acknowledge that they are responsible for securing compliance with the
company’s ‘relevant obligations’.
• Confirm that a compliance policy statement appropriate to that company
is in place to ensure compliance with the company’s ‘relevant obligations’
(or if it is not in place, explaining why not).
• Confirm that appropriate arrangements or structures are in place to
secure compliance with the company’s ‘relevant obligations’ (or, if not
done, explaining why not).
• Confirm that during the financial year a review of any such arrangements
and structures has been conducted (or if not done, explaining why not).
10. DIRECTORS’ COMPLIANCE STATEMENT
• The ‘relevant obligations’ which are covered by the directors’ compliance
statement are:
• Obligations the breach of which would give rise to a category 1 offence or
a category 2 offence under the Companies Act;
• Obligations the breach of which would give rise to a serious Market
Abuse offence or a serious Prospectus offence (really only relevant for
PLCs); or
• Obligations under the Taxes Acts.
11. DIRECTORS’ COMPLIANCE STATEMENT
• The ‘arrangements or structures’ for ensuring compliance with the company’s
‘relevant obligations’ may include:
• reliance on the advice of one or more employees of the company (e.g. a
head of tax or finance, an in-house lawyer, a qualified company
secretary, etc.); or
• reliance on an external professional adviser who has the requisite skill
and expertise to advise the company on compliance with its relevant
obligations.
• Failure to have a directors’ compliance statement is itself a category 3 offence.
• Audit committee for ‘large’ companies.
12. DIRECTORS’ COMPLIANCE STATEMENT
• A review of the ‘arrangements and structures’ must have taken place during
the year.
• No requirement that company’s auditors opine on the fairness /
reasonableness of the DCS (as there was under Section 45).
13. ASSURANCE MEASURES TO BE CONFIRMED IN DCS
Comply
Or
Explain
Compliance Policy
Statement
prepared re
material
compliance with
“relevant
obligations”
Appropriate
arrangements &
structures in place
to secure material
compliance with
“relevant
obligations”
Review of
arrangements &
structures during
relevant financial
year
14. DIRECTORS’ COMPLIANCE STATEMENTS: INTERNATIONAL COMPARISONS
• Most common law jurisdictions confine compliance verification requirements to
listed PLCs.
• UK requires LTDs to set out Directors’ Responsibility Statement in Directors’
Report but doesn’t go beyond confirming responsibility for preparation of
accounts/determination of accounting policies.
• US – Sarbanes-Oxley – compliance verification statement required in annual
returns of listed PLCs, limited to financed reporting. Aus & NZ – similar
approach to UK Corporate Governance Code – “principles based” code
applies to listed PLCs.
15. WHAT’S NEW IN DIRECTORS’ REPORT
• Directors’ Compliance Statement
• Statement re Relevant Audit Information
• Confirm if Disclosure Notice issued by CBI
16. AUDIT INFORMATION STATEMENT
• Directors’ Report must include statement that:
• all relevant information disclosed to auditors;
• each director has taken necessary steps to make him/herself aware of all
relevant audit information
• If one Director makes false statement, all at risk:
• Risk appetite of directors (especially NEDs) will be relevant
• Relevant Audit Information:
• any information auditors may need for Auditors’ Report
• Breach- Category 2 offence (5 yrs/€50k)
17. LEVEL OF RISK FOR DIRECTORS
• Business realities acknowledged in qualifications
• Standard – arrangements & structures acceptable if reasonable assurance of
material compliance
• Quasi-Subjective - Directors’ opinion relevant
• Reliance on advisors/consultants with requisite knowledge & experience
permitted. This is expected to become commonplace.
• In-scope companies should map corporate activities to relevant obligations &
control flash-points.
• Input from audit, legal, compliance advisors likely
18. ENFORCEMENT – CATEGORIES OF OFFENCES
1. Category 1 Offence - Conviction on indictment
• Imprisonment of up to 10 years and/or a fine of €500,000.
2. Category 2 Offence - Conviction on indictment
• Imprisonment of up to 5 years and/or a fine of €500,000.
3. Category 3 Offence - Summary conviction only.
• Imprisonment of up to 6 months and/or a Class A fine.
4. Category 4 Offence - Summary conviction only
• Class A fine
19. ENFORCEMENT – “OFFICER IN DEFAULT”
Repeating existing provisions
• “…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.”
Key Change
• “…where it is proved that the defendant was aware of the basic facts
concerning the default concerned, it shall be presumed that the defendant
permitted the default.”
20. SUMMARY: WHAT IS THE NEW DCS REGIME?
• Unique to Ireland so uncharted territory
• All PLCs & any LTDs, DACs, CLGs which meet thresholds
• Higher Thresholds - B/S > €12.5m & Turnover > €25m
• Material compliance with “relevant obligations”
• Tax Law
• Company Law - Category 1 & 2 Offences (Indictable) - serious market
abuse or prospectus offences
• Inclusion of compliance statement in Directors’ Report:
• Directors’ acknowledge responsibility for securing material compliance
• Comply or Explain re 3 Key Assurance Measures
• Breach is a Category 3 offence (6 months/€5k)