J.O.S Solicitors is often approached by clients querying and seeking advice on various aspects of company law. As a result, we have decided to provide a brief guide to help clarify some of the key fundamentals and in particular, recent updates to the law governing this vast and complex area.
June 2015 saw the commencement of the long awaited Companies Act 2014. It was a significant and ambitious piece of legislation, one which consolidated and reformed a plethora of previous company acts and has to a large extent succeeded in putting them all under one piece of legislation. It has also simplified various aspects, particularly the laws and procedural requirements relating to private companies (limited by shares), including the creation of new types of company structures plus codified for the first time, director’s duties.
What defines a company?
The law defines a company as a legal entity separate from its members, this is also known as “corporate personality”. Therefore once a company is incorporated and registered with the Companies Registration Office (CRO), this legal entity acquires separate individual rights and duties.
Salomon v Salomon (1897) is the famous case which first established this notion of a registered company having a separate legal identity to its shareholders and has since been referred to as “Salomon’s Veil” or the “Veil” of incorporation. In effect meaning that this Principle creates a fictional veil between the company and its members.
18 months to convert
The CA 2014 provides for an 18 month transition period (which began in June 2015), whereby existing “private companies” will need to determine which type of new company structure, will best suit their needs and objectives.
Current “private companies” that choose not to convert to either type of new entity, during this transition, will be treated as DAC for that period and at the end of the 18 months, will automatically become an LTD. (see below)
What types of companies are there?
The main types of companies under the CA 2014 are as follows:
- Private Company Limited by Shares (LTD)
- Designated Activity Company (DAC)
- Public Limited Company (PLC)
- Guarantee Companies (CLG)
- Unlimited Companies (ULC)
LTD is the most common type of company in Ireland and has been the focal point of the new CA 2014. The legislators recognised that LTD’s companies will be the cornerstone of small and medium sized businesses in Ireland, and in doing so has dedicated a large portion of this Act, in a concerted attempt to simplify the law relating to LTD’s. For example, LTD’s will now only require one director instead of two to form a company, however a company secretary is still required. The new Act removes the need for such companies to hold a physical annual general meeting (AGM’s) and instead can adopt written procedures for passing resolutions. The incorporation process is also far easier and simplified than in comparison to the other companies, as it only requires a single document constitution.
The DAC is the primary alternative to the LTD, and is aimed at those who wish to set up a company for a specific purpose. It requires at least two directors and also a company secretary. A DAC must hold a physical AGM and has a two document constitution, namely a Memorandum of Association (regulates and sets out the external activities such as the aims and objectives of the company) and Articles of Association (regulates and outlines the internal management procedures and how the company will operate, i.e. how directors are removed and appointed, voting rights and transfer of shares etc.).
The PLC is for larger and international companies, one which may list its shares on a stock exchange and offer its shares to the public. There has been few substantial changes to the laws governing this type of company following the Act. It still must have at least two directors and also have the Memorandum and Articles of Association. It must also have a minimum share capital of €25,000 (LTD’s or DAC’s don’t require a minimum share capital). The core difference between a public and private company, is that the public company can invite or advertise to the public the opportunity to buy its shares, something a private company is prohibited from doing.
Limited liability?
If a company has limited liability, it essentially means that if the company fails, (becomes insolvent) the debts of the company won’t be the debts of its members or shareholders. Accordingly, LTD, DAC’s and PLC’s have limited liability.
While CLG is a private company limited by guarantee without share capital. Organisation’s such as charities, sports clubs and property management companies tend to form this type of company, as it offers the benefits of incorporation (i.e. limited liability), but does not require its members to raise funds. However, any profit made by a CLG must be re-invested back into the company.
Unlimited Liability
Members of ULC’s pay an unlimited amount towards the company’s debts if it’s being liquidated (becomes insolvent). Such companies must also have two directors as well as a Memorandum and Articles of Association. Some advantages of ULC’s are that it does not need to file accounts with the CRO nor does it require the preparing of director’s compliance statements. (see below)
Director’s duties and obligations:
A director is an officer of the company and as alluded to above, for the first time director’s common law fiduciary duties have been codified. This means greater clarity for both directors and member/shareholders, as to what is expected of them following formal or informal appointment to such a role.
Defining fiduciary duties
Fiduciary duties are duties based on the principals of trust and honesty. The list is not exhaustive, but Section 228 of the CA 2014, sets out the following duties owed to the company by its directors:-
- To act in good faith and in the interests of the company
- To act honestly and responsibly in relation to the conduct of the affairs of the company
- To act in accordance with the company’s constitution and exercise such powers only for the purposes allowed by law
- To not use the company’s property, information or opportunities for their own or anyone else’s benefit, unless approved by the members or the company constitution.
- To not agree to restrict the director’s power (discretion) to exercise an independent judgement unless permitted by the company constitution, approved by its members or if it’s in the company interests
- To avoid any conflict between themselves and company
- To exercise reasonable care, due skill and diligence
- To have regards to the interest of the members as well as the employees of the company.
Director’s Compliance statement
Directors of LTD’s, DAC’s and most PLC’s will now also have a duty to provide a financial report every year to the company where turnover exceeds €25 million and balance sheet is in excess of 12.5 million. This statement is essentially acknowledgment by the directors that they are responsible for ensuring the companies compliance with its legal requirements and obligations.
Breaches of Director’s duties
When a director breaches any of the duties stipulated in Section 228 or related duties, the director may be liable to account to the company for any direct or indirect gain made, from that breach and indemnify the company for any loss or damage as a result. Therefore accepting such a role as company director, should not be taken lightly as severe penalties can apply for such breaches and more so in circumstances where fraudulent or reckless trading is evident.
Final Thoughts
Overall, this is a seismic and welcome piece of legislation, it will assist in making it far easier for companies to do business in Ireland. This briefing guide has attempted to address only some of the key issues and changes as introduced by the CA 2014. Please note the lists and items referenced have not been exhaustive or extensive.
If you would like J.O.S Solicitors to assist your business or organisation with its corporate law needs or to simply discuss your options about company conversion and require more information on the Companies Act 2014, then please contact us.
Disclaimer
This publication is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by J.O.S Solicitors for any action taken or not taken in reliance on the information set out in this publication. Any and all information is subject to change and professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication.
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