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Decision Notice D/2002/1
The Principal Duties and Powers of
Company Directorsunder the Companies Acts 1963-2001
For further information contact:
Office of the Director of Corporate Enforcement
16 Parnell Square
Dublin 1
(01) 858 5800
LoCall 1890 315 015
(01) 858 5801
www.odce.ie
www.odce.ie
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Decision Notice D/2002/1Information Book 2The Principal Duties and Powers of
Company Directorsunder the Companies Acts 1963-2001
COPYRIGHT STATEMENT
The contents of this document are the copyright of the Director of CorporateEnforcement. Nothing herein should be construed as a representation by, oron behalf of, the Director of Corporate Enforcement as to his understandingor interpretation of any of the provisions of the Companies Acts 1963 to2001 or as to the interpretation of any law.
Independent legal advice should be sought in relation to the effects of anylegal provision. The Director of Corporate Enforcement accepts no responsibility or liability howsoever arising from any errors, inaccuraciesor omissions in the contents of this document. The Director reserves theright to take action, which may or may not be in accordance with theprovisions of this document.
Contents
1.0 Introduction 3
2.0 Principal Duties and Powers of Company Directors 4
2.1 What is a Company Director 4
2.2 Qualifications Required to Become a Company Director 5
2.3 Types of Company Director 5– Shadow Directors– Alternate Directors– De Facto Directors– Executive Directors– Non-Executive Directors
2.4 What are Company Directors’ Duties and Obligations 6
2.5 Directors’ Common Law Duties 6
2.6 Directors’ Statutory Duties 72.6.1 Duties as a Company Officer 72.6.2 Duty to Maintain Proper Books of Account 72.6.3 Duty to prepare Annual Accounts (Financial Statements) 82.6.4 Duty to have an Annual Audit Performed 92.6.5 Duty to Maintain Certain Registers and Other Documents 92.6.6 Duty to File Certain Documents with the Registrar of Companies 102.6.7 Duty of Disclosure 102.6.8 Duty to Convene General Meetings of the Company 10
– Annual General Meeting (AGM)– Extraordinary General Meetings (EGM)
2.6.9 Directors’ Duties Regarding Transactions Between the Directors and the Company 11
2.6.10 Duties of Directors of Companies in Liquidation and Directors of Insolvent Companies 13
– Duties of Directors of Insolvent Companies– Duties of Directors of Companies in Liquidation
2.7 Company Directors’ Powers 14
3.0 Penalties Under the Companies Acts 15
3.1 Penalties for Criminal Offences 15Court Imposed PenaltiesAdministrative Fines
3.2 Civil Penalties 15DisqualificationRestrictionStrike Off
4.0 Useful Addresses 16
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Appendix A Appointment and Removal of Directors and Related Matters 17
Appointment of DirectorsRemoval of DirectorsRemuneration of DirectorsRequirement to Have One Director Resident in the StateLimitation on the Number of Directorships
Appendix B Restriction and Disqualification of Company Directors 18IntroductionRestriction of DirectorsRules Regarding Capital Maintenance of Companies who have a Restricted Director (or Secretary)Disqualification of Directors
Automatic DisqualificationDiscretionary Disqualification
Civil Consequences of Acting While Restricted or DisqualifiedRegisters of Restricted and Disqualified Persons
1.0 Introduction
The Companies Acts 1963-2001 containextensive provisions detailing how theaffairs of companies are to beconducted. These provisions describehow the various participants incompanies should discharge their dutiesand obligations. In addition, partici-pants are accorded substantial rightsand powers in order to enable them toassert their rights and, if necessary,defend their personal and/or corporateinterests.
The Director of Corporate Enforcementis of the view that the extensive require-ments of the Companies Acts make itdifficult for many non-professionalparticipants in company affairs to bewell informed of their rights and obliga-tions under the law. This has, in part,contributed to an inadequate standardof compliance with company law in thepast.
Section 12(1)(b) of the Company LawEnforcement Act 2001 specifies that afunction of the Director is “toencourage compliance with theCompanies Acts”. Consistent with thisremit, the Director issued aConsultation Paper setting out theprincipal duties and powers ofcompanies, company directors,company secretaries, members &shareholders, auditors, creditors,liquidators, receivers and examinersunder the Companies Acts 1963-2001.The responses received in response tothe Consultation Paper were reviewed indetail and, following that review, thecomments and suggestions made by thevarious contributors were, as far as ispracticable, taken into account.
The resulting guidance has beenprepared in the form of a series ofinformation books. There are informa-tion books on the following topics:
Information Book 1 – Companies
Information Book 2 – CompanyDirectors
Information Book 3 – CompanySecretaries
Information Book 4 – Members and Shareholders
Information Book 5 – Auditors
Information Book 6 – Creditors
Information Book 7 – Liquidators,Receivers andExaminers
In addition to information on therelevant duties and powers, each bookcontains information on the penaltiesfor failure to comply with the require-ments of the Companies Acts and usefuladdresses and contact points.
Each book has been prepared for use bya non-professional audience in order tomake the main requirements ofcompany law readily accessible andmore easily understandable.
The Director of Corporate Enforcementconsiders it important that individualswho take the benefits and privileges ofincorporation should be aware of thecorresponding duties and responsibili-ties. These information books aredesigned to increase the awareness ofindividuals in relation to those dutiesand responsibilities.
The Director wishes to make clear thatthis guidance cannot be construed as adefinitive legal interpretation of therelevant provisions. Moreover, it mustbe acknowledged that the law is open todifferent interpretations. Accordingly,readers should be aware that there areuncertainties in how the Courts willinterpret the law, particularly when thelaw is applied to the specific circum-stances of specific companies andindividuals.
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It is important to note that wherereaders have a doubt as to their legalobligations or rights, they should seekindependent professional legal oraccountancy advice as appropriate.
As changes are made to company law inthe future, the Director intends to keepthis guidance up to date. He alsowelcomes comment on its content, sothat future editions can remain asinformative as possible.
Office of the Director of CorporateEnforcement
November 2002
2.0 Principal Duties and Powers ofCompany Directors
2.1 What is a Company Director
A company is owned by its members(shareholders). Every company isrequired to have a minimum of twodirectors1. Directors are usuallyappointed by the members of thecompany but can be appointed by theother directors where the articles ofassociation allow. The directors of thecompany are collectively known as the‘board of directors’.
Section 2(1) of the Companies Act,1963 defines ‘director’ as “includingany person occupying the position ofdirector by whatever name called”.
The primary function of the directors isto manage the company on behalf of themembers. The articles of associationusually provide for the delegation of themembers’ management powers to theboard of directors and many of thefunctions of the directors are set out ina company’s articles of association. Acompany director may also act as thecompany secretary (the companysecretary is dealt with in InformationBook 3).
The main legislative provisionsconcerning directors are set out insections 174 to 199 of the CompaniesAct, 1963, Parts III, IV (Chapter 1 only)and VII of the Companies Act, 1990,sections 43 to 45 of the Company Law(Amendment) (No. 2) Act, 1999 andParts 4 and 9 of the Company LawEnforcement Act, 2001.
Every person appointed as a companydirector should, on or before appoint-ment, become familiar with the legalresponsibilities and obligationsattaching to the position. This book setsout a summary of directors’ responsibil-ities, obligations and powers.
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41 Section 174 Companies Act, 1963
2.2 Qualifications Required to Become aCompany Director
A person requires no formal qualifica-tions to become a company director. Adirector is not required to be a member(shareholder) of the company unless thearticles of association specifically soprovide. Certain parties, such as bodiescorporate (i.e. companies), undischargedbankrupts, the auditors of the companyand disqualified persons (i.e. a persondisqualified by a Court from acting as acompany director) are ineligible to actas company directors.
In addition, where a person is restrictedin acting as a director, the companymust comply with certain capitalrequirements before he or she can soact. The topics of disqualification andrestriction are dealt with in detail inAppendix B to this book.
2.3 Types of Company Director
The following are legal categories ofcompany director.
Shadow Directors
In addition to those who are formallyappointed as directors, any person,other than a professional adviser, withwhose instructions the directors of thecompany normally comply is a ‘shadowdirector’. In other words, where aperson who is not a director exerts suchan influence over the company’sdirectors that those directors areaccustomed to acting in accordancewith that person’s instructions, thatperson is a shadow director. The signifi-cance of being a shadow director is thata shadow director has many of the legalresponsibilities of a director2.
Alternate Directors
The Table A standard form articlesmake provision for ‘alternate directors’.Alternate directors are persons who arenominated by a director to act in their
absence. An alternate director can onlybe appointed with the agreement of amajority of the directors.
De Facto Directors
A ‘de facto director’ is a person who hasnot been validly appointed or who isdisqualified but who in effect occupiesthe position of, and acts as if he were, adirector. Such persons, although theymay not have been validly appointed,also come within the ambit of section2(1) of the 1963 Act.
In addition to the legal categories ofdirector as set out above, other termsare used in business to describecompany directors. In practice companydirectors are generally categorised aseither being ‘executive directors’ or‘non-executive directors’. However, it isimportant to note that these are notlegal classifications but rather aredistinctions drawn under corporategovernance best practice. Regardless ofwhether an individual is an executive ornon-executive director, they have exactlythe same legal responsibilities.
Executive Directors
Executive directors are directors of thecompany who are involved in the day today management of the company. Asthese individuals are involved in themanagement of the company they may,in practice, have specific titles within thecompany, for example, managingdirector, finance director, marketingdirector etc.
Non-Executive Directors
Non-executive directors are notinvolved in the day to day managementof the company and are appointed fromoutside the company. The rationalebehind appointing non-executive
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52 Section 27 Companies Act, 1990
directors is that, as they are notinvolved in the day to day managementof the company, they can bring anindependent voice and perspective to theboard.
It should be noted that there is no legalobligation for a company to appointnon-executive directors. However,certain companies i.e. companies listedon the Stock Exchange are required tocomply with codes of corporategovernance best practice which dorequire the presence of non-executivedirectors on the board. Further informa-tion on the subject of corporategovernance and related best practice isavailable on the ODCE website(www.odce.ie).
2.4 What are Company Directors’ Dutiesand Obligations
Company directors’ responsibilities arewide and diverse. Their duties ariseprimarily from two sources: statute (i.e.Acts of the Oireachtas and other legisla-tion e.g. EU Regulations) and commonlaw.
As the vast majority of Irish companiesare private companies, there are asubstantial number of companies ofwhich the directors and members areone and the same. Under such circum-stances, the distinction between thecompany’s property and thedirector/member’s own property can bea matter of some confusion with theresult that the directors treat companyproperty as though it was their own.
A company director stands in a specialrelationship to the company of whichthey are an officer. This special positionis known as a ‘fiduciary position’ andthe director is known as a ‘fiduciary’. Afiduciary is required to act in a mannerwhich is legally becoming of their officeand which places the interests of thecompany ahead of their own.
Perhaps somewhat surprisingly to many,
a director’s duties are usually owed inthe first instance to the company andnot to the members, creditors oremployees of the company. Where,however, a director expressly undertakescertain obligations to shareholders, heor she may stand in a fiduciary relation-ship to them and owe them fiduciaryduties. This may particularly be the casein a small private company whereshareholders often look to the directorsfor advice.
When a company is insolvent (i.e. isunable to pay its debts as they fall due),a director will owe a duty to thecompany’s creditors (i.e. people towhom the company owes money).
A director is also obliged to have regardto the interests of the company’semployees. However, this duty may notbe enforced by the employeesthemselves and is instead owed to thecompany3.
2.5 Directors’ Common Law Duties
Directors’ common law duties can besummarised into three principles:
I. Directors must exercise their powersin good faith and in the interests ofthe company as a whole. Directorsmust not abuse their powers. Theymust exercise their powers in whatthey honestly believe to be theinterests of the company as a wholeor the members as a whole ratherthan in the interests of a particularmember or members.
II. Directors are not allowed to makean undisclosed profit from theirposition as directors and mustaccount for any profit which theysecretly derive from their position asdirector. It is not automatically abreach of a director’s duties to beinvolved in a business whichcompetes with the company ofwhich they are a director. However,where a director has a contract of
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63 Section 52 Companies Act, 1990
employment or service contract withthe company, it may be in breach oftheir duties of fidelity and loyalty tothe company to do so.
III. Directors are obliged to carry outtheir functions with due care, skilland diligence. A director is liable forany loss resulting from theirnegligent behaviour. However, adirector need not exhibit in theperformance of his or her duties agreater degree of skill than mayreasonably be expected from aperson of his or her knowledge andexperience.
A director is, in general, justified indelegating duties to other officials of the company (e.g. to the company’smanagement) where such duties mayproperly be left to such officials, havingregard to the articles of association ofthe company and the nature of itsbusiness. A director, while not bound togive continuous attention to the affairsof the company, should attend meetingsin circumstances where he or she isreasonably able to do so.
Where a director abuses their powers,any action taken is invalid but may besubsequently ratified by a generalmeeting of the members of the company.
2.6 Directors’ Statutory Duties
Directors’ statutory duties arise fromthe Companies Acts 1963-2001 andrelated legislation e.g. EU Regulationsetc. This section gives a guide to theprincipal duties imposed by statute.
2.6.1 Duties as a Company Officer
A director, as an officer of a company, isunder a duty to comply with his or herobligations under the Companies Actsand to ensure that the requirements ofthe Companies Acts are complied withby the company. A director is in breachof this duty where they authorise orpermit a default to take place.
A director is presumed to havepermitted a default by the companyunless the director can establish thats/he took all reasonable steps to preventit or, due to circumstances beyond theircontrol, was unable to do so4.
Where a director, in purported compli-ance with any provision of theCompanies Acts, answers a question,makes a statement or produces adocument which he or she knows to befalse or is reckless, they are in breach ofthe Acts.
2.6.2 Duty to Maintain Proper Books of Account5
Under section 202 of the CompaniesAct, 1990, every company is required tomaintain proper books of account. Thedirectors of the company are required toensure that this requirement is compliedwith. It is a criminal offence for anydirector of the company to fail to takeall reasonable steps to ensure compli-ance with this requirement.
Proper books of account should:
• correctly record and explain thetransactions of the company;
• at any time, enable the financialposition of the company to bedetermined with reasonableaccuracy;
• enable the company’s directors toensure that the balance sheet andprofit and loss account comply withthe Companies Acts, and;
• enable the accounts to be readilyand properly audited.
Books of account must be kept on acontinuous and consistent basis. That isto say the entries made in them must bemade in a timely manner and be consis-tent from one year to the next. Section202 of the 1990 Act stipulates that thebooks of account must contain:
• entries from day to day of all sumsof money received and expended by
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74 Section 100 Company Law Enforcement Act, 20015 See also Appendix E to Information Book 1 - Companies
the company and the matters inrespect of which the receipts andexpenditure take place;
• a record of the company’s assets andliabilities;
• if the company’s business involvesdealing in goods (i.e. stocks):
– a record of all goods purchasedand sold (except those goods soldfor cash by way of ordinary retailtrade) showing the goods, sellersand buyers in sufficient detail toenable the goods, sellers andbuyers to be identified and arecord of all the invoices relatingto such purchases and sales, and;
– a statement of stock held by thecompany at the end of eachfinancial year and all records ofstocktakes on which suchstatements are based.
• where the company’s businessinvolves the provision of services, arecord of the services provided andall the invoices relating to thoseservices must be maintained.
The books of account should be kept atthe company’s registered office or atsuch other place as the directors thinkfit.
If a company, which is unable to pay itsdebts as they fall due, is being woundup (legally dissolved) and that companyhas failed to maintain proper books ofaccount, the Court can, if satisfied thatthe failure to maintain proper books ofaccount contributed to the company’sinability to pay its debts, hold everydirector in default and guilty of anoffence. Furthermore, the Court maymake the directors personally liable forthe debts of the company6.
2.6.3 Duty to Prepare Annual Accounts(Financial Statements)
Generally, companies (and by extensiondirectors) are required to prepareaccounts on an annual basis.
The annual accounts are prepared fromthe information contained in thecompany’s books of account and otherrelevant information. The accounts (alsoknown as financial statements), whichare required to give ‘a true and fairview’7 of the company’s affairs,normally include the following, some ofwhich are required by law and others ofwhich are required by accountingstandards:
• Profit and loss account: this recordsthe income and expenditure of thecompany over a particular periodand shows the profit or loss arisingfrom the company’s activities;
• Balance sheet: this is a statement ofthe company’s assets and liabilitiesat a given point in time;
• Cash flow statement: this is astatement of the company’s cashinflows and outflows over a periodof time. It is a requirement underaccounting standards but is notrequired in the case of ‘small’companies (the criteria to qualify asa small company are set out inAppendix A to Information Book 1);
• Notes to the financial statements:these contain detailed informationrelating to the profit and lossaccount, balance sheet or cash flowstatement e.g. analysis of fixedassets and depreciation;
• Directors’ Report: The directors arerequired to annex a report to theaccounts, known as a directors’report8. This is a report by thedirectors to the members of thecompany. It is required to addresscertain matters, namely:
– the state of the company’s affairs.To the extent necessary for anappreciation of the state of thecompany’s affairs, the reportshould address any changes inthe nature of the company’sbusiness during the year;
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6 Sections 203 and 204 Companies Act, 19907 The term ‘true and fair view’ is not defined in law. However, it is generally accepted that a set of financial statements will give a true and fair view when they have been prepared in accordance with (i) the
provisions of the Companies Acts, and (ii) accounting standards (accounting standards are statements of standard accounting practice issued by the Accounting Standards Board, an independent standardsetting body).
8 The Directors’ Report is required by section 158 of the 1963 Act as amended by section 90 of the Company Law Enforcement Act, 2001. Its contents are prescribed by section 158 of the 1963 Act andby sections 13 and 14 of the Companies (Amendment) Act, 1986.
– a fair review of the developmentof the business during thefinancial year;
– particulars of any importantevents affecting the companywhich have occurred since theyear end;
– an indication of likely futuredevelopments in the business ofthe company;
– an indication of the company’sactivities, if any, in the area ofresearch and development;
– the amount, if any, that thedirectors recommend should bepaid as a dividend;
– the steps that the directors havetaken to ensure compliance withthe requirement for the companyto maintain proper books ofaccount, and;
– the exact location of the books ofaccount.
2.6.4. Duty to Have an Annual AuditPerformed
Having prepared the financialstatements, the directors are generallyobliged by law to have the financialstatements audited at least once a year.An audit is an independent examinationof the financial statements by anindependent expert (an auditor). Havingconducted an examination of thefinancial statements, the auditor isrequired to report to the members of thecompany. In that report, the auditor isrequired to form an opinion on anumber of matters including e.g.whether the financial statements give atrue and fair view of the company’saffairs and whether the financialstatements are in agreement with theunderlying books of account. Thematters upon which auditors arerequired to report on are dealt with indetail in Information Book 5 - Auditors.
Certain companies can be exemptedfrom the requirement to have an annualaudit provided that they comply withcertain conditions9. The criteria thatmust be satisfied are set out inInformation Book 1 (section 2.10.3).
2.6.5 Duty to Maintain CertainRegisters and Other Documents
Every company has a legal obligation tomaintain certain registers and otherdocuments. Company directors areresponsible for ensuring that companiescomply with their obligations in thisregard and, consequently, directors areresponsible for ensuring that theserecords are maintained, updated asappropriate and made available to theappropriate parties.
Directors are responsible for ensuringthat the following registers and otherdocumentation are maintained by thecompany:
• register of members
• register of directors and secretaries
• register of directors’ and secretary’sinterests
• register of debenture holders
• minute books
• directors’ service contracts
• contracts to purchase own shares;
• register of interests of persons in itsshares (public limited companiesonly).
Directors should refer to section 2.10.4of Information Book 1 where theinformation required to be included inthese registers is set out in detail.
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99 The criteria and procedures for audit exemption are set out in Part III of the Companies (Amendment) (No. 2) Act, 1999.
2.6.6 Duty to File Certain Documentswith the Registrar of Companies
Company directors are legally obligedto ensure that certain documents arefiled with the Registrar of Companies.Some are required to be filed by everycompany e.g. the annual return whileothers are required to be filed only incertain circumstances e.g. on the deathof a director.
Once filed with the Registrar, thesebecome public documents and are opento inspection by any member of thepublic at the Companies RegistrationOffice. Set out below is a list of thosedocuments more commonly required toby filed with the Registrar.
• Annual return10;
• Change of registered office;
• Notice of increase in nominal(authorised) capital;
• Change of director and/or secretaryor of their particulars;
• Declaration that a person has ceasedto be a director or secretary;
• Notice that a person holding theoffice of director or secretary hasdied;
• Nomination of a new annual returndate;
• Notification of the creation of amortgage or charge;
• Memorandum of satisfaction ofcharge;
• Ordinary resolution (seeInformation Book 4 – Members andShareholders);
• Special resolution (see InformationBook 4 – Members andShareholders).
2.6.7. Duty of Disclosure
Directors are required to disclose thefollowing:
• certain personal information in theregister of directors and secretaries11.The information required is name,date of birth, address, nationality,occupation and details of any otherdirectorships12;
• interests in shares of the company orrelated companies in the register ofdirectors’ interests13;
• payments to be made to them inconnection with share transfers14;
• directors’ service contracts with thecompany must be made available forinspection by any member of thecompany15;
• where a director has in any way aninterest in a contract or proposedcontract with the company, they arerequired to declare the nature ofthat interest at a meeting of thedirectors of the company16. For thepurposes of this requirement, ageneral notice given to the otherdirectors is deemed to be a sufficientdeclaration of that interest.
2.6.8 Duty to Convene GeneralMeetings of the Company
Company law provides for two types ofmeeting of a company, namely anAnnual General Meeting and anExtraordinary General Meeting. Generalmeetings of the company are meetingsof the members and the directors atwhich certain company business isconducted.
Annual General MeetingIn general, every company is required tohold an annual general meeting (AGM)annually17. No more than 15 monthsshould elapse between each meeting.The only exception to the requirementto hold an AGM is in the case of a
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10 The annual return and its contents are dealt with in Appendix A to Information Book 1 - Companies.11 Section 51(11) Companies Act, 199012 Section 51(2) Companies Act, 199013 Section 53 Companies Act, 199014 Section 188 Companies Act, 196315 Section 50 Companies Act, 199016 Section 194 Companies Act, 1963 as amended by section 47(3) Companies Act, 1990. Also see sections 27(3), 47(1) and 47(2) of the Companies Act, 199017 Section 131 Companies Act, 1963 as amended by section 14 Company Law Enforcement Act, 200118 Regulation 8(1) of European Communities (Single Member Private Limited Companies) Regulations, 1994 (S.I. No. 275 of 1994). For further information on the provisions of S.I. 275 of 1994, see
Appendix F to Information Book 1 – Companies.
single member private limited company,where the sole member may decide todispense with the holding of an AGM18.The AGM must be held in the Stateunless otherwise provided for in thearticles or where all the members of thecompany agree.
The directors are required to presentaudited financial statements to themembers at each AGM (or unauditedfinancial statements where the companyis eligible to, and has decided to, availof the small company audit exemption –see Information Book 1 section 2.10.3).A report by the directors must also beannexed to the financial statementspresented to the members at the AGM(the matters that must be addressed inthe directors’ report are set out insection 2.6.3 above).
Extraordinary General MeetingsAs the term suggests, an extraordinarygeneral meeting (EGM) of the companydeals with matters outside the normalbusiness conducted at an AGM. Undercertain circumstances, companydirectors are required to convene anEGM of the company e.g. directors areunder a duty to convene an EGM wherethe company’s net assets (i.e. total assetsless total liabilities) have fallen to 50%or less of its called-up share capital19.Where such circumstances exist, theauditors (where an audit has beenperformed) are required to state in theiraudit report that, in their opinion, anEGM is required.
2.6.9 Directors’ Duties RegardingTransactions between the Directors andthe Company
Directors have certain responsibilitiesand obligations where they enter intotransactions with the company of whichthey are a director. Where a director ofa company or its holding company (i.e.a company owning in excess of 50% of
the shares of the company in question)or a person connected20 with a directoracquires an asset from, or sells an assetto, the company and the value of thatasset exceeds:
• €63,487 (£50,000), or;
• 10% of the company’s net assets asdetermined by reference to theaccounts prepared and laid before theAGM in respect of the last precedingfinancial year in respect of whichaccounts were so laid (or the calledup share capital where no accountshave been prepared and laid)
the arrangement must first be approvedby resolution of the company in ageneral meeting21. Note: this require-ment does not apply where the amountin question does not exceed €1,270(IR£1,000).
If the director or connected person is adirector of the holding company or aperson connected with such a director,the arrangement must be approved by aresolution in a general meeting of theholding company.
Where a company enters into a transac-tion in contravention of this provision,the arrangement is voidable at theinstance of the company (i.e. can benullified), subject to certain exceptions.
A company is generally prohibited frommaking a loan or quasi-loan (i.e. atransaction which is a loan in all butname) to a director of the company orits holding company or a connectedperson. It is also generally prohibitedfrom entering into a credit transactionor guarantee on behalf of such a personand from providing security in relationto such a transaction22. However, thisgeneral rule is subject to a number ofexceptions and savers, details of whichare set out overleaf:
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19 Section 40 Companies (Amendment) Act, 198320 A person is connected with a director of a company if he or she is a near relative of the director, in business partnership with the director or if he or she acts as trustee for a trust the principal beneficia-
ries of which are the director, his near relatives or a company which he controls. A company is connected with a director if it is controlled by that director. Furthermore, it is presumed that the solemember of a single member company is connected with a director of that company.
21 Section 29 Companies Act, 199022 Section 31 Companies Act, 1990
• the general prohibition does not applyto loans, quasi-loans and credittransactions if the aggregate value ofthe arrangement and the amount(s)outstanding from any other sucharrangements is less than 10% of thecompany’s net assets as determined byreference to the accounts prepared andlaid before the AGM in respect of thelast preceding financial year in respectof which accounts were so laid (or 10%of the called up share capital where noaccounts have been prepared andlaid)23. However, where the amount(s)outstanding under any other sucharrangement(s) come to exceed 10%of the company’s net assets for anyreason including because the value ofthose assets has fallen, the directors arerequired within two months ofbecoming aware of the situation toamend the terms of the arrangementsconcerned in order to bring the valueof loans back within the limit24.
• the general prohibition does notpreclude a company from enteringinto a guarantee or providing anysecurity in connection with a loan,quasi-loan or credit transaction madeby any other person for a director ofa company or of its holding companyif25:
– the entering into the guarantee is,or the provision of security is,given under the authority of aspecial resolution of the company,and;
– the company has provided, witheach notification of the generalmeeting at which the matter is tobe considered, a statutory declara-tion setting out the followinginformation:
– the circumstances in which theguarantee is to be entered into orthe security provided;
– the nature of the guarantee orsecurity;
– the person(s) to or from whomthe loan, quasi-loan or credittransaction is to be made;
– the purpose for which thecompany is entering into theguarantee or is providing security;
– the benefit which will accrue tothe company directly or indirectlyfrom entering into the guaranteeor providing the security;
– that the persons making thedeclaration have made a fullinquiry into the affairs of thecompany and that, having doneso, are of the opinion that thecompany will, having entered intothe guarantee or provided thesecurity, be able to pay its debtsas they fall due.
The statutory declaration must also besubmitted to the Registrar ofCompanies and is required to beaccompanied by a report from thecompany’s auditors stating whether, intheir opinion, the declaration isreasonable.
Where a company director makessuch a statutory declaration withouthaving reasonable grounds for theopinion that, having entered into theguarantee or security, the companywill be able to pay its debts as theyfall due, the transaction is voidable(cancellable) at the instance of thecompany. Moreover, that director canbe held personally liable (without anylimitation of liability) for all or any ofthe debts of the company. Similarly, ifthe company is wound up within 12months after the making of thestatutory declaration and its debts arenot paid, it is presumed (unless shownto the contrary) that the director didnot have reasonable grounds for theopinion.
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1223 Section 32 Companies Act, 199024 Section 33 Companies Act, 1990 as amended by section 77 Company Law Enforcement Act, 200125 Section 34 Companies Act, 1990 as amended by section 78 Company Law Enforcement Act, 2001
• the general prohibition does notprevent a company from making aloan or quasi-loan to any companywhich is its holding company,subsidiary or subsidiary of its holdingcompany or from entering into aguarantee or providing any securityin connection with a loan or quasi-loan made by any person to anycompany which is its holdingcompany, subsidiary or subsidiary ofits holding company. A similarexception applies to entering into acredit transaction as creditor26.
2.6.10 Duties of Directors ofCompanies in Liquidation and Directorsof Insolvent Companies
Directors have a number of duties andresponsibilities where the company ofwhich they are a director is:
• insolvent i.e. unable to pay its debtsas they fall due, or;
• in liquidation (i.e. in the process ofbeing legally dissolved).
Duties of Directors of InsolventCompaniesWhere a director of an insolventcompany (i.e. a company which cannotpay its debts as they fall due) is found tohave misapplied or wrongfully retainedor become liable or accountable for anymoney or property of the company orhas wrongfully exercised his or herlawful authority or has breached his orher duty of trust in relation to thecompany, proceedings can be institutedfor the recovery of, or for payment ofcompensation to the value of, suchmoney or property so lost.
A director can also be held personallyliable (without limitation of liability) fora company’s debts if found liable forreckless trading27. An officer of acompany will be deemed to have beenguilty of reckless trading if:
• they were party to the carrying onof business which they ought to
have known, having regard for theirgeneral knowledge, skill and experi-ence, would cause loss to thecreditors, or any one of them, of thecompany, or;
• they were party to the contracting ofa debt by the company and did nothonestly believe that the companywould be able to pay the debt as itfell due.
Similarly, if a director is found guilty offraudulent trading the director can beheld personally liable (without limita-tion of liability) for the debts of thecompany28. However, as fraudulenttrading is also a criminal offence, aperson convicted of that offence mayalso be fined or imprisoned29. A personis guilty of fraudulent trading if they areknowingly party to the carrying on ofthe business of a company with theintention of defrauding the creditors ofthe company or the creditors of anyother person.
Duties of Directors of Companies inLiquidationWhere a company is being wound up(i.e. in liquidation), the directors of thecompany are under a duty to co-operatewith the liquidator (person appointed toliquidate the company – liquidators andwinding up are dealt with in detail inInformation Book 7).
Where it is proposed to put thecompany into members’ voluntaryliquidation, a director is under a duty tomake an accurate declaration ofsolvency30. An essential feature of amembers’ voluntary liquidation is thatthe company must be solvent i.e. be ableto pay its debts as they fall due.Accordingly, the directors, or a majorityof them, are required to make a swornstatement to the effect that the companyis solvent. The declaration of solvencymust be accompanied by a report froman independent person who is qualifiedto act as the company’s auditor. That
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26 Section 35 Companies Act, 1990 as amended by section 79 Company Law Enforcement Act, 200127 Section 297A Companies Act, 1963 (as inserted by S138 Companies Act, 1990)28 Section 297A Companies Act, 1963 (as inserted by S138 Companies Act, 1990)29 Section 297 Companies Act, 196330 Section 256 Companies Act, 1963 as amended by section 128 Companies Act, 1990
independent person is required to forman opinion as to whether the statementof solvency is reasonable.
Where, contrary to the statutorydeclaration of solvency, a company isactually insolvent (i.e. unable to pay itsdebts), a company director can be madepersonally liable for some or all of thecompany’s debts31. Furthermore, wherea company’s debts have not been paidor provided for 12 months after thecommencement of the members’voluntary winding up, it is presumedthat the directors did not have reason-able grounds for their opinion that thecompany was solvent32.
2.7 Company Directors’ Powers
A company’s directors act on behalf ofthe company. They only have powers todo what the company itself is legallyentitled to do. The powers that directorshave are those which have beenconferred upon them by the company,usually via the company’s articles ofassociation.
Normally, directors’ powers are conferredcollectively. These powers are formallyexercised by a resolution at a boardmeeting, usually decided by a majority ofvotes. A company is obliged to keepminutes of such meetings33. Wheredecisions are made informally, acompany’s articles of association usuallyaccept their validity, provided that aresolution is signed by all of the directors.
Typically, the articles of association of acompany provide that the directors mayexercise all of the powers of thecompany which are not required by theCompanies Acts or by the articles ofassociation to be exercised by thecompany in a general meeting (i.e. in ameeting of the members). In suchcircumstances, the delegation to thedirectors is unrestricted, and they areentitled to do whatever the company isempowered to do.
As is the case with a company, adirector is precluded from doinganything which is illegal or ultra vires(i.e. outside the powers of thecompany). The company cannot in ageneral meeting validly set aside anaction taken by the directors which iswithin the powers conferred on them bythe articles. Similarly, the companycannot in a general meeting take anystep which is delegated to the directorsby virtue of its articles of association.
In addition to the actual powersdelegated to a director by the board, adirector may also have ‘ostensibleauthority’. That is to say, where acompany holds a director out as havingauthority to do something or anotherparty is led to believe that a director hasthe authority to commit the company ina certain way and no attempt is made tocorrect the impression given, thecompany may be precluded fromsubsequently denying this authority.
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1431 Section 256(8) Companies Act, 196332 Section 256(9) Companies Act, 196333 Section 145 Companies Act, 1963
3.0 Penalties Under the Companies Acts
3.1 Penalties for Criminal Offences
Court Imposed Penalties
Under the Companies Acts, provision ismade for two types of criminal offence,namely summary and indictableoffences. A summary offence isgenerally of a less serious nature and istried before a judge only in the DistrictCourt. Indictable offences are generallyof a more serious nature. Indictableoffences can, in the same way assummary offences, be tried in theDistrict Court before a judge only.However, the distinction between asummary offence and an indictableoffence is that, due to their more seriousnature, indictable offences can also betried in the Circuit Court i.e. before ajudge and jury. Where this course istaken, the indictable offence is said tobe prosecuted on indictment.
Where an offence is prosecuted onindictment, the penalties provided forby the law on conviction are generallyconsiderably higher than had theoffence been prosecuted summarily.
In general the maximum penalty onconviction:
• of a summary offence under theCompanies Acts is €1,900 and/or12 months imprisonment, and;
• of an indictable offence under theCompanies Acts is €12,700 and/or5 years imprisonment.
However, the Companies Acts alsoprovide for considerably highersanctions in respect of certain offencese.g. fraudulent trading (€63,000 and/or7 years imprisonment on conviction onindictment) and insider dealing(€254,000 and/or 10 years imprison-ment on conviction on indictment).
Administrative Fines
Under the provisions of the CompanyLaw Enforcement Act, 2001, theDirector of Corporate Enforcement alsohas the discretion to impose an adminis-trative fine rather than initiating asummary prosecution. Where theDirector chooses this course of action,provided that the fine is paid and thedefault in question is remedied within21 days, no prosecution will ensue34.
3.2 Civil Penalties
Disqualification
In addition to fines and penalties, thereare also provisions for other sanctionsunder the Acts. Persons convicted onindictment of an indictable offencerelating to a company or involvingfraud or dishonesty are automaticallydisqualified from acting as companydirectors/officers (see also Appendix B).
The Director of Corporate Enforcementcan also apply to the Courts seeking thedisqualification of any person:
• guilty of two or more offences offailing to maintain proper books ofaccount, or;
• guilty of three or more defaultsunder the Companies Acts.
Restriction
The provisions relating to the restrictionof company directors apply to insolventcompanies i.e. companies that areunable to pay their debts as they falldue. Where a company which goes intoliquidation or receivership35 is insolvent,a director of the company who fails tosatisfy the High Court that he or shehas acted honestly and responsibly willbe restricted for a period of up to fiveyears.
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34 Section 109 Company Law Enforcement Act, 200135 A liquidator’s function is to collect and realise the assets of the company, to discharge the company’s debts, to distribute any remaining surplus, investigate the company’s affairs and to legally dissolve the
company. The function of a receiver is to dispose of certain assets of the company in order to allow the repayment of a debt to a creditor e.g. a bank. See Information Book 7 for further information onliquidators and receivers.
Such a restriction prevents a personfrom being a director or secretary orbeing involved in the formation orpromotion of any company unless it isadequately capitalised. In the case of aprivate company, the capital require-ment is €63,487 (£50,000) in allottedpaid up share capital, and in the case ofa public company, €317,435(£250,000). Such a company is alsosubject to stricter rules in relation tocapital maintenance. The topic ofrestriction is dealt with in detail inAppendix B.
Strike Off
Where a company defaults inperforming certain of its legal obliga-tions e.g. fails to file an annual returnwith the Registrar of Companies, theRegistrar can strike the company off theregister of companies.
If struck off the register, ownership of acompany’s assets automatically transfersto the State. Ownership will remainwith the State until such time as thecompany is restored to the register.While struck off, the liability of everydirector, officer and member of thecompany continues and may beenforced as though the company hadnot been dissolved36.
The procedures required to have acompany reinstated to the register aredealt with in Appendix A toInformation Book 1.
4.0 Useful Addresses
Office of the Director of CorporateEnforcement,16 Parnell Square,Dublin 1.Tel: 01 858 5800 Web: www.odce.ie
Companies Registration Office14, Parnell Square,Dublin 1.Tel: 01 804 5200Web: www.cro.ie
Department of Enterprise, Trade &Employment,Kildare Street,Dublin 2.Tel: 01 631 2121Web: www.entemp.ie
Company Law Review Group,Earlsfort Centre,Hatch Street Lower,Dublin 2.Tel: 01 631 2763Web: www.clrg.org
BasisBusiness Access to State Information &ServicesWeb: www.basis.ie
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16 36 Section 12B(1) Companies (Amendment) Act, 1982 as inserted by section 46 Company Law Enforcement Act, 2001
Appendix AAppointment and Removal ofDirectors and Related Matters
Appointment of Directors
The first directors of a company must benamed in a statement delivered to theRegistrar of Companies and will usually alsobe named in the articles of association. Therules and procedures governing subsequentappointments are governed by the articles ofassociation. A director is usually appointed bythe company in a general meeting. Thestandard articles as contained in theCompanies Act, 1963 provide that one thirdof directors, apart from the managing director,retire each year at the AGM and may, if theywish, offer themselves for re-election.
Where a director dies or resigns, the articlesgenerally empower the board of directors tofill such a vacancy until the next generalmeeting of the company when the appointedperson is eligible for re-election. The articlesmay also be drafted in a manner permittingthe appointment of certain persons asdirectors for life (however, life directors areonly permitted in private companies).
Removal of Directors37
The members of the company are empoweredto dismiss or remove a director by passing anordinary resolution (i.e. by simple majority).Where a director is appointed for life by thememorandum or articles of association, such adirector can only be removed if the correctprocedure for the alteration of thememorandum or articles is followed.
Where a resolution to remove a director isproposed, 28 days notice must be given to thecompany and to the director concerned, unlessthe articles of association provide otherwise.Members must be notified of all written (non-defamatory) representations in relation to theproposed resolution, and the director mayrequire that the representations be read at themeeting and that he or she be afforded an
opportunity to speak on the resolution at themeeting. A director who is removed cannot bedeprived of compensation or damages towhich he or she is entitled, for example, undera contract of employment.
Remuneration of Directors
The articles usually provide that the companyin general meeting shall determine theremuneration and expenses of the directors.Contracts of employment entered intobetween a company and a director for a termin excess of five years, and which cannot beterminated by notice or which can only beterminated in specific circumstances, must beapproved by the members in general meeting38.
Readers should note that it is unlawful for acompany to pay a director’s remuneration freeof income tax.
Requirement to Have One Director Resident in the State39
Except in limited circumstances, at least oneof the directors of a company must be residentin the State. This rule does not, however,apply to a company which holds a bondworth €25,395 (£20,000). The purpose of thebond is to provide for the payment of anyfines that might be imposed on the companyunder the Companies Acts or certain fines andpenalties imposed under the TaxesConsolidation Act, 1997. An exemption isallowed where the Registrar of Companiesgrants a certificate stating that the companyhas a real and continuous link with one ormore economic activities being carried on inthe State. Further information on bonds isavailable from the Registrar of Companies.
Limitation on the Number of Directorships40
A person is not permitted to be a director orshadow director of more than 25 companiesat any one time. However, in calculating thenumber of companies of which the personconcerned is a director, companies in respectof which the Registrar of Companies hascertified that they have a real and continuouslink with an economic activity being carried
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37 Section 182 Companies Act, 196338 Section 28 Companies Act, 199039 Section 43 Companies (Amendment) (No. 2) Act, 199940 Section 45 Companies (Amendment) (No. 2) Act, 1999
out in the State are excluded, as are publiclimited companies and other publiccompanies. A number of other companiessuch as companies quoted on the StockExchange, investment companies and certainbanking companies are also excluded.
Appendix BRestriction and Disqualification of Company Directors
Introduction
Part VII of the Companies Act, 1990introduced provision for the restriction anddisqualification of company directors (andothers) under certain circumstances.Restriction and disqualification are serioussanctions having important consequences fordirectors and are dealt with in detail below.
Restriction of Directors
The provisions relating to the restriction ofcompany directors apply to insolventcompanies i.e. companies that are unable topay their debts as they fall due. Where acompany which goes into liquidation orreceivership41 is insolvent, a director of thecompany who fails to satisfy the High Courtthat he or she has acted honestly and respon-sibly will be restricted for a period of up tofive years.
Such a restriction prevents a person frombeing a director or secretary or being involvedin the formation or promotion of anycompany unless it is adequately capitalised. Inthe case of a private company, the capitalrequirement is €63,487 (£50,000) in allottedpaid up share capital, and in the case of apublic company, €317,435 (£250,000). Such acompany is also subject to stricter rules inrelation to capital maintenance (see below).Restrictions will also apply to shadowdirectors and persons who are directors of thecompany within twelve months prior to thewinding up.
A person will not be restricted as a directorprovided that the High Court is satisfied thatthey:
• have acted honestly and responsibly inrelation to the conduct of the affairs ofthe company and there is no other just
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1841 A liquidator’s function is to collect and realise the assets of the company, to discharge the company’s debts, to distribute any remaining surplus, investigate the company’s affairs and to legally dissolve the
company. The function of a receiver is to dispose of certain assets of the company in order to allow the repayment of a debt to a creditor e.g. a bank. See Information Book 7 for further information onliquidators and receivers.
and equitable reason for imposing therestrictions;
• are a nominee of an institutionproviding credit facilities to thecompany provided that personalguarantees from the directors have notbeen obtained for such facilities, or;
• are solely a nominee of a venture capitalcompany which has purchased orsubscribed for shares in the company.
In the context of the foregoing, it should benoted that in relation to nominees of creditinstitutions and venture capital companies, inorder to avoid restriction the individuals inquestion will also have to demonstrate thatthey have acted honestly and responsibly.
On application by a liquidator or a receiver,the High Court may extend the period ofrestriction as it sees fit. It may also lift therestriction on the application of a restrictedperson within one year of the imposition ofthe restriction order.
In considering whether to restrict a director,the Court takes into account matters such as:
• whether the company continued totrade when the director knew it wasinsolvent;
• the preservation of basic records andcompliance with the Companies Acts;
• the accuracy or reliability of thestatement of affairs42 sworn by thedirector;
• the lifestyle maintained by the director ifit was funded by the company.
Rules Regarding Capital Maintenance ofCompanies Who Have a Restricted Director(or Secretary)43
Such companies are not permitted to givefinancial assistance for the purchase of theirown shares. Moreover, the restrictionsnormally only applying to public limitedcompanies (plcs) under sections 32-36 of theCompanies (Amendment) Act, 1983 regardingthe acquisition of non-cash assets from, interalia, directors apply to the company (regard-less of whether it is a plc or not).
Disqualification of Directors
A court may disqualify a person from actingas, inter alia, a director. The effect of beingdisqualified is that when such a disqualifica-tion order is imposed, the person concerned isdisqualified from acting as a director, auditor,officer, receiver, liquidator or examiner orbeing involved in the promotion, formation ormanagement of a company for a period of fiveyears or such other period as the Court maydirect.
Automatic Disqualification
Disqualification is automatic in the followingcircumstances:
• where a person is convicted on indict-ment of any indictable offence44 inrelation to a company or involvingfraud or dishonesty45;
• where a person fails to notify theRegistrar of Companies on appointmentas a director that they have been disqual-ified in another State or makes a false ormisleading statement in this regard46;
• where a person is convicted of actingwhile restricted except in the circum-stances permitted by statute47. Any personguilty of acting as a director whilerestricted, in addition to being automati-cally disqualified, is also guilty of acriminal offence (for which the maximumpenalty is €1,904 and/or 12 monthsimprisonment on summary conviction or€12,697 and/or 5 years imprisonment onconviction on indictment);
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42 A statement of affairs is a statutory statement of the company’s assets and liabilities, together with full details of all of the company’s creditors i.e. names, addresses, occupations and amounts owed.43 Section 155 Companies Act, 199044 The Companies Acts provide for two types of offence, namely summary offences and indictable offences. Summary offences are tried before a judge only in the District Court. Such offences are said to be
tried summarily. Indictable offences, which are generally more serious in nature, can be also be tried summarily i.e. in the District Court. However, the distinction is that an indictable offence can also betried on indictment i.e. before a jury in the Circuit Court. Where an indictable offence is tried on indictment the penalties (i.e. fines and prison sentences) available to the Court on conviction aregenerally substantially higher than were it to be tried summarily.
45 Section 160(1)(b) Companies Act, 199046 Section 160(1A) as inserted by section 42 Company Law Enforcement Act, 200147 Section 161 Companies Act, 1990
• where a person is convicted of actingwhile disqualified. Any person guilty ofacting while disqualified will automati-cally have their period of disqualifica-tion extended for a further 10 years.Moreover, they are also guilty of acriminal offence (for which themaximum penalty is €1,904 and/or 12months imprisonment on summaryconviction or €12,697 and/or 5 yearsimprisonment on conviction on indict-ment);
• where a person is convicted of acting asauditor, liquidator or examiner of, or inthe formation, promotion or manage-ment of, any company while anundischarged bankrupt48.
Discretionary Disqualification
The Court has the discretion to disqualify aperson for such period as it deems fit wherethat person, while acting as director, promoter,auditor, officer, receiver, liquidator, orexaminer of a company has been guilty of anyof the following:
(a) a fraud in relation to the company, itsmembers or creditors49;
(b) a breach of duty in relation to thecompany50;
(c) conduct which makes them unfit to beconcerned with the management of acompany or fraudulent or recklesstrading which resulted in a declarationof personal liability for some or all ofthe debts of the company51;
(d) persistent default in relation to obliga-tions under the Companies Acts52.Persistent default is defined as beingconclusively proven where in any fiveyear period a person has been guilty ofthree or more defaults;
(e) two or more offences of failure tomaintain proper books of account53;
(f) in the case of a director of an insolventcompany, failure to file all outstandingannual returns on request and thecompany is struck off the register ofcompanies as a result54.
The Court may also disqualify a person wherethey have been disqualified under the law ofanother State and the Court is satisfied that, ifthe conduct causing that disqualification hadoccurred in this State, disqualification wouldhave been appropriate55.
Where a restricted person is, or becomes, adirector of a company which commences to bewound up within a period of five yearsfollowing the commencement of the windingup that caused the restriction and it appears tothe liquidator that the company is unable topay its debts, the Court may if it deemsappropriate, disqualify that person56.
Civil Consequences of Acting While Restricted or Disqualified
Any person guilty of acting as a director whilerestricted (except in those circumstancespermitted by statute) or disqualified can, atthe discretion of the Court, be made person-ally liable (without limitation of liability) forthe debts of the company if the companybecomes insolvent during or within a periodof twelve months from the date they acted asdirector while restricted or disqualified57.
Registers of Restricted and Disqualified Persons
The Registrar of Companies is required tomaintain a register of restricted persons58 anda register of disqualified persons59. The CourtRegistrar is required to notify the Registar ofCompanies when the Court grants a restric-tion or disqualification order against anindividual. These registers are available forinspection by any member of the public andare maintained at the Registrar’s premises.
The Director of Corporate Enforcement alsointends to publish details of all restriction anddisqualification orders granted by the Courtson his website (address: www.odce.ie.).
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48 Section 169 Companies Act, 199049 Section 160(2)(a) Companies Act, 199050 Section 160(2)(b) Companies Act, 199051 Section 160(2)(c), (d) and (e) Companies Act, 199052 Section 160(f) Companies Act, 199053 Section 160(2)(g) Companies Act, 199054 Section 160(2)(h) Companies Act, 199055 Section 160(2)(i) Companies Act, 199056 Section 161(5) Companies Act, 199057 Section 163(3) Companies Act, 199058 Section 153 Companies Act, 199059 Section 168 Companies Act, 1990
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