Company Law: Has the Sheer Size and Complexity of Company Law Now Reached Practical Joke Status?

Date: July 19th, 2010 | Filed under: Mediation & Company Law Articles | Tags: 2011, Company law, ireland

I recently bought the latest copy of the MacCann’s Companies Acts 1963 to 2009 and in doing so I was about to throw out my old copy and I had a quick look at the foreword by the former Chief Justice Ronan Keane in which he wrote on 29th October1993.

“….. I referred at the outset to 1908 Act. That fine company lawyer, Alexis Fitzgerald, liked to recall that the 1908 Act and the 1963 Act had at least this much in common, that they both became law on April 1st. This may have been  pure chance. Or it may have reflected a sense of history on the part of those responsible in 1964. Or perhaps it was an ironic gesture on someone’s part: the staggering complexity of modern Irish company law sometime times looks very much like a practical joke, giving the relatively small size of the Irish economy………..

But back then in 1993, we had just seven different companies acts to  contend with, today we have 15 different companies acts, dozens of complex and serious regulations and EU directives and in my humble opinion company law is totally incomprehensible to your average company director of which there are in around 500,000 or so in charge of companies today in Ireland.

Just take a quick look at the latest offering, S.I. number 220 of 2010, EUROPEAN COMMUNITIES (STATUTORY AUDITS) (DIRECTIVE 2006/43/EEC) REGULATIONS 2010!

This is one serious piece of work that has recently been introduced here as a statutory instrument, it contains 121 sections, two schedules and it’s the equivalent of another new companies act but instead it’s been introduced here as a regulation and it makes significant changes to Irish company law. However, even if you have the latest edition of the MacCanns Companies Acts, you will have to refer to these regulations if you want to keep to the up-to-date with Irish company law.

As an example of how complex and mixed up things are, up until recently Irish auditors could be brought  before a disciplinary committee of  their Institute when a number of them were discovered to be auditors and also members of the company.

If you ever hear an accountant  saying he works for itself, true enough he does but he is very heavily supervised by his own Institute and the Institute now heavily supervised by the Irish Auditing and Accounting Supervisory Authority, IASSA, their Institute’s have pointed out that in accordance with Section 187(2)(h) of the Companies Act  1990 an auditor cannot be a member of the company you audits.

True, Section 35 of the Companies (Auditing and Accounting) Act 2003,  inserts a new Section 187(2)(h) of the Act of 1990 and this legislation being enacted on 23rd December 2003.

Section 2 of the Act of 2003 goes on to state that the Act shall come into operation on the date that the Minister may, by order, appoint and that different days may be appointed under this section, by one or more orders, for different purposes or different provisions of this Act.

In that regard, I find that the Minister for Enterprise Trade and Employment has made eight orders pursuant to Section 2 of the Companies (Auditing and Accounting) Act  2003.

I set out here the relevant orders made:

• S.I. 667 of 2007 – Companies (Auditing and Accounting) Act 2003 (Procedures Governing the Conduct of Section 23 Enquiries) Regulations 2007

• S.I. 61 of 2007 – Companies (Auditing and Accounting) Act 2003 (Commencement) Order 2007

• S.I. 619 of 2006 – Companies (Auditing and Accounting) Act 2003 (Prescribed Bodies for Disclosure of Information) Regulations 2006

• S.I. 57 of 2006 – Companies (Auditing and Accounting) Act 2003 (Prescribed Accountancy Bodies) Regulations 2006

• S.I. 56 of 2006 – Companies (Auditing and Accounting) Act 2003 (Commencement) Order 2006

• S.I. 791 of 2005 – Companies (Auditing and Accounting) Act 2003 (Commencement) (No. 2) Order 2005

• S.I. 686 of 2005 – Companies (Auditing and Accounting) Act 2003 (Commencement) Order 2005

• S.I. 132 of 2004 – Companies (Auditing and Accounting) Act 2003 (Commencement) Order 2004.

However, no order had been made by the Minister bringing the relevant Section 35  into operation as is required by law.

There are also numerous other sections within the 2003 Act and in particular Section 45 of the Act which although enacted, has not been commenced into law.

Regulation 6 of SI 220 of 2010, the new statutory audit regulations now deletes subsection 2 of section 187 of the Act of 1990. This particular section is not being commenced into law, it is being abandoned. However, auditors are not in the clear they need to go to Part 7 of the new regulations and regulation 71 now inserts the prohibition than an auditor cannot be a member of a company that they are an auditor of.

It probably doesn’t get any more complicated than this. I have a suspicion that many an auditor may well have been reprimanded by their professional body under these regulations that were never enacted into law.

Company Law Today and What’s Happening in 2011

The Companies Acts, 1963 – 2009

The Principal Act, The Companies Act, 1963

Companies (Amendment Act) 1977

Companies (Amendment) Act, 1982

Companies (Amendment) Act, 1983

Companies (Amendment) Act, 1986

Companies (Amendment) Act, 1990

Companies Act, 1990_____________________Since 2000

Companies (Amendment) Act, 1999

Companies (Amendment) (No. 2) Act 1999

Company Law Enforcement Act 2001

Companies (Auditing and Accounting) Act, 2003

Investment Funds, Companies and Miscellaneous Provisions Act 2005

Investment Funds, Companies and Miscellaneous Provisions Act 2006

Companies (Amendment) Act, 2009

Companies (Miscellaneous Provisions) Act 2009

The latest legislation, we got 2 Companies Acts in 2009 alone

Companies (Amendment) Act 2009

This new company legislation enacted and commenced into law in  July 2009, expands the powers of the Director of Corporate Enforcement (“ODCE”) to police compliance with and to investigate suspicions of breaches of the Companies Acts.

It’s Companies Act  number 14 and it contains just 11 sections of new law.

The changes will:

give to the ODCE a specific right of access to and the power

• to take copies of books of a company that records a director’s declaration of his or her interest in any contract or proposed contract with the company;

• clarify the ODCE’s power to require the production of records from third parties where the records relate to the business of a company under investigation;

• subject to “appropriate safeguards”, expand the power for the ODCE to enter and search premises (including allowing the court to extend the period of validity of a warrant, and permitting the ODCE to seize and remove papers and electronic information for subsequent examination elsewhere); and

• permit the ODCE to seize information (whether hard copy or in electronic form) that is claimed to be legally privileged, and provide for its storage by the ODCE – without having been examined by ODCE – pending determination by the High Court as to whether any

privilege attaches.

Transactions with Directors – Disclosure Obligations

The new Act increases disclosure obligations in respect of certain transactions between a company and any of its directors, and in that regard to apply special rules for disclosure by “licensed banks”. In that context the Act is a  recast a breach of the provisions governing loans by a company to any of its directors or connected persons as a criminal offence.

Directors’ Residency Requirements

The Act also amends the requirement that has existed since 1999 that at least one director of many Irish companies is resident in the State or that a bond be provided in respect of certain breaches of the Companies Acts and Taxes Acts by that company. It is provided that, instead, a director that is resident in an EEA Member State will suffice. The Act will also clarify the circumstances in which a company is to be regarded as having a real and continuous link with one or more economic activities that are being carried on in the State, the existence of which link removes the necessity of having a resident director.

The Directors’ Residency requirements were introduced in 1999 to curb the massive problems that existed in the late 90s with regard to the Irish non-resident companies and when company compliance rates were as low as 12%. The country was overrun at that time with non-resident directors who had little or no respect for our  company law. Whilst a Romanian or Bulgarian National cannot work in the State without a work permit, there appears now to be no prohibition on them becoming a director of an Irish Company, this new change in Irish company law appears to introduce an interesting loophole in the work permit legislation whereby people from these States could use the vehicle of the Irish private company as a mechanism to sidestep the work permit regime!

COMPANIES (MISCELLANEOUS PROVISIONS) ACT 2009

It’s Companies Act  number 15 and it contains just 5 sections of new law.

Some of the provisions resemble something that you might think that were taken from the Star Trek Transposer room on the Starship Enterprise, you pass resolutions and fill in some forms and hey presto, the magic happens, you move the corporate body of a Cayman Islands or a Bermudan company simultaneously from that jurisdiction to the Companies Registration Office at 14 Parnell Street Square in Dublin 1!

New regulations and new companies registration office forms detailing how all this can be achieved are expected very shortly and it will be interesting to see how many companies migrate from the warmer climates to our shores!

Most of the other provisions of this Act come into effect immediately.

The Companies (Miscellaneous Provisions) Act 2009 amends company law in a range of areas.

US GAAP

Firstly it provides that parent companies incorporated in Ireland, many of whom already have a substantial presence in the State, can continue for a limited period to prepare their accounts in accordance with US Generally Accepted Accounting Principles, known as “US GAAP”, if they comply with specified criteria.

The companies in question have moved, or are in the process of moving their parent companies to Ireland and have a continuing obligation, because of their US listings to produce US GAAP accounts. There are logistical difficulties and financial implications involved with changing in a short time span either to Irish or International Financial Reporting Standards, which are those normally followed in the State. The Act provides for a transitional period to allow for this to take place in an orderly manner.

The period in respect of which an availing company can use these standards is set at a maximum of four years, and the date of termination of the proposal as the end of 2015.

The Act also gives the Minister for Enterprise, Trade and Innovation the power to prescribe other internationally recognised accounting standards for similar companies for a similar limited period of time.

It’s Companies Act  number 15 and it contains just 5 sections of new law.

Migrating Funds

The Act also introduces a mechanism whereby certain collective investment fund entities can migrate their registered offices into and out of Ireland without firstly having to wind up in their current jurisdiction. This measure was introduced at the request of the Irish funds industry who reported that there is a window of opportunity to attract for Ireland to attract investment funds business from third countries if our laws were to allow such a mechanism. The funds entities in question are seeking to relocate to well regulated jurisdictions. This would respond to investor concerns arising from the recent financial turmoil.

This mechanism will be available to funds migrating from and to jurisdictions that will be prescribed by the Minister. Inward migrating funds will be authorised and supervised by the Irish Financial Regulator in the same way as existing collective investment funds already based here.

THE NEW COMPANIES BILL 2011

It’s here now, approved by Government and already being worked on by the Office of the Parliamentary Draughtsman.  The draft heads of this gigantic new Companies Bill in a published format are available from the CLRG, www.clrg.org.  The exact enactment and commencement into law depends on its inevitable passage through the Oireachtas.  However, the CLRG will hand over a practically complete Companies Bill, thus hastening its here nor there is a lack of willingness to ensure their impeccable good hour or in a weirdly good reading in the Oireachtas.  At the end of the day, much of the work here will fall on the members of the select committee who will read the Bill in its entirety line by line and move it through the Houses of the Oireachtas

It’s been a huge overhaul of our company law. The Company Law Review Group was devised as the engine for delivering a world-class companies code in Ireland.  On foot of a Government decision, Mary Harney TD, the then Tánaiste and Minister for Enterprise, Trade and Employment, set up the Review Group in February 2000.   The Group operated on an administrative basis until it was accorded a statutory advisory status in the Company Law Enforcement Act 2001.

The 2001 Act sets out the role and the advisory responsibilities of the Review Group and the basis on which its members are appointed.  The membership brings together the expertise of company law practitioners, Government departments and agencies, recognised professional bodies, regulatory bodies and the social partners. It is chaired by Thomas B Courtney.

The members of the CLRG generously give of their time and expertise on a voluntary basis.   Their project to reform and modernise company law is perhaps the biggest single regulatory reform project ongoing in Ireland today. The completion of their work will make an enormous difference to the thousands of company directors and other users of company law in Ireland. However, corporate life is not going to get any easier for them, there is an ever-increasing burden of corporate governance to be adhered to, but all the rules and regulations and procedures will be condensed in one single volume of law.

Dr. Courtney delivered the First Report of the Company Law Review Group to the Tánaiste in 2002.  The focus of the report was on simplification.  The general objectives of the report are that the reformed and streamlined companies code should be effective, intelligible to company law directors and shareholders, and that the law should reflect how business is actually transacted. The report reflects throughout its 195 individual recommendations the Review Group’s concern to maintain creditor and shareholder protection.

The big idea at the heart of the report is to replace the public company (plc), by the most common type of company, the private company limited by shares as the standard type of company.  This will accord with the actual reality that 90% of all companies are private companies limited by shares.   This will bring the advantage, particularly to small and medium sized businesses, of clarity and relative simplicity in the regulatory and compliance regime.

The Company Law Review Group, CLRG, actively encourage all users of company law, company officers, shareholders, creditors and other stakeholders to make any submission whatsoever to the group if they feel there is any issue in any area of company law which needs to be reviewed or if they feel an existing provision of company law needs to be amended or repealed.

Accordingly, now is the time to communicate with the CLRG.  Full details of the work programme and how to make a submission can be found at the very useful website of the group, www.clrg.org

The Minister gave approval for an enhanced consultation process, whereby the constituent parts of the General Scheme of the proposed New Consolidation Bill , be made available, on completion by the Drafting Committee of the CLRG to the public through their website.

The General scheme of the Companies Consolidation and Reform Bill-Pillar A

and

General scheme of the Companies Consolidation and Reform Bill-Pillar B

Both available from www.clrg.org free of charge are summarised briefly here but should be read in their entirety from the General Scheme:

Pillar A – The Private Company as the New Model Company

Pillar A deals exclusively with the private company limited by shares, referred to in the Review Group’s First Report as the company limited by shares or  proposed new name, the CLS..

The General Scheme will give effect to the primacy of the private company as the preferred corporate entity of choice and it will be moved to centre stage and be the new model company in Irish company law

The simplification of Irish company law is being achieved in part through structural changes to the legislation. The self-contained approach proposed for the private company is comprised of 14 separate Parts and every provision of company law that is or may be applicable to the private company is to be found in Pillar A,:

1 – Definitions and Interpretation

2 – Incorporation and Registration

3 – Shares and Share Capital

4 – Corporate Governance

5 – Duties of Directors and Others

6 – Accounts, Audit and Annual Return

7 – Debentures and Charges

8 – Receivers

9 – Reconstructions and Arrangements

10 – Examinership

11 – Winding-Up

12 – Strike-Off and Restoration

13– Compliance, Investigation and Enforcement

14 – Powers and Duties of the Minister and Regulatory and Advisory Bodies

The result of this re-structuring is a unified body of legislation, comprised of some 750 sections of law.

Pillar A represents both a consolidation and a simplification of existing legislative provisions.

Distilled into its 14 Parts are all provisions in the Companies Acts and significant statutory instruments that are relevant to private companies limited by shares. In so providing the Review Group is following the “thinking small first” principle enunciated in its First Report and believes it has ensured that

(a)       the law is clear and accessible;

(b)       accuracy and certainty have not been sacrificed in an attempt to make the law merely superficially more accessible and

(c)       the legislation has been structured in such a way that the provisions that apply to the private company are easily identifiable.

The key features of the private company provided for in Pillar A are:

• It is to be limited by shares and must has a share capital.

• It is to have the same capacity as a natural person i.e. the doctrine of ultra vires will have no application to the private company.

• It is to have a one-document constitution, which will replace the current two document constitution that is the Memorandum and Articles of Association.

• It is to have a limit of 99 members, provided that there will be a carve-out from this for property management companies that are formed as private companies so that they may have an unlimited number of members provided that they are all co-owners in the same development.

• It cannot publish a prospectus or list its shares or debenture.

• It can have just one director and a company secretary (who may not be the same persons);

• It can have just one member.

• Its member (or members) can waive the requirement to hold an AGM.

• Its members can pass a majority written resolution.

• It will be eligible for audit exemption, provided it meets the requirements for availing of the exemption.

An elective conversion of existing private companies limited by shares to the new model private company is proposed and it is thought that the advantages are such as to mean that most companies that will be eligible to participate in the new model company regime will do so.

Pillar B – Other Corporate Forms and Miscellaneous Provisions

The General Scheme envisages that, in addition to the private company, there will be   ten other types of company, viz. –

1.         The public limited company, or PLC – limited by shares

2.         The designated activity company or DAC

2.1       – limited by shares or

2.2       – limited by guarantee having a share capital

3.         The Guarantee Company – limited by shares without a share capital

4.         The Unlimited Company

4.1       – private unlimited company with a share capital (ULC); or

4.2       – public unlimited company with a share capital (PUC); or

4.3       – public unlimited company without a share capital (PULC).

5.         External Companies

6.         Unregistered Companies

7.         Investment Companies

Apart from the external, unregistered and investment companies, the General Scheme provides for five generic types of company:

(1)       the new model company (i.e.the private CLS);

(2)       the public limited company;

(3)       the designated activity company;

(4)       the guarantee company and

(5)       the unlimited company.

The law applicable to each of these types of company is provided for in Pillar B of the General Scheme, which is comprised of 10 Parts, viz.:

1 – Definitions

2 – Public Limited Companies

3 – Designated Activity Companies

4 – Guarantee Companies

5 – Unlimited Companies

6 – Re-registration and Conversion

7 – External Companies

8 – Unregistered Companies

9 – Investment Companies

10 – Miscellaneous

The architecture of Parts 2, 3, 4, 5, 7, 8 and 9 of Pillar B (each of which concerns a particular type or generic categorisation of company) follows a uniform path.

First, in each such Part in Pillar B, the law that applies to the private company, as set out in Pillar A is expressly applied to the Pillar B type company, subject to the disapplication of certain provisions that are not relevant or otherwise inappropriate to the Pillar B-type company.

Secondly, additional provisions that are not contained in Pillar A (because

they are of no relevance to private companies) are set out where they are applicable to a particular Pillar B-type company.

The Company Law Review Group appeared to have finished this draft Bill towards the end of 2006, it seems to have been sitting on a shelf somewhere in the Parliamentary Draughtsman’s office waiting to be finalised into a Bill that can be initiated in the Oireachtas, it’s over three years late and doesn’t look like it’s going to happen this year, maybe towards the end of next year, nobody is saying exactly when it will happen. Even if this draft legislation is introduced in 2011 it could take three or four years to work its way through the Oireachtas, it will be the largest piece of legislation in the history of the State, businesses desperately need a reformed and modern company code, however, it’s unlikely this will be fully operational until around 2015, which is far too late for the times we live in today.

Brian Walker BL

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