1. What's happening?
The Companies Act 2014 (the "2014 Act") comes into force on 1 June 2015, consolidating and reforming Irish company law. In particular, directors' duties, having long been the product of ad hoc decisions by the Irish courts, will now have a legislative basis. For the first time in Irish law, a concise statement of the key fiduciary duties of directors, whether executive or non-executive directors, of an Irish company, whether public of private companies, will exist.
Putting these duties in a one-stop shop statutory box (namely part 5 of the 2014 Act) will make it easier for directors to clearly ascertain what duties are expected of them in their capacity as a director and will, it is hoped, generate an increase in corporate compliance activity.
While the 2014 Act codifies and collates existing directors' duties, it is important for directors to be aware that the 2014 Act goes much further than simply listing familiar and traditional duties. There is a new, and significant, emphasis on directors' roles in relation to compliance and new onerous penalties (and bolstered existing penalties) for breaches of directors' duties to be mindful of.
2. What does this mean?
2.1. Fiduciary Duties
Among the principal fiduciary duties now codified in the 2014 Act are the following:
- The duty to act in good faith in what the director considers to be the interests of the company;
- The duty to act honestly and responsibly in relation to the conduct of the company's affairs;
- The duty not to use the company's property, information or opportunities for the director's own (or anyone else's) benefit;
- The duty to avoid any conflict between the directors' duties to the company and the directors' other interests; and
- The duty to exercise the care, skill and diligence which would be exercised by a reasonable person having the knowledge and experience (i) that may reasonably be expected of a person in the same position as the director and; (2) which the director has.
The foregoing duties are owed to the company by all directors, shadow directors and de facto directors.
2.2. General Duties
In addition to fiduciary duties, directors have many other statutory duties and responsibilities. Existing legislation in relation to health & safety, data protection, employment law etc. remains relevant and unchanged by the 2014 Act.
A more significant change to the current landscape of directors' duties is the increased emphasis in the 2014 Act on the personal responsibility of directors for compliance, with the proposed introduction of a requirement for directors of certain companies to include an annual compliance statement in their directors' report accompanying the company's financial statements.
Compliance statements will be required from directors of private limited companies and guarantee companies which have a balance sheet of over €12.5m and a turnover in excess of €25m in the year to which the directors' report relates. Compliance statements will also be required from directors of all public limited companies (other than those that are investment PLCs), regardless of balance sheet and turnover figures.
The 2014 Act requires directors of the foregoing "in-scope" companies to:
- acknowledge in the directors' report their responsibility for securing compliance by the company with tax law and also certain company law provisions;
- ensure that adequate accounting records are kept;
- ensure that the company does not give any unlawful financial assistance in relation to the acquisition of shares in the company; and
- confirm (on a "comply or explain" basis): (a) that they have drawn up a "compliance policy statement"; (b) that arrangements are in place that are, in the directors' opinion, designed to secure material compliance with such provisions; and (c) that they have reviewed, during the financial year, the arrangements which have been put in place to secure such material compliance.
Directors will be able to rely on the advice of persons employed by the company or retained under a contract for services who appear to the directors to have the requisite knowledge and experience to advise the company on compliance with relevant obligations.
2.3. What else is new when it comes to directors' duties?
The 2014 Act also imposes a new duty on directors of all private companies to ensure that the company secretary has the skills or resources necessary to discharge his/her statutory duty and other duties and to maintain (or procure the maintenance of) the company's statutory non-financial records.
2.4. What are the potential consequences?
There will be a financial cost for many of the in-scope companies in producing the abovementioned compliance statements on an annual basis. Advice will likely be required from professional advisors as to the nature of, and how to ensure compliance with, the relevant laws. Management time will also have to be committed to ensure that directors are comfortable about making the required statements.
As is currently the situation in Irish law, the 2014 Act confirms that where directors breach their fiduciary duties, they will be liable to account to the company for any gain made and/or indemnify the company for any loss of damage resulting from the breach. It remains the case that the High Court may relieve a director from personal liability if he or she has acted honestly and reasonably.
The 2014 Act will significantly increase the current penalties and liabilities for non-compliance with company law by Directors. It puts in place a new "streamlined" offences regime whereby all offences under the 2014 Act will be grouped under one of four categories. Category 1 offences carry the highest penalties (for conviction on indictment, imprisonment for up to 10 years and/or a €500,000 fine). Category 4 offences carry the lowest penalty (a fine up to €5,000).
It is important to note that, in addition to new liabilities, in certain cases pre-existing penalties (for example under the Companies Act 1990) are being substantially increased via the 2014 Act.
3. What should you do?
The coming into operation of the 2014 Act presents an opportune time for company directors to seek a refresher session on their duties and what these duties mean in practice.
- Directors should familiarise themselves with the new regime in good time as soon as possible.
- In-scope companies should develop a Compliance Policy Statement and look at putting in place appropriate policies and structures to facilitate directors providing the required compliance confirmations. Professional advice, for a legal, audit and tax perspective, will likely be required.
- The new duties regarding company secretaries may necessitate attendance at training courses or making arrangements to outsource the function to a professional secretary.