Section 225 of the Irish Companies Act 2014 (the "Act") introduces a new requirement to include a directors' compliance statement ("DCS") in the directors' report that accompanies a company's annual financial statements. While directors of Irish-incorporated special purpose vehicles (including 'section 110 companies') ("SPVs") need to be aware of this DCS requirement, in many cases an SPV will fall outside the scope of the requirement. Where an SPV is required to comply with the DCS requirement, the directors should be able to satisfy the requirement without any material impact to the SPV or its cost of operations.
What are the requirements?
The DCS requires the directors to make two statements in the directors' report. The first is an acknowledgment that the directors are responsible for ensuring the company's compliance with its obligations under Irish tax law as well as certain obligations under the Act and Irish prospectus, transparency and market abuse law (where applicable) ("relevant obligations").
Secondly, the DCS must include either a confirmation that the directors have completed steps listed in the Act designed to guide a company's compliance with the relevant obligations (the "opt-in model") or, if this has not been done, an explanation as to why it has not (the "explain model").
If the opt-in model is chosen, the steps are the drawing up of an internal compliance policy for the company, putting in place appropriate arrangements designed to secure material compliance with the relevant obligations and reviewing these arrangements during each financial year ("opt-in procedures").
Where applicable, the DCS must be included for all financial years commencing on or after 1 June 2015. Failure to comply is an offence on the part of each director to whom default is attributable.
Is my Irish SPV in-scope?
Non-Irish incorporated entities are exempt from the DCS requirement, (including Cayman Islands-incorporated Irish tax resident companies).
Further, an Irish-incorporated company is outside scope of the DCS requirement if its balance sheet total for the financial year in question is less than €12.5m or if its turnover for that year is less than €25m. Balance sheet total means the aggregate of the amounts shown as assets in the SPV's balance sheet, while turnover means the amount of the turnover shown in the SPV's profit and loss account.
Given the above, directors should therefore be able to determine with relative ease whether an SPV is in-scope. It is likely that most single aircraft or property-holding SPVs will fall short of the required turnover threshold.
The Act allows for a possible exemption for section 110 companies by ministerial order. Irish industry bodies are working to activate this exemption, but it is unclear if this will happen in time for the completion of the first financial statements otherwise subject to the DCS requirement.
Opt-in vs explain models
If your SPV is in-scope, the key decision for directors will be to choose between the opt-in or explain models. While ultimately the directors' decision should be determined on a case by case basis for in-scope SPVs, in many cases the explain model should be an appropriate choice. Directors distinguishing between an SPV and a true corporate, with ordinary and potentially diverse commercial activity, is a sensible approach.
The question is whether it is appropriate for an SPV to implement and document each of the opt-in procedures. Looking at the SPV's compliance arrangements first, many SPVs delegate operations to reputable servicers who assume responsibility for ongoing SPV compliance and periodically report to the board.
Given appropriate compliance arrangements are already hard-wired into the SPV's operations, and that an SPV's contractual arrangements often heavily restrict its permitted activities, it is questionable what additional benefit there is in also completing the additional opt-in procedures listed above.
What do I need to do?
First, determine whether you have any in-scope SPVs, based on the above financial thresholds, company type and place of incorporation.
Second, for any in-scope SPVs, the board needs to decide which model to adopt. If the explain model is chosen, the board should agree on a form of appropriate DCS wording to include in the directors' reports.
Finally, if the opt-in model is chosen, the SPV's Irish legal advisors should be engaged as soon as possible to assist in drawing up an appropriate compliance policy and the board should agree procedures to review the SPV's compliance arrangements at least annually.