In light of the recent banking crisis, the Government has moved to amend the Companies Acts, particularly those provisions relating to transactions between banks and their directors, and to strengthen the powers of the Director of Corporate Enforcement.
A few weeks after it was suggested in the High Court that the investigation by the Office of the Director of Corporate Enforcement (ODCE) into the affairs of Anglo Irish Bank was being hampered by outdated company law, the Minister for Enterprise, Trade and Employment introduced the Companies (Amendment) Bill 2009. Among other things, the Bill seeks to improve the transparency of loans made by banks to their directors and to give greater support to the Director of Corporate Enforcement in his efforts to enforce compliance with company law.
The main changes in respect of the increased powers of the ODCE are:
- an extension to the remit of search warrants;
- extended powers of seizure to deal with large volumes of paper or electronic information to be removed for later examination;
- a reduction in the evidential burden on ODCE when taking action against companies in default of company law with regard to loans to their directors; and
- amendment of existing requirements in relation to disclosure of loans to directors.
The new powers will apply whether the company being investigated is a bank or any other type of company.
Rights of Access to Information
Under section 194 of the Companies Act 1963, a director of a company has an obligation to declare any interest in a contract with the company and to record all such interests in a register of directors' interests. The Bill amends this section to provide a specific right for the ODCE to access such registers. The Bill also clarifies the provisions of section 19 of the Companies Act 1990 (1990 Act) in relation to the production of books and records by third parties, where these relate to a company under investigation. The ODCE will be entitled to order third parties to produce such books and records and to specify when and where they are to be produced.
Powers of Search and Seizure
The powers of the ODCE have been strengthened by the introduction of an extended power of seizure, which empowers an officer to remove certain material or electronic information from a company's premises for further examination. While the potential remit of this power is extensive, there are a number of restrictions on the ODCE, requiring it to assess:
- the number of persons required to carry out the determination;
- whether the investigation would cause damage to the property;
- the equipment necessary to carry out the investigation; and
- the cost of carrying out the determination on the premises as opposed to an off-site investigation.
There are also a number of safeguards contemplated for companies in that the ODCE must make arrangements for the appropriate storage and safeguarding of such seized information, must allow reasonable access to the assets by the owner of the business and must provide for confidentiality to be maintained unless the officer believes that this would result in the concealment, falsification, destruction or otherwise of the information. The Bill also provides for the extension of search warrants upon application by the ODCE to the district court beyond their usual one-month period.
Legal Professional Privilege
The position in relation to documents protected by legal professional privilege is currently set out in section 23 of the 1990 Act. The Bill contains significant changes to these provisions, allowing the ODCE to seize information on a sealed and confidential basis pending adjudication by the court as to whether or not the information is in fact privileged. The court will also be entitled to appoint an independent adjudicator to assess the position.
New Disclosure Obligations for Banks
Under current legislation, the obligations on licensed banks in relation to disclosure of loans to company directors and related persons are different from those in relation to non-banking companies. While non-banking companies are required to set out particulars of transactions with directors and connected persons in detail in their annual accounts, banks were largely exempted from these requirements, being obliged only to disclose aggregate amounts outstanding at the end of each financial year for such transactions and the number of persons to whom the arrangements related. The Bill provides for onerous requirements that where any company is in default of any obligations regarding the disclosure of directors' interests, the company and every director of that company will be guilty of an offence. The Financial Regulator has recently introduced new rules requiring licensed banks and building societies to disclose loans to directors above de minimis thresholds in their annual accounts on the same basis as non-banking companies, rather than on an aggregated basis.
The only exception will be in relation to connected persons, where only the aggregated information is required. Similar provisions are set out in the Bill, which makes amendments to section 44 of the 1990 Act requiring the maintenance of a register of loans, transactions and arrangements with directors and connected persons (to apply in addition to the Financial Regulator Rules). The Bill also allows for the preparation of a statement based on information in the register to be made available prior to and at the AGM of such a company (but this will not now be required where such information is already disclosed in the accounts of a company). The ODCE will also have the power to inspect the registers held by the banks and to take copies.
The Bill will amend section 40 of the 1990 Act. Section 40 provides for criminal penalties for breaches of section 31 of 1990 Act (which prohibits loans by a company to its directors except in certain limited circumstances). Section 40 currently provides that a director who authorizes or permits a company to enter into a transaction or arrangement knowing that the company was thereby contravening section 31 will be guilty of an offence.
The Bill provides for a far more onerous obligation on directors in that where a company defaults in complying with section 31, then every person who at the time of that default is a director of the company will be guilty of an offence. There is therefore a far greater obligation on all directors to ensure that the company is in compliance with its obligations under section 31 (although it will be a defence for a director to show that he took all reasonable steps to ensure such compliance). The amendment aligns the offence with a number of similar offences under the Companies Acts and replaces the existing requirement for a successful prosecution to effectively prove wilful default.
Irish-Registered Non-Resident Companies
The current position under sections 43 and 44 of the Companies (Amendment) No 2 Act, 1999 in relation to any company registered in Ireland is that it has either one director resident in the state or can show that it has a real and continuous link with economic activity being carried on in the state. If neither of these requirements is satisfied, a bond of €50,000 must be lodged with the Companies Registration Office.
The amendment proposed in the Bill will replace the provisions with a requirement that one director must be resident in the European Economic Area (EEA). This change has been proposed to meet EU Commission concerns that the existing requirements are not in compliance with the EC Treaty and will be of benefit to companies registered in Ireland that operate within the EEA but do not necessarily have either business operations or directors based in Ireland. The Bill is expected to be passed by the Dáil and the Seanad in the next couple of months.