The Corporate Enforcement Authority Act 2021 overhauled the legislative framework for businesses in Ireland, impacting company directors, corporate restructuring, share premiums, and the distribution of profits. Dee Moran and Lilian Halpin dig into the details
Although most of the provisions of the Companies (Corporate Enforcement Authority) Act 2021 (CEA Act) came into effect in July of this year, the focus thus far has centred primarily on the Corporate Enforcement Authority, the successor to the Office of the Director of Corporate Enforcement.
There is far more to this Act, however, including a number of interesting updates the Companies Act 2014 (CA 2014).
The introduction of the CA 2014, followed the wide-ranging overhaul, modernisation and streamlining of company law in Ireland. It was inevitable, however, that there would be some gaps and omissions in the new regime. The CEA Act introduces provisions aimed at remedying some of these anomalies.
While further remediative legislation is expected in the future as the legislature continues to review and refine existing law, in this article, our focus will be the amendments included by the CEA Act impacting company directors, company re-organisation, share premiums, and the distribution of profits.
Requirement for directors to provide PPSN details
Section 35 of the CEA Act introduces the requirement for directors of Irish registered companies to provide details of their Personal Public Service Number (PPSN) to the Companies Registration Office (CRO) when completing certain documents.
While this section of the CEA Act has not at time of writing commenced, it is intended to help protect against identity theft, specifically concerning the set-up of new companies that have used bogus director details and addresses or individual names without permission. The UK’s register of businesses and their directors is famously so weak on information verification that both “Donald Duck” and “Adolf Tooth Fairy Hitler” have been listed as directors of companies.
Other difficulties faced prior to this amendment included obtaining a list of directorships for an individual from the CRO as individual director filings may use different versions of the person’s name, such as ‘Eddie’ and ‘Edward’, or the person may have changed address. The introduction of the requirement to file the PPSN as a unique identifier should, therefore, make this process easier.
It is important to note that there will be an alternative procedure in place for those directors who do not have a PPSN. The CRO is currently reconfiguring its online portal to accommodate this new requirement and it is expected that Section 35 will commence in the first quarter of 2023.
Its implementation will not be without challenge and the CRO has set up a working group to identify issues and try to resolve them to ensure a smoother transition.
The CRO is also reviewing the technical challenges that arose after the commencement in 2019 of the Registry of Beneficial Ownership (RBO). The RBO is “the central repository of statutory information required to be held by relevant entities (corporate or legal entities incorporated in the State) in respect of the natural persons who are their beneficial owners/controllers, including details of the beneficial interests held by them.” It is hoped that the CRO will take the learnings from this review and incorporate them into the new system.
It is important that potential technical challenges in relation to PPSNs are resolved before section 35 of the CEA Act commences. If they are not properly considered, there is the potential for delays in the filing of changes to directors or to the filing of annual returns, and the possibility of late filing fees or the loss of audit exemption.
Therefore, companies and practitioners alike need to be aware of these changes and to begin to make plans to ensure that the appropriate information is understood and updated.
Three party share-for-undertaking transactions
The provision for three party share-for-undertaking transactions within corporate reorganisations was introduced in section 91 of CA 2014. This section recognised that it is not uncommon for companies to enter into a transaction where an undertaking, part of an undertaking, or a subsidiary, is transferred to a new company, which then issues shares as consideration to the shareholders, rather than to the transferring company.
Subsection 91(4) of CA 2014 has, however, been interpreted by certain practitioners to mean that such a transaction could only be validated by either a summary approval procedure or a special resolution confirmed by court—even where the company has adequate distributable reserves to underpin the transaction.
The CEA Act has added subsection 91(4)(c) to clarify that such a transaction can take place without the summary approval procedure, or court approval, in circumstances where the company has distributable reserves that are at least equal to the value of the undertaking transferred.
The use of a company’s share premium account
Under the Companies Act 1963, a company’s share premium account could be applied for several purposes, such as application by the company in writing off preliminary expenses, or in writing off the expenses of, or the commission paid or discount allowed on, any issue of the shares or debentures of the company.
Equivalent provisions were not included in CA 2014 in what was assumed to be an unintended omission by the drafters. This reduced the flexibility of companies in relation to the use of share premiums, causing difficulties. A company wishing to effect a transaction which had been permissible under the Companies Act 1963 was now, for example, obliged to carry out a formal reduction of company capital by the summary approval procedure in CA 2014.
This meant that the company might have incurred additional expense, such as obtaining a statutory auditors’ report, or that it might have had to make a court application in circumstances where such a move would not previously have been required. In addition, because the summary approval procedure is not available for the reduction of company capital in the case of public limited companies, such a company had to apply to the High Court in order to reduce its company capital so it could write off such costs and expenses.
To remedy this, section 14 of the CEA Act inserts a new subsection 71(5A) into the CA 2014. This subsection restores the status quo that had existed prior to the introduction of the CA 2014, with the exception of permitting its use for the issue of shares at a discount.
Restoration of exceptions to “distribution” definition
In the since repealed Companies (Amendment) Act 1983, company legislation provided for two exceptions to the rule that a company should not make a distribution except out of profits available for this purpose. They were:
- a reduction of share capital by paying off paid up share capital; and
- extinguishing or reducing all or part of a member’s liability on shares that are not fully paid up.
These exceptions were not included in CA 2014 and it is worth noting that these omissions were considered and not unintentional. Both exceptions were included in draft legislation but were subsequently removed before CA 2014 was enacted.
The effect of the omission of the exceptions meant that a company had to find distributable profits to be able to lawfully reduce or extinguish the liability of members in respect of any unpaid shares, or to pay off paid-up capital. The explanatory memorandum to CA 2014 refers to the omission of the exceptions as providing consistency in the legislation.
However, in 2017, the Company Law Review Group—a statutory advisory expert body that advises the Minister on the review and development of Irish company law—was of the opinion that the omission of the two exceptions in the CA 2014 did not take into account the new and detailed regime in that legislation for the reduction of share capital, i.e. requiring either a court order, or to be effected under the summary approval procedure with contingent director liability. It recommended that the two exceptions which had been omitted from CA 2014 be reinstated.
Section 19 of the CEA Act has now amended section 123 of CA 2014 to reinstate these exceptions.
Planning for the changes ahead
It is encouraging that improvements and clarifications continue to be made to legislation, particularly in company law where omissions or inadvertent changes from older legislation have resulted in difficulties in practice.
Chartered Accountants Ireland continues to work with its technical committees to identify areas where further clarity on aspects of company law would be beneficial and to make representations to the relevant department outlining those areas so that they might be considered for future legislation.
Dee Moran is Professional Accountancy Lead at Chartered Accountants Ireland and Lilian Halpin is Technical Manager at Chartered Accountants Ireland
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