With most Companies Act 2014 provisions now in effect, directors of financial services entities should prepare for transition to the new regime, writes Mark Kennedy and Sarah Lane.
The Companies Act 2014 (CA 2014), which came into effect on 1st June 2015, consolidates 16 companies acts in addition to many statutory instruments and court judgements. The Act is divided into two sections with Parts 1-15 relating to private companies limited by shares and Parts 16-25 outlining the requirements for all other companies.
A number of parts are of particular relevance for directors of financial services entities. Part 4 stipulates corporate governance requirements while Part 5 covers directors’ duties. Part 6, meanwhile, outlines the requirements for financial statements, annual returns and audit.
Part 24 is also relevant to Irish funds structured as investment companies licenced under Part XIII of the Companies Act 1990, which is largely a restatement of existing company law in that area.
Directors’ duties and compliance statements
Part 5 sets out in statute, for the first time in Irish law, the eight principal fiduciary duties of directors, thereby codifying the existing common law duties of directors.
Company law offences have also been grouped into four categories. Category one addresses the most serious offences, which are punishable by a fine of up to €500,000 and imprisonment of up to 10 years. Directors will continue to have statutory duties and responsibilities, and these will not be affected by the Act. It is important to note that these duties apply to all directors, including shadow directors.
CA 2014 also reintroduces the requirement for directors to provide directors’ compliance statements. This obligation applies to directors of a public limited company – other than an investment company – and directors of a limited company, a designated activity company, and a company limited by guarantee where the balance sheet exceeds €12.5 million and turnover exceeds €25 million. This element of the Act is deferred for the first year in accordance with Section 225. Further information is provided in the deferrals section below.
Choosing a company type
Companies have 18 months to decide on the company type they will adopt under CA 2014. Most companies in Ireland are private companies limited by shares and will have the option to become a limited company or designated activity company.
The majority of financial services entities regulated by the Central Bank of Ireland, such as credit institutions and insurance entities, are expected to become designated activity companies. One exception, however, is Irish funds structured as investment companies. Such companies are dealt with under Part 24 of the Act where Undertakings for Collective Investment in Transferable Securities have the option to become a designated activity company or limited company.
In the case of a designated activity company, members must begin the transition process at least three months prior to the final transition date of 31st December 2016. If a company fails to make a decision to re-register as a designated activity company or limited company by the end of the transition period, an existing private company will be deemed to be a limited company.
Credit institutions, insurance undertakings, and companies offering debt or equity securities to the public must become designated activity companies. Part 16 of CA 2014 outlines the relevant law applicable to such companies and refers back to Parts 1-15, with some exceptions.
A memorandum and articles of association, two directors, an objects clause and a physical AGM are still required for designated activity companies. Regulated entities are also required to notify the Central Bank of Ireland of a company’s change of name when it is made. Private companies limited by shares and limited companies no longer require an objects clause or a physical AGM, and can now incorporate with one director. The Corporate Governance Code still applies and companies must ensure continued compliance with both the code and Part 4 of CA 2014, which outlines the Act’s corporate governance requirements.
Financial statements
Financial statements prepared on or after 1st June 2015 must be prepared in accordance with CA 2014. A small number of deferrals are exempt from this requirement. The Companies Registration Office (CRO) plans to take the following approach in relation to financial statements attached to annual returns delivered to the registrar on or after 1st June 2015 for financial year ends: where financial statements are signed by the director(s) before 1st June, documentation should be prepared and filed in accordance with the 1963-2013 Companies Acts. Those signed by the directors after 1st June 2015, meanwhile, should be prepared and filed in line with CA 2014.
Many CA 2014 reliefs relating to financial statements, and the auditing of such statements, can be availed of on or after 1st June 2015 where financial statements are approved on or after 1st June 2015. Reliefs include the extension of audit exemption reliefs in specified circumstances to ‘small groups’, companies limited by guarantee, and dormant subsidiaries. There is also an option to adopt written AGMs for private companies limited by shares and a simplified written approval process for certain
restricted activities.
A number of changes have also been made to the terminology used in the statutory auditor’s report on companies’ financial statements under CA 2014. While the requirements of previous companies acts are mostly retained, the matters on which the statutory auditor reports and the contents of the statutory audit report have changed somewhat. Chartered Accountants Ireland provided a number of useful technical releases in this regard. The releases address the reporting obligations imposed on the statutory auditor to report on the statutory financial statements under Section 336; the obligation on the statutory auditor to report to the Director of Corporate Enforcement in accordance with Section 392 and Section 393; and changes to other reporting obligations relating to requirements under previous companies acts. It would be useful for directors of financial services entities to familiarise themselves with these changes in terms of financial statement implications, particularly if they sit on an audit committee.
Deferred requirements
A limited number of provisions will apply in respect of a financial year commencing on or after 1st June 2015. The following requirements are deferred in relation to Part 6 of CA 2014:
- Section 167 – Audit Committees: The requirement for companies with a balance sheet in excess of €25 million and turnover in excess of €50 million to establish an audit committee.
- Section 225 – Directors’ Compliance Statement & Related Statement: The compliance statement must be made by the directors of a public limited company, other than an investment company, and the directors of a limited company, a designated activity company, and a company limited by guarantee where the balance sheet exceeds €12.5 million and the turnover exceeds €25 million.
- Section 305(1)b – Share Options Disclosure: Similar to existing conditions, directors are required to disclose in the notes to the company’s financial statements details of gains made by directors and connected persons on the exercise of share options.
- Section 306(1) – Payments to Connected Persons: Supplemental provisions in relation to Section 305. Disclosures under Section 305(1)(b) are extended to connected persons as defined under Section 220.
- Section 326(1)a - Directors’ Report General Matters: The requirement to name the persons who, at any time during the financial year, were directors of the company in the directors’ report.
- Section 330: Directors’ report to include a statement that all relevant audit information has been provided to the auditors.
This is the beginning of a new era of significant legislation – legislation that has yet to be tested. It is therefore imperative that all directors are aware of their duties and the consequences of those legal duties not being fulfilled, including potential imprisonment.
Mark Kennedy, FCA is Joint Senior Partner at Mazars, while Sarah Lane, ACA is the firm’s Director of Regulatory Assurance.