A new dawn in Irish company law. The new Company Law Reform and Consolidation Bill

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1 A new dawn in Irish company law The new Company Law Reform and Consolidation Bill The Company Law Review Group (CLRG) is a statutory body established to advise the Minister for Enterprise, Trade and Employment (the Minister) on the reform and modernisation of Irish company law. Mary Harney (the then Minister) asked the CLRG on its formation in February 2000 to examine the simplification of company law as it applies to small and medium companies. The stated policy of the CLRG is to think small first. The process to consolidate and modernise Irish company law was initiated in response to the increasing complexity of Irish company law which is currently based on 12 Acts, numerous Statutory Instruments and other provisions derived from both common law and EU Law. The UK is currently undergoing (albeit a little further down the line) the same process with the UK Companies Bill which is currently working its way through the British Parliament to much debate. The CLRG has since its formation published three full reports, one separate report (on Directors Compliance Statements) and three minor reports. It has also fed into the enactment of the Company Law Enforcement Act 2001, the Companies (Auditing and Accounting) Act 2003, the Investment Funds, Companies and Miscellaneous Provisions Act 2005, and various statutory instruments transposing European Directives on accounting law, prospectuses, insider dealing, market manipulation and public company takeovers. It is currently engaged in the process which will lead to the transposition of the Transparency Obligations Directive. The First Report Strategy The first full report of the CLRG, published in the Spring of 2002 mapped out the strategy for the restructuring, consolidation, simplification and modernisation of company law. The draft of the current Companies Consolidation Bill follows substantially that set out in that Report. The second full report, published in the Spring of 2004 made recommendations in a number of key areas. The Companies Consolidation Bill, as prepared by the CLRG to date has been published on the website It should be noted that the Bill discussed in this article is in a draft form and will be subject to the rigours of final approval by the CLRG and the disciplines of the office of parliamentary counsel. That said, it is worthwhile to consider the key concepts contained in the Bill. Key Concepts The following are some of the proposed concepts/amendments which may be of relevance to practitioners on an ongoing basis in the future.

2 Model type of company The key concept of the CLG recommendations is that the private company limited by shares (CLS) is to be established as the model type of company for the purposes of the Irish Companies Acts. 88.8% of all companies currently incorporated in Ireland are private companies limited by shares. The CLRG pointed out in their 1 st Report that despite the fact that public limited companies and private limited companies are fundamentally different business models it is by and large the same law that applies to them.there is a world of difference between a one-person private company formed by a tradesman, at one end of the spectrum, and a listed public limited company, at the other.. The proposed Bill is divided into two groups of parts, Group A governs the CLS and Group B will define and govern the remaining types of companies and bodies corporate. Incorporation matters From the perspective of the CLS, the current requirement for a memorandum and articles of association will be replaced by a one document constitution of the company. Currently, the memorandum of association of private limited companies provide for certain specified objects of the company which generally list a myriad of objects. This required checking on an ongoing basis whether any transaction entered into by the company was within the corporate powers of the company. If a transaction is not within the corporate powers of the company specified in its memorandum of association it is deemed to be ultra vires the powers of the company. The concept of ultra vires would be repealed by the Bill where relevant to CLSs. The CLSs will have the legal capacity of a natural person and the proposed Bill provides at Group A Part 2 that a company shall have whether acting inside or outside of the State full and unlimited capacity to carry on an undertake any business or activity, do any other act or enter into any transaction. Special purpose vehicles There is recognition in the Bill (as there was in the CLRG reports) that there are special purpose vehicles (SPVs) formed for, say, financing or IFSC like transactions. The CLRG accepts that it is essential that these companies do not enter into other transactions and therefore the ultra vires doctrine should apply to these companies. These companies will be called designated activity companies (DACs) and are discussed further below. Corporate Restructurings and Mergers The new Bill proposes to deal with certain company law headaches which arise in company restructurings. Consider a situation where it is proposed to hive down the business and undertaking of a transferring company to a NewCo where the NewCo issues consideration shares to the transferring company s shareholders rather than to the transferring company.

3 Structure before transaction Transaction

4 This transaction would, subject to strict rules, qualify for stamp duty relief under section 80 of SDCA 1999, as well as other tax interpretation under TCA exempting the parties to the transaction from other taxes. The CLRG state in their 2 nd Report 1 that where a company enters into such a transaction it is in company law terms giving away an asset of the company and, therefore, unless there are distributable reserves equivalent to the value of the transferred undertaking such a transaction cannot proceed. The Bill will provide that this transaction can take place subject to compliance with a standard validation procedure which is introduced by the Bill which would involve the swearing by the directors of the transferring company of a statutory declaration of solvency, along the lines of that used for section 60 financial assistance procedures. The declaration must refer to the circumstances in which the transaction or arrangement is to be entered into and the benefit which will accrue to the company directly or indirectly from entering into the arrangement. Then, once approved by special resolution, the transaction can proceed. Reduction of Share Capital Currently a private limited company in order to reduce its share capital is required to apply to the High Court for such a reduction. The Bill provides that CLS can continue to reduce its share capital by way of application to the High Court or, alternatively, can do so by way of the composite validation procedure referred to above (statutory declaration of the directors + special resolution). Corporate Governance Other reforms planned include the following: a CLS can only have one director but where a company only has one director, he/she cannot also be the secretary; a specific requirement has been introduced for directors to receive reasonable notice of any meeting of the board of directors; a CLS need not hold an annual general meeting in any year if all the members entitled to attend and vote at the AGM execute a written resolution acknowledging receipt of the accounts, approving all resolutions and confirming no change in the audit appointment. the concept of a de-facto director is introduced being a a person who occupies the position of director but who has not been formally appointed director. the Bill will list the fiduciary duties which a director owes the company previously this had been largely derived from common law/case law which was difficult for any prospective director to research. a director will now be formally obliged to account to the company for any gain which he/she makes arising from a breach of duty and, further, is obliged to indemnify the company against any loss or damage resulting from that breach of duty. 1 Page 82 of the CLRG Second Report

5 Receivers Part 8 now prescribes specific powers for receivers which would be in addition to any powers conferred on the receiver by any court order or the instrument appointing the receiver which includes the power to borrow money on the security of the company. Compulsory acquisition An individual can now benefit from the compulsory acquisition provisions, previously this had only applied to private companies (i.e.) where an individual makes an offer to purchase the entire issued share capital of the CLS which is accepted by more than 80% of the shareholders the individual may seek to compulsorily acquire the remaining shareholding. It is worth noting that the 80% threshold will remain even though for listed companies it has been necessary to increase it to 90% to comply with the EU Takeovers Directive. Creation of company security It is acknowledged that the existing system for the registration of charges over the assets of an Irish incorporated company is inequitable and requires amendment. The CLRG sets out an example of this - A lender makes available finance to a borrower company on day 10 subject to receiving searches showing no existing charges, etc. If a lender files a Companies Registration Form C1 in relation to the charge on day 12, the lender would reasonably assume that it has priority over any other charges created by the borrower. However, if the corporate borrower had created a separate charge on day 2 but had not registered particulars of the charge until, say, day 20 the latter charge would rank on priority to the charge given on day 10 as it had been created although not filed prior to the date of the day 10 charge. This system is open for abuse. The first ambit of the proposed changes in the Bill is the concept of the filing of a preliminary notice of the creation of a charge provided that the formal notice is filed within 21 days thereafter. The preliminary notice would lapse otherwise. The second ambit is the policy that the creditor who files first in time gets priority which is the position in other jurisdictions. Examinerships Part 10 applies Council Regulation (EC) No 1346/2000 relating to cross border insolvency proceedings whereby the Courts will look at the centre of company s main interest for the purposes of the commencement of insolvency proceedings and allows for the commencement of secondary examinership proceedings in countries where the debtor company has an establishment.

6 Dissolution and Reinstatement The Registrar of Companies will be required to notify the Office of the Director of Corporate Enforcement ( ODCE ) of the names of the persons who were listed as directors as at the date of initiation of a strike off process. The ODCE then has the option to take proceedings against any of the directors. A difficulty which arises in respect of the strike-off process for lawyers and accountants is that where a company has been struck off the register and purports to be reinstated is that even though the company may be reinstated and the company will be deemed to have never been struck off the company will not in fact exist. For example, if accounts are being prepared as part of the restoration process then accounts are being prepared in respect of a company which does not in fact exist. Part 12 now provides that a company will have a "shadow existence for the purposes of achieving restoration and accordingly all actions necessary pursuant to the restoration process may be taken on the basis that, for this purpose only, as if the company has, in fact, existence. Public Limited Companies Single member plc's are now permitted. Unlike CLSs, a plc will continue to have a memorandum and articles of association, collectively known as its constitution. The directors of the plc will have the obligation to ensure that the plc continues to act within its specified corporate powers and any third party dealing with the plc in good faith shall be under no obligation to ascertain if the plc is acting within its powers in entering into any transaction. Instead the director of the plc will be held liable. In saying that, the shareholders can ratify the transaction even if its beyond the capacity of the company this is a radical amendment of the existing common law position - and in addition the members can also absolve the director from any liability arising from entering into the transaction. A plc would only be required to send out summary financial statements to shareholders in place of the full annual accounts as is the current position. Designated Activity Companies As mentioned above, there is an acceptance that certain companies require specified objects which would therefore be subject to the ultra vires rule referred to above. The Bill provides that this class of company would be a special category company with the lettering dac appearing at the end of their corporate title. There will be two types of DACs, the first being a private limited company with the capacity to do such things as set out in its constitution (a special purpose vehicle) and secondly a private company limited by guarantee and having a share capital. In order to protect third parties acting in good faith dealing with DACs the third party shall not be required to enquire as to the powers of the DAC and the obligation to ensure that the DAC acts within its corporate powers rests with the directors who can be held to account for any breach by the DAC of its corporate powers.

7 Unlimited companies An unlimited company must have a memorandum of association. An unlimited company must hold an annual general meeting as distinct from a CLS which can dispense with the requirement. The Bill seeks to correct a current legislative issue as regards the applicability of part of the capital maintenance rules comprised in the Companies (Amendment) Act 1983 to unlimited companies. The Bill now provides that an unlimited company can reduce its share capital and distribute its profits available for distribution in any way by the passing of special resolution. Unlimited companies shall not be entitled to rely on the audit exemption. Conclusion The consolidation of the existing companies legislation is an overdue and highly necessary step for the development and encouragement of commercial life here in Ireland and will enable practitioners, company owners and prospective directors to refer to a single point of reference. Attribute to Gavin O Flaherty, Senior Associate, Mason Hayes+Curran. Gavin O Flaherty is a senior associate in the corporate department of Mason Hayes+Curran. For more information, please contact Gavin at goflaherty@mhc.ie or The content of this article is provided for information purposes only and does not constitute legal or other advice. Mason Hayes+Curran ( is a leading business law firm with offices in Dublin, London and New York. Copyright Mason Hayes+Curran All rights reserved.