CORPORATE COMPLIANCE - TEN STEPS FOR COMPANY DIRECTORS
Many people believe that compliance with company law is a technical and difficult task which must be delegated to the company’s professional advisors. However, compliance for small and medium sized firms is relatively straightforward. The following ten steps may help directors improve their compliance.
1. WHO IS ENTITLED TO ACT AS A DIRECTOR OF A COMPANY?
Virtually every person can act as a company director unless they are legally prohibited, restricted or disqualified from doing so. Even if a person is entitled to be a company director, they must be validly appointed to act. Normally, the shareholders at the company’s Annual General Meeting (AGM) will appoint the company’s directors. If in doubt, have a look at the company’s constitution, i.e., its Memorandum and Articles of Association.
2. ARE THE COMPANY DETAILS ON THE REGISTER CORRECT AND UP TO DATE?
The provision of inaccurate or incomplete information on the Register exposes directors to possible prosecution. It is also an offence to fail to file an Annual Return within 28 days of the annual return date (ARD), with severe penalties of up to €1,200 per annual and may result in the company being struck off the Register. Where a company is struck off, the company no longer legally exists, the directors may be personally liable for the company’s operations during the period of strike-off and the assets of the company vest in the Minister for Finance. While it is possible to restore a company to the Register, it can be a time-consuming and expensive process which involves an application to the Circuit Court or High Court.
3. WHAT BOOKS AND RECORDS MUST BE MAINTAINED BY THE COMPANY?
The following are required to be kept by all companies:
a) Register of Directors and Secretary;
b) Register of Directors’ and Secretary’s interests (in the company or related companies);
c) Register of Members;
d) Register of (Debentures) Mortgages;
e) Register of Directors’ employment contracts with the company; and
f) Minutes of general meetings of members and the board of directors.
A majority of companies fail to maintain the minutes of directors’ meetings despite the simplicity of such requirement. The Companies Acts require that the books and records should be kept at the company’s registered office. All members of the company are entitled to inspect these books. Failure to maintain these records or to permit inspection of them is an offence by the company and its officers.
4. WHAT FINANCIAL INFORMATION SHOULD BE AVAILABLE ABOUT THE COMPANY?
The company is obliged to maintain at its registered office books of account which:
· correctly record and explain the company’s transactions;
· at any time enable the financial position of the company to be determined with accuracy;
· enable the directors to ensure the accounts comply with the requirements of the Companies Acts; and
· allow the financial statements to be readily and properly audited.
Failure to maintain such books of account is an offence and may also result in personal liability being imposed on directors if the company becomes insolvent. In general, a company is obliged to have the books of account audited by an external auditor at the end of the financial year. An audit confirms if the company has maintained proper accounts which give a “true and fair view” of the company’s affairs. If the auditor identifies any serious company law offences during the course of the audit he is obliged to report them to the ODCE. However, a large number of smaller companies are now exempt from the requirement to have the accounts audited. Qualifying companies must satisfy at least two of the following three conditions:
• have a turnover of less than €1,500,000 per annum;
• have a balance sheet total which does not exceed €1,904,607; and
• have an average number of employees which does not exceed 50.
5. MUST THE COMPANY HOLD AN ANNUAL GENERAL MEETING (AGM)?
AGMs are mandatory and must be held in each calendar year with not more than 15 months between AGMs. Prior to an AGM, the board of directors must provide the members of the company with the required Notice (normally 21 days); any Resolutions which the company proposes to put to the Meeting; and a copy of the company’s annual financial statements. An AGM is required to appoint the officers of the company, including its auditors, and to pass resolutions and/or special resolutions. A failure by a company to hold AGMs within the prescribed time limits, to serve notices on the members entitled to attend, or to hold the Meeting in the proper manner may constitute an offence.
6. WHAT ARE THE DUTIES OF DIRECTORS AND THE BOARD OF DIRECTORS?
The main function of the board of directors is to supervise the management of the company and to set its policy and direction. There is no prescribed agenda or timing of board meetings. However, a board should meet regularly to review the company’s state of affairs. A director has a number of general duties including:
· to use their skills and a reasonable level of care in the performance of their duties;
· to attend meetings regularly (but not necessarily every time);
· to act in good faith in the company’s best interest;
· to exercise powers for a proper purpose, namely for the benefit of the members or the purposes for which the company was set up; and
· to avoid actual or potential conflicts of interest between their personal interests and those of the company.
7. WHAT PERSONAL ENTITLEMENT DO DIRECTORS HAVE TO COMPANY PROPERTY?
One of the most important principles which a company director must learn is that a company’s assets are not their property. There are many parties with a financial interest in the business, including the company’s employees and its creditors (including Revenue and Banks). Therefore, company directors should not treat company assets as belonging to them. The most appropriate methods by which a director can obtain value from the company are as follows:
· Dividend - A dividend can only be declared at the AGM and must only be paid out of the company’s accumulated profits.
· Contract of Employment - A director can be an employee of the company and may take a salary.
· Directors’ Loans - There is general prohibition on directors drawing down funds from the company for personal purposes. However, it is permitted in certain circumstances. One of the permitted circumstances is where the aggregate value of loans to directors does not exceed 10% of the company’s ‘relevant assets’. A breach of the permitted circumstances may constitute a criminal offence by the directors.
8. WHAT HAPPENS IF THE COMPANY IS IN FINANCIAL TROUBLE?
If a company cannot pay its debts as they fall due, then the company is insolvent. If the company continues to operate / trade while in this situation and in disregard of the interests of its creditors and other stakeholders, the directors may be held personally liable for the consequences, including any debts which the company may incur while trading in an insolvent manner. The director will also be at the risk of prosecution, restriction or disqualification if they fail to act within the law and discharge their duties in a responsible manner. Some 300 company directors have been restricted in the last two years for acting either dishonestly or irresponsibly in the conduct of an insolvent company.
9. WHERE CAN FURTHER INFORMATION ON COMPANY LAW COMPLIANCE ISSUES BE OBTAINED?
The CRO and OECD have produced Information Books on the duties and rights of directors, companies and other company stakeholders, including members/shareholders and company creditors. Guidance is also available on the new requirement that directors will report annually on their company’s compliance with tax law, company law and certain other enactments having a potentially material effect on the company’s financial statements.
10. WHEN SHOULD PROFESSIONAL ADVICE BE SOUGHT?
Some company law provisions can be quite technical. In addition, directors will face important or difficult issues during the course of a company’s life. General information such as that available from the ODCE or CRO should always be supplemented by advice from the company’s professional legal advisers.
Please contact us at Seamus Monaghan, Solicitors to arrange an initial appointment to discuss your case.