Post-2016 Procedures

2014 Act & Objects

The Companies Act 2014 provides, in effect, that the private limited company, referred to as “an LTD”, is the default form of company.  It is possible to elect into the designated activity company regime, which resembles more closely, the pre-2014 Act form of private limited company.

A private limited company has unlimited capacity to do all things which a natural person can do. A pre-2014 Act private limited company lost its objects clause on 1st December 2016, unless it became a Designated Activity Company.

One important consequence is that in corporate lending, it is no longer be necessary to examine the company’s objects clause in order to ascertain whether borrowing, guaranteeing or granting security for a particular purpose, is permissible in the circumstances.


2014 Act & Objects II

In the case of designated activity companies (DAC), public limited companies (PLC) and companies limited by guarantee, the same considerations as applied prior to the 2014 Act, continue to apply.  Such companies have a memorandum and articles of association which provide for objects.  Agreements and transactions which are outside the scope of these objects are unenforceable against the company.

The prior law, which protected outsiders in relation to issues of corporate authority and capacity, has been restated and strengthened by the 2014 Act.  It is provided that the validity of an act done by a DAC, PLC and guarantee company, is not to be challenged on the grounds of lack of capacity by reason of anything contained in its objects.  Members of a DAC, PLC or guarantee company may take proceedings to restrain acts which are beyond its capacity. An act done in fulfilment of a prior legally binding obligation may not be restrained.

It is provided that an act outside the objects of the company, can be ratified by special resolution.  This amends the common-law agency principle, by which an act outside the principal’s capacity cannot be ratified at common law.


Authority of Board I

A company may have a single director under the 2014 Act. Prior to the commencement of the Act, a minimum of two directors was required.

The acts of the directors are valid, notwithstanding any subsequently discovered defect in their qualification or the invalidity of their appointment. The 2014 Act preserves the so-called indoor management rule.  Outsiders are entitled to rely on the apparent validity of company’s internal procedures.

The 2014 Act provides expressly for a written resolution of the directors. The resolution of the sole director of a single director company suffices.


Authority of Board II

In accordance with existing legislation, persons may be registered by notice filed in the CRO as having authority to bind the company. Where a registered person’s authority is revoked, the revocation is not effective until filed with the Companies Registration Office.

A registered person and /or the board of directors have the powers of the company.  They may do anything which the company may do.  They may authorise others or act on their behalf.  A company may appoint an attorney to act on its behalf, in a document executed as a deed or signed by a party with authority.

The general principle of agency that a company may hold out an individual as having authority on its behalf, and be thereby bound by his actions, is preserved. This is so, irrespective of any non-apparent limitations on the person’s authority. The third party is not required to investigate his actual authority. He is entitled to assume that a person who appears have authority by reason of being held out by the board, has in fact been duly authorised.


Financial Assistance

The 2014 Act preserved the restrictions on giving financial assistance in amended terms. The prohibition applies when financial assistance is given for the purpose of the acquisition of shares in the company itself or in its holding company. It is not lawful for a company to give,  by means of a loan, guarantee, provision of security or otherwise, any financial assistance for the purpose of an acquisition made or to be made by any person of any shares in the company or where the company is a subsidiary, in its holding company.

The 2014 Act deleted the words “in connection with,” which had been interpreted widely. The deletion of the words makes the prohibition slightly narrower in scope. It still applies to direct and indirect assistance.

A transaction in breach of the prohibition on financial assistance is voidable at the instance of the company against any person, whether or not a party to the transaction, who had notice of the facts, which constituted the contravention. “Actual” rather than implied or constructive notice is required.  This is in accordance with the general policy to uphold commercial transactions and not to require prior investigation in everyday corporate transactions.


Exceptions

Financial assistance is not prohibited where the company’s principal purpose in giving it, is not for the purpose of the acquisition of shares or if the financial assistance is only an incidental part of some larger purpose of the company.  This exception is only available where the assistance is given in good faith and in the interests of the company.

A number of important exemptions are available for other types of company, which are frequently taken up in practice. Where financial assistance is given in accordance with the summary approval procedure, the prohibition does not apply. This exception is not available to public limited companies.

There is an exemption from the prohibition, where the lending of money is part of the ordinary course of the business of the company. The loan must be made in the ordinary course of its business.

The giving of financial assistance by means of a guarantee, provision of security or otherwise to discharge a liability is exempt where it refinances a transaction that gave rise to the provision of the financial assistance, which has already been given by the company in accordance with the summary approval procedure or its predecessor.  The exemption also applies to a subsequent loan, guarantee or security which further refinances a previous refinancing. This exemption may apply on any number of subsequent occasions.


Connected Persons

Loans, guarantees and security for directors and persons connected with directors are generally prohibited. This can be a practical difficulty in the context of loans, security and guarantees to a group of companies or to associated companies. The associated or group company is connected to the director if it is controlled by him.

There is an exemption from the prohibition for companies that are in a group as defined. Proof is required of the group relationship in order to show that the prohibition does not apply. The exemption is not available for loans with guarantees and security granted by associated companies which are under common control.

Sometimes a group structure is created by the issue of a “golden” controlling share in order to constitue a group (as defined). Alternatively, the yshare capital can be reorgainised so as to create a group in another way, Tax and company law relief is available to facilitate such reorganisation.

The summary approval procedure is available under the 2014 Act to validate loans, gaurantes and security that would otherwise be in breach of the prohibition. Unlike the validation procedure under the previous legislation, the requirement for an accountant’s certificate no longer applies.


Approval Procedure I

The summary approval procedure is potentially available, subject to conditions in a number of cases, in order to “whitewash” that which would be otherwise prohibited. It applies to the giving of financial assistance and to the granting of guarantees and securities in favour of directors and persons connected to them.  It replaces a number of previous procedures with a common procedure.

The summary approval procedure is available to private companies limited by shares, designated activity companies, and companies limited by guarantee.  It is not available to public limited companies and their subsidiaries.

A special resolution must be passed approving the transaction or activity within 12 months prior to the relevant transaction.  The resolution must be on foot of a meeting of shareholders, convened with due notice accompanied by a copy of a director’s declaration and the draft resolution.


Approval Procedure II

If the special resolution is passed by less than 90% holders of the nominal value of the voting shares, the financial assistance, guarantee or security, etc. may not be given for at least 30 days after the special resolution.  The holders of at least 10% of the nominal value of the issued share capital or any class thereof may apply to the court, to have the resolution varied or set aside.

Where the resolution is challenged in court, then it will take effect, only if and as sanctioned by the court.  Persons who have voted in favour of the resolution may not apply or join in the application to the court.

The required declaration is to be made by the directors, before the special resolution authorising the financial assistance (or the connected person loan, guarantee or security).  It must be signed by a majority of the directors.  It must be made at a meeting, not more than 30 days before the member’s meeting or the date of the special resolution approving the activity.

The declaration by the directors, in the context of financial assistance, must include details of the proposed transactions and arrangements and the benefits accruing to the company, directly or indirectly arising out of the transaction or arrangement.  The directors must confirm that the company is able to pay or discharge its debts and other liabilities in full.

Equivalent provisions apply to the declaration required in the case of a connected person loan, guarantee or security.


Approval Procedure III

The declaration must be filed with the CRO within 21 days of the date on which the financial benefit is made available.  Failure to do so invalidates the summary approval procedure and consequently, the underlying transaction may be prohibited.

An application may be made by an interested party for a court order that the activity is to be valid, notwithstanding the failure to comply with the filing obligation with the deadline.  This is only permissible if the court is satisfied that it is just and equitable to so allow.

Where the directors make a declaration, without having reasonable grounds for the opinion that the company, having entered into with the transaction or arrangement will be able to pay or discharge its tax and other liabilities in full as they fall due during the period of 12 months after the date of the relevant action, the court may declare that the directors shall be personally liable without limitation, for all or any of the debts or other liabilities of the company. Where the company is wound up within 12 months of the declaration, it is presumed, until the contrary is shown, that the directors did not have reasonable grounds for their opinion.

Similarly, equivalent provisions apply to challenging the use of the summary approval procedure in the case of a connected person loan, guarantee or security.


Declared Matters

The declaration must be made by a majority of the directors at a meeting held within 30 days prior to the member’s meeting at which the special resolution is passed.  The declaration shall state

  • the circumstances in which the transaction or arrangement is to be entered, the nature of the transaction or arrangement and the person or persons with or for whom the transaction or arrangement is to be made;
  • the purpose for which the company is entering into the transaction or arrangement;
  • the nature of the benefit, which will accrue to the company directly or indirectly from the transaction or arrangement.

The directors must declare, that having made a full inquiry into the affairs of the company, that they have formed the opinion that the company, having entered into the transaction or arrangement, will be able to pay or discharge its debts and other liabilities in full as they fall due during the period of 12 months after the date of the relevant act.

The declaration of the directors must set out the nature of the benefits which will accrue to the company, directly or indirectly, from entering the transaction or arrangement.  The directors must consider the matter from the perspective of the company.  The actual benefits should be set out.

Difficulties can arise, whereas is commonly the case, the benefit is primarily that of a group or a related company.  Group companies are separate entities. In some cases, the interests of the group may be capable of being sufficiently beneficial to the company.  However, the courts are unlikely to be sympathetic if the interests of the group companies are put before the interest of creditors of the company concerned.


References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)     Courtney

Keane on Company Law 5th Ed. (2016) Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore Browne on Companies

Palmer’s Company Law