Service Contracts

Office of Director

Directors may have a wide variety of roles in the company, in addition to the exercise of the office or function of a director. They frequently hold key executive positions. An executive director is a full-time working director who may or may not be a shareholder.

A directorship as such is not a paid office.  There is no automatic entitlement to pay or a salary for acting as a director. Directors may provide other services to the company under a service contract. Directors are often employees.

There may be a contract that directors’ fees and expenses be paid. Most non-executive directors are paid fees for acting as such. A director may be able to recover payments on a restitutionary basis, where services are provided with an expectation of payment, in the absence of a contract.

The default provisions allow the board of directors of a private limited company, to determine the director’s remuneration. In the case of PLCs and CLGs, the default position is that the shareholders approve remuneration and directors’ fees. Directors may be paid expenses under the default provisions. Directors remuneration and expenses must be disclosed in the accounts.


Director’s Service Contract

A director may have a separate contract regulating his role and responsibility as a director and as a service provider or employee.

An employment contract with a director for a term exceeding five years must be approved by shareholders. This is to reduce the potential for abuse by directors in giving themselves long term contract.

This requirement applies where the contract for employment is for more than five years and cannot be ended by notice or can be ended only in special circumstances.  It also applies to employment contracts with a director of the holding company. In practice, the provision will apply only to a small minority of contracts, as most can be terminated on notice.

Although a director may be removed from office, it does not follow that he is thereby dismissed or fairly dismissed as an employee. Although shareholders have a statutory right to dismiss a director, this may cause the company to dismiss or breach the director’s employment contract unfairly.

A director is generally entitled to fair procedures in removal from his office (and employment).  A director who has been removed may have a right to compensation for wrongful dismissal or unfair dismissal. He may have a right to be reinstated.


Employment Contracts 3 Years+ I

A company must keep details of some categories of employment contracts with its directors and directors of its subsidiaries, at its registered office and place of business. It must be open for inspection by the shareholders, subject to reasonable restrictions. Where the contract is not written, its terms must be set out in writing and be made available for inspection.

This does not require a copy or note of the contract to be kept when the unexpired part of the term for which the contract is to be in force is less than 3 years or when the contract can be terminated by the company without payment of compensation within the next 3 years.

Where the obligation applies, it requires that the company shall keep a copy of the written contract of service (or a written memorandum of it, if it is not in writing), in respect of each director employed by the company or a subsidiary. All copies and memoranda kept by the company shall be kept at the same place.


Employment Contracts 3 Years + II

The general rights of inspection and taking of copies by members, etc. apply to the above mentioned copies and memoranda. Where a contract of service is only partially in writing, the provisions nonetheless apply.

If default is made in complying with the above obligations, the company concerned and any officer of it who is in default shall be guilty of a category 3 offence.

The obligation to retain directors’ contract does not apply in relation to a director’s contract of service with the company or with a subsidiary of the company if that contract required him or her to work wholly or mainly outside the State. However, the company must  keep (in the same place as above)a memorandum  setting out

  • the name of the director and the provisions of the contract relating to its duration;
  • in the case of a contract of service with a subsidiary of the company, a memorandum setting out the name of the director, the name, and place of incorporation of the subsidiary and the provisions of the contract relating to its duration.

Remuneration of Directors

The following provisions apply to a private limited company, (an LTD) save to the extent that the company’s constitution provides otherwise.

The remuneration of the directors of a company is determined, from time to time, by the board of directors. The directors may be paid all travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of the directors or any committee or general meetings of the company, or otherwise in connection with the business of the company.

It is not lawful for a company to pay a director remuneration (whether as a director or otherwise) free of income tax or the universal social charge, or otherwise calculated by reference to or varying with the amount of his or her income tax or with the rate of income tax.

Any provision contained in  the company’s constitution,  any contract or  any resolution of a company or a company’s directors, for payment to a director of the remuneration in the above manner shall have effect as if it provided for payment, as a gross sum subject to income tax


Employment Contracts 5 Years+ I

A company may not incorporate a term in a director’s contract of employment with the company of which he is director or where he is director of its holding company by which his employment by any company in the group is to continue or may be continued, otherwise than at the election of the company, for period exceeding five years without the approval of the shareholders.

The requirement applies only where the contract may continue for more than five years, without the possibility of termination by the company by notice or by which it may be terminated only in specified circumstances. This may be under the contract of employment or a new contract entered into pursuance of it. In practice, the provision will apply only to a small minority of contracts, as most can be terminated on notice.

The contract or arrangement must be approved by the company in general meeting. In the case of the director of a holding company, it must also be approved by a resolution of that company in general meeting. A written memorandum, setting out the proposed agreement incorporating the terms, must be available for inspection by the members at the registered office for at least 15 days beforehand and at the meeting itself. If a written resolution is proposed to be used, a written memorandum setting out the proposed agreement incorporating the relevant terms must be circulated with the proposal for the written resolution.


Employment Contracts 5 Years + II

A term in a contract of employment which purports to be put in place in in breach of this obligation is void to the extent that it contravenes the obligation. The agreement is deemed to provide for an entitlement on the part of the company to terminate the contract by giving reasonable notice at any time.

Where a person is or is to be employed by a company as a director under a non-terminable agreement in the above sense, and  more than 6 months before the expiration of its term, the company enters into a further agreement (not in pursuance of the other party’s right in the original agreement) under which he or she is to be employed with the company, (or where he is a director of a holding company) within the group, the term above also includes the period for which the person is to be employed under that further agreement.


Payments Re Loss of Office

It is not lawful for a company to make a payment to a director by way of compensation for loss of office or in connection with his retirement unless the particulars of the payment including its amount, are disclosed to the members and the members approve the same by resolution in general meeting. This does not apply to a payment made bona fide in the discharge of an existing legal obligation.

The approval of the company in general meeting is required for the payment to a director of compensation in connection with the sale of the business of the company. It is not lawful in connection with the transfer of the whole or any part of the undertaking or property of a company for any payment to be made to a director by way of compensation for loss of office or as consideration or in connection with retirement from office unless it is so approved.

The particulars of the proposed payment including the amount must be disclosed to the company, and it must be approved by the company in general meeting. Payments that are not so approved are not lawful and are deemed to be received in trust for the company. A payment made bona fide in the discharge of a legal obligation is not subject to the prohibition.


Disclosures on Takeover I

Directors have duties to disclose to the company, payments made or to be made in connection with vacation of office in connection with a takeover of the company. The duty arises where, in connection with the transfer to any person of all or any of the shares in the company arising from a general offer to the shareholders, payment is to be made to the director by way of compensation for loss of office or in consideration of his retirement from office.

The obligation applies to

  • offers made to the general body of shareholders;
  • offers made by or on behalf of another entity with a view to the company becoming a subsidiary or the subsidiary of its holding company;
  • offers made by or on behalf of an individual with a view to his obtaining the right to exercise not less than one-third of the voting power at a general meeting; or
  • any other offer which is conditional on exceptions to a given extent.

Disclosures on Takeover II

The director must take reasonable steps to secure that the particulars of any proposed payment to be made to him by way of compensation for loss of office or as a consideration for or in connection with his or her retirement from office, including its amount, are included in any notice of the offer made for their shares, which is given to shareholders.

Unless the above requirements are complied with, and the proposed payment is approved by the members in general meeting, any sums received by the director are deemed to be received on trust for the persons who have sold their shares and must be so distributed. If a meeting is convened, and there is neither a quorum at that meeting nor at an adjourned meeting, then the payment is deemed to be approved.

A director whose fails to take the steps mentioned above or any person, who has been required by the director to include the particulars and fails to do so, is guilty of a category 3 offence.


Exceptions and Further Provisions

A payment made bona fide in the discharge of an existing legal obligation is not covered by the above obligation to obtain shareholders’ approval. An existing legal obligation is an obligation that is not entered in connection with the event giving rise to the loss of office or the transfer of shares in question.

Where in connection with a transfer, the price paid to a director is in excess of the price which could have been obtained by other holders of the like shares, or any valuable consideration is given to a director, the excess is deemed to be a payment by way of compensation for loss of office or in consideration of retirement from office. Accordingly, the above obligations apply.

Compensation for loss of office or retirement includes payments made for loss of office as director of the company or of any other office in connection with the management of the company’s affairs. It does not include damages for breach of contract or a pension in respect of past services.

The above requirements do not limit the operation of any rule of law requiring disclosure to be made with respect to any such payments or with respect to any other like payments made or to be made to the directors of a company, or the operation of any rule of law or enactment in relation to the accountability (if any) of any director for any such payment received by him or her.

A director includes a past director. A body corporate is deemed associated with a company if one is the subsidiary of the other, or both are subsidiaries of another body corporate.


Contracts with Sole Member

Where a single-member company enters a contract with the sole member and the sole member represents the company in the transaction, whether as director or otherwise, the single-member company shall, unless the contract is in writing, ensure that the terms are set out in a written memorandum and recorded in the minutes of the first meeting of the directors following the making of the contract.

The obligation does not apply to contracts entered in the ordinary course of the company’s business.

If the company fails to comply with the obligation, the company and any director in default are guilty of a category 3 offence. Failure to comply with the obligation does not affect the validity of the contract.


References and Sources

Primary References

 

Companies Act 2014 S.154- S.156  S.249 – S. 255(Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch.13   Courtney

Keane on Company Law 5th Ed. (2016) Ch.27 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

Palmer’s Company Law