SEMINAR ON RECENT DEVELOPMENTS IN INSOLVENCY LAW

The Irish Centre for Commercial Law Studies

University College Dublin
5 December 2002
___________________
ENSURING BEST CORPORATE BUSINESS PRACTICES FOR SOLVENT
COMPANIES

The Responsibilities of Company Directors

The Role of the Office of the Director of Corporate Enforcement

Paul Appleby
Director of Corporate Enforcement

1.

Introduction

A company is a separate legal entity which means that, in the eyes of the law, it exists
separately from those individuals who own and manage it. While its members own a
company, the articles of association usually provide that the management of the company
is delegated to a board of directors who are approved by the members. The company, its
members and directors have distinct roles and responsibilities in company law. In a
typical small private limited company owned and directed by two persons, often a
husband and wife, it is easy to lose sight of the different legal personae which are
represented by the company, its members and directors and of the purpose for certain
legal provisions which require communications from the husband and wife as members to
themselves as directors. The Company Law Review Group in its first Report has already
recommended a substantial simplification of the Companies Acts, so that the legislation is
based in the future on the requirements of the private limited company rather than the
public limited company, where typically the members and directors are different persons.
Beyond noting for the purposes of today that change is therefore in prospect, the detailed
requirements of the existing legislation will remain in place for a little time yet. Indeed
while some of these requirements will change for the future, the fundamental principles
governing the distinction between the roles of the company, the members and the
directors are likely to remain unchanged. It is these principles which determine the
relationships between the three separate personae, and I will be concentrating therefore
on those principles in my presentation on the responsibilities of directors.
The final point to note at the outset is that I am focusing on solvent companies, i.e., those
companies which are able to discharge their debts as they fall due. I am leaving aside
therefore the particular responsibilities of directors which apply in receivership,
examinership and liquidation situations.
responsibilities.

Later speakers will address these

The main legislative provisions concerning directors in the Companies Acts are
summarised in Appendix 1 to this Paper.
1. THE RESPONSIBILITIES OF COMPANY DIRECTORS
2.

General Duties and Responsibilities

A directors primary legal duty is to the company, rather than to its members and
shareholders. This relationship is that of agent, trustee and employee, and directors are
expected to be honest, loyal and conscientious in discharging their responsibilities.
A director also owes certain duties to creditors particularly in insolvent situations,
employees in the health and safety area for instance and members and shareholders in
providing appropriate disclosure of information to help them protect their interests.
Where a director expressly undertakes certain obligations to shareholders, he or she may
stand in a fiduciary relationship to them and owe them fiduciary duties. This may
particularly be the case in a small private company where shareholders often look to the
directors for advice.
A directors responsibilities are principally grounded in common law and statute.
3.

Fiduciary Responsibility

A director stands in a special relationship, known as a fiduciary position, to the company

of which he or she is an officer. A fiduciary is required to act in a manner which is
legally becoming of their office and which places the interests of the company ahead of
their own.
A director is required to exercise his or her powers in good faith and in what he or she
honestly believes to be the best interests of the company as a whole. Directors are not
allowed to make an undisclosed personal profit from their position and must account for
any profit which they secretly derive from their position, even in the absence of bad faith
on the part of the director. Where a director abuses his or her powers, any action taken is
invalid but may subsequently be ratified by a general meeting of the company.

It is not automatically a breach of a directors duties to be involved in a business which

competes with that of his or her company. However where a director has a contract of
employment or service contract with the company, it may be in breach of his or her duties
of fidelity and loyalty to the company to do so.
4.

Transactions between Director and Company

As a fiduciary, a director is expected to minimise the potential for conflicts between his
or her personal interests and those of the company. However, where such a potential
conflict arises, the Companies Acts require in certain situations that the transaction must
first be approved by resolution of the company in a general meeting. Such a situation
arises where a director of a company or its holding company or a person connected with a
director acquires an asset from or sells an asset to the company whose value exceeds
either 63,487 or 10% of the companys net assets or called up share capital. Where the
amount in question does not exceed 1,270, this provision does not apply.
A person is connected with a director of a company if he or she is a near relative of the
director, in partnership with the director or if he or she acts as trustee for a trust the
principal beneficiaries of which are the director, his near relatives or a company which he
controls. A company is connected with a director if it is controlled by that director.
Furthermore, it is presumed that the sole member of a single member company is
connected with a director of that company.
If the director or connected person is a director of its holding company or a person
connected with such a director, the arrangement must be approved by a resolution in a
general meeting of the holding company. Where a company enters into a transaction in
contravention of this section, the arrangement can be cancelled by the company, subject
to certain exceptions.
A company is generally prohibited from making a loan or quasi-loan (i.e., a transaction
which is a loan in all but name) to a director of the company or its holding company or a

connected person. It is also generally prohibited from entering into a credit transaction or
guarantee on behalf of such a person and from providing security in relation to such a
transaction. This general rule is subject to a number of exceptions and savers. Where a
company enters into such a transaction or arrangement in contravention of this provision,
the transaction is voidable at the instance of the company and may lead to the imposition
of personal and/or criminal liability on the director.
5.

Responsibility to act with Due Care, Skill and Diligence

A director is obliged to carry out his or her functions with due care, skill and diligence.
In the absence of an indemnity, a director is liable in tort for negligent behaviour.
However, a director need not exhibit in the performance of his or her duties a greater
degree of skill than may reasonably be expected from a person of his or her knowledge
and experience.
A director is in general justified in leaving duties to be performed by another official of
the company where such duties may properly be left to such an official, having regard to
the articles of association of the company and the nature of its business. A director, while
not bound to give continuous attention to the affairs of the company, ought to attend
meetings in circumstances where he or she is reasonably able to do so.
6.

Responsibilities of Disclosure

A director is obliged to disclose certain personal information in the register of directors

and secretaries. A director must also disclose his or her interest in shares of the company
or related companies in the register of directors shareholdings. He or she must disclose
payments to be made to him or her in connection with share transfers. The directors
service contract with the company must be made available for inspection by any member
of the company.
Where a director is in any way interested in a contract or proposed contract with the
company, he or she is required to declare the nature of that interest at a meeting of the
directors of the company.

A company is required to maintain an up-to-date register of members, so that their

interest in the company is acknowledged and they can be informed periodically of
developments in the company.
The company director is required to maintain proper books of account, to prepare
financial statements of the companys trading performance, assets and liabilities and other
than in certain circumstances, to have them audited. He or she is expected to convene an
annual general meeting and present annual accounts to the members at the meeting. The
annual accounts are the profit and loss account, balance sheet and the notes to the
accounts. A report by the directors on the state of affairs of the company and a report of
the auditors (where applicable) are required to be attached to the accounts.

These

accounts must give a true and fair account of the companys state of affairs and its profit
and loss. While the term true and fair is not defined, accounts are generally accepted as
showing a true and fair view when they have been prepared in accordance with the
Companies Acts and relevant accounting standards.
A director is under a duty to convene an extraordinary general meeting of the members of
the company where the companys net assets have fallen to 50% or less of its called-up
share capital.
The directors are also obliged to make a reliable and timely disclosure of financial and
other information not only to the members of the company but to the general public as
well. These requirements are more extensive where the liability of the company for its
debts is limited. These general duties give rise to many of the filing and registration
obligations which are imposed on directors in the Companies Acts.
A summary of the principal legal responsibilities of directors in respect of the
maintenance of company registers, the filing and registration of documentation with the
Registrar of Companies and their operational obligations is set out in Appendix 2 to this
Paper.

7.

General Responsibilities as Company Officer

A director, as an officer of a company, is under a duty to comply with the companys

obligations under the Companies Acts. A director is in default where he or she authorises
or permits a default to take place in breach of his or her duty as a director. Indeed for
defaults subject to a fine or penalty, the burden of proof in a prosecution now rests with
the director to establish that he or she took all reasonable steps to prevent the default or
was unable to do so by reasons of circumstances outside their control. Where a director,
in purported compliance with any provision of the Companies Acts, answers a question,
makes a statement or produces a document which he or she knows to be false or is
reckless, he or she is in breach of the Acts.
ROLE OF THE ODCE
8.

Introduction

At the outset, it is important to indicate that the general aim of ensuring best corporate
business practice is not a role which is exclusive to the Director of Corporate
Enforcement. In its widest sense, there are many other regulators seeking to ensure high
standards of corporate behaviour, and these include, for instance, the Central Bank of
Ireland in the financial area, the Environmental Protection Agency in environmental
protection and the Health and Safety Authority in maintaining high standards of
workplace operation. What I, as Director, am focused on is ensuring compliance with
and enforcement of the Companies Acts.
However, even this is not a role which rests solely with my Office. There are other
persons who are given legal standing in company law to protect their interests and
enforce statutory obligations. In certain cases, the Company Law Enforcement Act has
merely extended to me powers which have been available for some time to others, such
as creditors and members, and in more specific circumstances, auditors, examiners
liquidators and receivers. Accordingly, many parties will have a legal right of civil action
against a company or other party from whom he or she requires co-operation or with

whom he or she is in dispute, and my Office will not generally become involved where
there exists a sufficient civil remedy.
In addition, the Registrar of Companies continues to have primary responsibility for
enforcing compliance with the registration and filing requirements of the Companies
Acts. While I, as Director, may prosecute registration and filing offences, I am unlikely
to do so unless they are part of a wider set of proceedings which we are undertaking.
There are of course non-statutory requirements, such as accounting and auditing
standards and the ethical rules of accountancy and legal professionals, which also play an
important part in securing good corporate business practices.
Within our sphere of influence, the primary mandate of the Office is to improve the
compliance environment for corporate activity by:

9.

encouraging adherence to the requirements of the Companies Acts and

bringing to account those who disregard the law.

Compliance Role

We are discharging our compliance role by making ourselves available to business and
professional interests for the purpose of communicating the benefits of compliance and
explaining in particular the role that the ODCE will be discharging in the company law
area. For instance, we are currently collaborating with the Chambers of Commerce of
Ireland in holding seminars in provincial areas, in order to widen the constituency which
receives the compliance message.
We have developed a website at www.odce.ie on which we publish information on the
role of the Office and information relating to our ongoing work. The Companies Acts
and associated subsidiary legislation is either on or accessible from the site. The website
also contains newly published Information Books on the legal obligations of companies,
company directors, company secretaries, members/shareholders, auditors, creditors,
examiners, liquidators and receivers under the Companies Acts.

We have also issued to date three other Decision Notices for the purpose of clarifying in
simple terms the approach of the Office to aspects of our remit and with a view to
explaining the standard of behaviour with which we expect people to comply. These
Notices have involved us in a productive exchange with business and professional
interests, following which we will issue definitive guidance.
The purpose of all of this work is to achieve as far as possible voluntary compliance by
companies and company directors in particular with their statutory obligations.
Compliance is a preferable outcome for everyone concerned, including my Office.
10.

Encouraging Reporting of Suspected Non-Compliance

The bridge between compliance and enforcement of suspected misconduct in the

company law area is the reporting to my Office of such incidents. There are a number of
mandatory reporting provisions in the Company Law Enforcement Act which apply to:

auditors in relation to indictable offences committed by companies, company

directors and others;

liquidators in relation to matters for which persons may be criminally liable;

recognised accountancy bodies in relation to indictable offences committed by

members of the body, and

certain prescribed professional bodies in relation their members acting as

liquidators and receivers, insofar as they may not have kept proper books or
may have committed suspected indictable offences under the Companies Acts.

We have also made available a mechanism to enable the general public to provide us with
information suggesting corporate malpractice. A Complaint Form is available on our
website, and it has been structured to provide sufficient information to enable us to
undertake a proper evaluation of the circumstances in question.

The Company Law Enforcement Act also enables us to share information with the Garda
Sochna, the Revenue Commissioners and the Competition Authority in particular in
pursuance of our role in uncovering and sanctioning corporate misconduct.
11.

Investigative Role

The ODCEs investigative role is quite extensive with respect to solvent companies. In
investigating complaints of improper conduct, my Office possesses the same powers as
certain other parties to seek access to company registers, minutes, etc. These are often
useful in establishing if there is substance to the complaint which has been made.
If more extensive investigations are warranted, I have the power to initiate or seek to
have initiated fact-finding company investigations in certain circumstances suggesting
fraud or other illegality. Such an investigation may take various forms, viz:

it may be undertaken, at my request, by an Inspector appointed by the High

Court to conduct a wide-ranging inquiry of a companys affairs;

I may directly appoint an Inspector to establish the beneficial ownership of a

company or of shares or debentures in a company, or

I may undertake a private examination of a companys books and documents.

While the powers of Inspectors are more extensive, the powers in a private examination
include:

requiring that company books and documents be produced for examination by

all persons in possession of them;

compelling directors and other persons to explain the companys books and

obtaining relevant documents from certain third party sources, such as other
companies.

In such cases, there may be a substantial engagement between my Office and company
directors who are required to give all reasonable assistance to my staff in their
investigations.

Where criminal investigations are warranted, I may seek the assistance of the High Court
in certain circumstances to gather appropriate evidence. In addition, the members of the
Garda Sochna attached to my Office may exercise and perform all of their normal
powers to gather evidence, e.g., by way of search and seizure of documents, and take
statements.
12.

Enforcement Role

Where, following investigation, breaches of the Companies Acts are suspected with
respect to solvent companies, I have four main enforcement options, viz:

I may invite the persons in default to remedy the breach and pay an
administrative fine in lieu of facing a summary prosecution before the courts.
This power is unlikely to be commenced by the Minister for a number of
months yet;

I may apply to the High Court to order that the default be rectified by persons
named in the order;

I may initiate a summary prosecution for the suspected breach of company

law, or

I may refer the case to the Director of Public Prosecutions for decision as to
whether a prosecution on indictment should be commenced.

Obviously, the enforcement option selected will reflect the nature and gravity of the
suspected offence.
13.

Conclusion

This presentation of the ODCEs investigation and enforcement role is limited to solvent
companies. Further options arise in insolvent companies, but I will leave these matters to
be dealt with by later speakers.
As a final comment, I am anxious that my Office contributes to the simplification of
company law which, as I said at the outset, is being led by the Company Law Review
Group. I have committed a number of staff to assist the Group with its work, in order to

ensure that the forthcoming simplified and consolidated legislation is capable of being
complied with by companies and company directors in particular and is readily
enforceable as well.
New legislation is in prospect to establish an Irish Auditing and Accounting Supervisory
Authority. It is envisaged that this legislation will also require the directors of certain
companies in due course to confirm annually compliance with the Companies Acts and
other legislation. The auditor will also have to confirm if the directors compliance
statement is fair and reasonable.
There is also a significant pipeline of EU legislation which is being advanced as part of
the drive towards a Single Market in Financial Services. By way of example, new
provisions dealing with market abuse and prospectuses will also require to be
implemented in Irish law in the near future.
All of these will present challenges to company directors, practitioners and my Office. I
hope that the advent of the ODCE will contribute to enhancing corporate business
practices in the company law area. We have pursued a policy from the outset of engaging
with business and professional people in relation to our remit, and we want to continue
that approach in the years ahead. If you wish to provide us with feedback or have ideas
on how we should handle matters or how legislation of interest to us might be better
framed to improve corporate business practices, we are available to listen.
Thank you for your attention.

APPENDIX 1
Principal Provisions of the Companies Acts dealing with Directors Responsibilities
Sections 174-199 of the Companies Act 1963 dealing with Directors and Other Officers;
Parts III of the Companies Act 1990 (Transactions involving Directors);
Part IV (Chapter 1 only) of the Companies Act 1990 relating to Share Dealings by
Directors, Secretaries and their Families;
Part VII of the Companies Act 1990 (Disqualifications and Restrictions);
Sections 43 to 45 of the Company Law (Amendment) (No. 2) Act 1999 dealing with
resident directors and limitations on the number of directorships.
Part 4 of the Company Law Enforcement Act 2001 deals with suspected undischarged
bankrupts acting as directors and the restriction and disqualification of directors and other
persons. These provisions involve amendments to the 1963 and 1990 Acts and provide
inter alia a role for the Director of Corporate Enforcement in bringing applications in
these areas before the High Court.
Part 9 of the Company Law Enforcement Act 2001 deals with transactions involving the
company and its directors, and it revises the legal rules originally set out in Part III of the
1990 Act.
The 2001 Act makes a number of other changes to the earlier Companies Acts dealing
with directors responsibilities.

APPENDIX 2
The Basic Legal Responsibilities of a Company Director
Company Documents to be kept, updated and made available for inspection by the
members (and in some cases by the public)

Register of Members

Register of Directors and Secretaries

Register of Directors and Secretaries Interests

Register of debenture holders

Directors Service Contracts

Minute Books of the proceedings of General Meetings and Directors

Meetings

Register of interests of persons in its shares (public limited company only)

Every Instrument creating or evidencing a charge over the companys

property

Every contract to purchase its own shares

Operational Obligations

Maintaining proper books of account

Preparing financial and other statements

Having the financial statements audited (other than in certain situations)

Holding an annual general meeting (AGM)

Circulating to members before every AGM a signed copy of the balance sheet,
profit and loss account, directors report and auditors report (where applicable)

Holding an extraordinary general meeting when circumstances require

General Obligations to file and register with the Registrar of Companies

Change in the companys constitution (Memorandum and Articles of Association)

Change in the registered office

Change of directors/secretaries

Alterations in share capital

Annual return

Mortgages and charges

Agreed Resolutions