Directors’ compliance statements should be expanded to include compliance with environmental law and climate action, said Michael Moore, Director of Legal Services with KPMG.
“The Companies Act 2014 has had a very positive impact on reorganisations and structuring but should be updated to incorporate green concerns,” he said.
The comprehensive Act consolidates all existing Irish company law into 17 schedules. It was the largest reform of company law the State has seen in over 50 years and it is intended to make running a business in Ireland easier.
The Summary Approval Procedure (SAP) – a statutory procedure based on a company’s solvency– is one of the key innovations in the Act said Moore. “This allows companies to undertake certain restricted activities that previously required either High Court approval (adding costs and taking time), required profit reserves to effect or simply were not permitted at all. These transactions include capital reductions and loans to directors.”
Another key innovation introduced by the Act relates to mergers. “For the first time there is a statutory process allowing two or more Irish private companies to merge so that the assets and liabilities of one transfer to the other, after which the transferor company is dissolved. The merger can be effected using the SAP without the requirement for court approval.”
“This is common in civil law jurisdictions like France and Germany but not possible for private companies incorporated in the UK. It is a useful tool in group entity simplification processes. A key advantage over traditional business transfer arrangements is that the assets/liabilities/contracts of the transferor company pass automatically by operation of law to the successor company under the merger. In most cases there will be no need to obtain third party consents to the merger, in contrast to a business transfer arrangement. A further benefit of the merger process is that multiple companies can be merged into one successor company at the same time as part of a single merger process. This allows many dormant group companies to be eliminated in one fell swoop under one merger process without the need to undertake multiple strike off or liquidation processes to eliminate each individual company.”
The SAP is essentially a solvency procedure and its critical limb is the provision of a Declaration of Solvency by the directors of the company. It is vital that directors are appropriately advised in this regard and undertake a comprehensive review of the financial position of the company. Failure to do so could potentially expose the directors to personal liability on an unlimited basis in the event of a future insolvency of the company, said Moore. In the event of an economic downturn, these declarations of solvency could come back to haunt directors in the same way as personal guarantees provided to banks imposed significant personal liability on individuals during the last recession.
The Declaration of Solvency must include confirmation by the directors that a full inquiry has been made into the affairs of the company and that having done so, they have formed the opinion that the company is able to discharge its debts and liabilities in full as they fall due for a period of 12 months after the restricted activity is carried out.
Moore believes we should consider expanding directors’ compliance statements to include compliance with environmental law and introduce a new obligation for directors to have regard to the environmental impact of a company’s activities. He noted that there was already a positive statutory obligation on directors to have regard to the company’s employees in the performance of their duties. Introducing a new statutory obligation on directors to have similar regard for the environment would be timely.
“The Companies (Auditing and Accounting) Act 2003 provided for this and required the directors of pubic and large private companies to confirm compliance in their annual directors’ report with all statutory obligations . However, the relevant statutory provisions were never commenced. The Companies Act 2014 has now given legal effect to these obligations but on a more limited basis.”
Directors of all public companies and of private limited companies with a balance sheet total of €12,500,000 and a turnover of €25,000,000 must produce an annual compliance statement. This statement must confirm either that the directors have adopted measures to ensure the company’s compliance with tax law and company law or explain why they have not done so. Failure to do so is a criminal offence
“The legislation only applies to larger companies and only in respect of tax and company law. It doesn’t apply to environmental law. It would be a very simple way to extend a company’s environmental obligations and would provide a nudge to company directors to have regard to their company’s environmental impact.”
He also said that future innovations should include removing the requirement for the company seal. Irish incorporated companies are required have an official seal in order to execute deeds. The company seal consists of two opposing metal plates which each contain a rubber face engraved with legible letters and must be physically applied to a deed.
“Making electronic execution of deeds by Irish incorporated companies possible would promote competitive advantage of Ireland as a place to do business,” said Moore. “This is especially relevant during these COVID times but also makes good business sense in general as it will facilitate the ease and speed of document execution and transaction completion.”
This article was originally published in The Sunday Business Post and is reproduced here with their kind permission.
If you have concerns about directors' compliance statements, or any queries on the issues mentioned above, please contact Michael Moore, Director of Legal Services.