Company Law Enforcement Act, 2001

The provisions of the Company Law Enforcement Act, 2001 ("the Act") herald a new era in relation to corporate enforcement. Although the Act became law on the 9th July 2001, it did not take effect until the Minister for Enterprise, Trade and Employment issued the relevant regulations. The relevant Commencement Orders are S. I. No. 391 of 2001, S. I. No. 438 of 2001, S. I. No. 523 of 2001 and S. I. No. 524 of 2001.

The focus of the Act is to assist in creating a more compliant company law regime for the effective regulation of the business environment. In summary, the key developments are as follows:-

• Appointment of an independent statutory officer (the Director of Corporate Enforcement "the Director") with general, but not exclusive, responsibilities for the enforcement of company law (Sections 7 and 12);
• Introduction of an annual return date (Section 60);
• Enhanced compliance and filing obligations for directors (Section 90);
• New provisions governing the giving of guarantees or security relating to transactions with directors and connected persons (Section 78);
• Liquidator now obliged to make a report on every director of an insolvent company (Section 56);
• Auditors obliged to report suspected offences under the Companies Acts (Section 74); and
• Establishment of the Company Law Review Group on a statutory basis (Section 67).

Office of the Director of Corporate Enforcement

The primary objective of the Act is to establish a Director of Corporate Enforcement ("the Director"). The Director has assumed most of the roles under the Companies Acts 1963 - 2001 ("the Acts") previously discharged by the Minister. The focus of the Director is to encourage compliance with the Acts and to take appropriate investigative or enforcement action where there are suspected breaches of the Acts.

It would appear that the current Director, Mr. Paul Appleby, sees the role of encouraging compliance as including the provision of information regarding the rights and duties of companies and related parties, thus ensuring that those parties are aware of their respective obligations thereby preventing breaches of the Acts.

The Director has extensive powers to conduct investigations and prosecutions, has a supervisory role over activities of liquidators and receivers and may apply to the High Court for an order requiring any company or officer of a company to comply with the Acts.

New Annual Return Date

A specific annual return date ("ARD") is established for every company including particular provisions for group companies. The ARD is a specific date in each year within 28 days of which a company must file its annual return.

The ARD is determined having regard to the last annual return delivered to the Companies Office prior to the 1st March 2001. The new ARD is the anniversary of the date to which the return is made up i.e. the date referred to on the previous annual return which is 14 days after the convening of the AGM.

It is possible to move the ARD to an earlier date by making the annual return up to a date which is more than 14 days prior to the initial ARD or to move the ARD to a later date by delivering an annual return to the CRO no later than 28 days after the initial ARD to which no accounts need be annexed and nominating the new annual return date which cannot be later than 6 months after the initial ARD.

The new system is very date sensitive and a failure to file within the 28 day period already referred to will trigger automatic penalties. Criminal offences have been created for companies and officers in default of filing annual returns.

Giving of Guarantees and Security

Section 31 (1) (c) of the Companies Act, 1990 ("the 1990 Act") provides that a company shall not enter into a guarantee or provide any security in connection with a loan, quasi loan or credit transaction made by any other person for a director or a person connected with a director. The 1990 Act contained the following exceptions to the Section 31 prohibition:-

• Section 32 - de minimis exception
• Section 34 - Exception for inter-company loans within a group
  
  This applied to loans and quasi-loans and the giving of guarantees or security in connection with loans and quasi-loans. It was applicable between holding companies and subsidiaries and between subsidiary and holding company. However, the Section 34 exception did not apply to credit transactions.
• Section 35 - Transactions by a subsidiary in favour of its holding company
• This exception did not extend to a holding company entering into a transaction for the benefit of a subsidiary.
• Section 36 - Directors expenses properly incurred
• Section 37 - Transactions entered into in ordinary course of business

A director of a company will be deemed to control a body corporate if he together with any "connected person" (which is defined to include the spouse, parent, brother, sister or child of that director or the trustee of any trust, the principal beneficiaries of which are the director, his spouse or any of his children or any body corporate which he controls or a partner of that director) is interested in more than 50% of the equity share capital of that body or entitled to exercise or control the exercise of more than 50% of the voting rights at general meeting of that body.

Amendments to Section 31 in 2001 Act

• References to a partner of a director are references to a person who is partnership with the director within the meaning of the Partnership Acts.
• A director now controls a body corporate if he alone or together with any other directors or any body corporate connected with the director/s controls 50% or more of the equity share capital of the company. This means that all of the directors must be considered together and not individually and the relevant percentage in terms of control is 50% and not in excess of 50%. Accordingly, transactions not previously prohibited under Section 31 will now be prohibited.
• A sole member of a single member company is presumed to be connected with a director of the company unless the contrary is shown.
• The group exception has been amended to provide that any one member of the group can make a loan or quasi-loan to another member of the group, or enter into a credit transaction as creditor for another member or give a guarantee or security for a loan, quasi-loan or credit transaction in favour of another member of the group.
• There is a new whitewash procedure similar to the Section 60 procedure in that the directors must make a Statutory Declaration of Solvency and the members must pass a special resolution. The procedure is only available to validate the entering into of a guarantee or the giving of security and NOT to validate the making of a loan, quasi-loan or a credit transaction. The declaration and a report of the auditor which provides that the declaration is reasonable must be filed in the CRO within 21 days of the giving of the security.

Winding-up and insolvency

The Director may inspect the books and papers of a company which is being wound up and there is provision for the examination on oath of any person connected with a company being wound up. The Director will be notified of the appointment of voluntary liquidators and receivers by the Registrar of Companies. Liquidators of insolvent companies are obliged to report to the Director on the liquidations and are obliged to alert the Director of any criminal breaches of company law by the company which is being wound up or by its officers. Liquidators in court liquidations and creditors' voluntary liquidations are obliged to seek the restriction of the directors of an insolvent company. Receivers must file a statement of opinion regarding the company's solvency to the Registrar at the conclusion of a receivership who will forward a copy to the Director.

The Court may make an award upon application of the Director against any person whom it is satisfied, after examination by it, is indebted to the company or is in possession or control of company property, and may issue warrants enabling liquidators or the Director to enter any buildings, to search for and to seize property of a company being wound up. Further, the Court may, on the application of the Director, a creditor or other interested party order the arrest of members and officers of a company in liquidation where it is feared they may abscond from Ireland.

The Court may order any person connected with a company being wound up to restore property to the company or to contribute money to the company by way of compensation upon application by the Director, a liquidator or any creditor of the company where such person has misapplied or become accountable for any money or property of the company or has been guilty of any misfeasance or breach of trust. In addition, the Court may freeze some or all of the assets of any officer where there is a substantive civil cause of action against the officer and there is evidence that the officer may remove his or the company's assets with a view to evading his or the company's obligations.

Auditors

Auditors must hold a current practising certificate from a recognized accountancy body and are now obliged to alert the Director when in their opinion a client company is not maintaining proper books of account or where there are reasonable grounds for believing that a client company has committed a serious offence under the Acts. The officers of the relevant company will, in all probability, then face a company law audit and a full review into the company's compliance with company law. However, it is the company directors and the company secretary who are primarily responsible for the compliance with the Acts. The exposure for auditors arises in the context of sanctions and prosecutions in particular in relation to mandatory restriction and examination applications against directors of insolvent companies.

Sanctions

• Increase in the maximum penalties for many offences under the Acts to €1,904.61 in the case of fines for summary conviction and to five years imprisonment in the case of convictions on indictment;
• Consequent application of enhanced investigative powers and powers of arrest to those offences punishable by a maximum of five years imprisonment; and
• Power for the Director to issue "on-the-spot" fines for minor offences.
  

For further information or general enquires please contact
Kevin O'Brien
E-mail: kobrien@kilroys.ie or
Joanne Griffin
E-mail: jgriffin@kilroys.ie
Telephone: +353-1-4395600
Fax: +353-1-4395601/4395602

© Kilroys Solicitors 2002