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New Companies Legislation – doing nothing is not an option

May 2014, updated January 2015

Introduction

The new, long-awaited, companies legislation was finally signed into law by the President on 23 December 2014 and has been enacted as the Companies Act 2014 (No. 38 of 2014). Although the new Act will not come into effect until June 2015 when it is expected to be commenced by Statutory Instrument, companies and their directors need to start looking at the implications for them of the new legislation and how they need to prepare for it. Before looking at the specific actions that will need to be taken, a brief overview of the purpose of the Act and its principal innovations will be helpful in understanding the different options available.

Overview of Legislation

Objective

The principal objective of the Act is to restructure, consolidate, simplify and modernise company law in Ireland. The Act consolidates the existing 16 Companies Acts (dating from 1963 to 2012) and numerous statutory instruments which, together, constitute the current company law framework.

Simplification

Whilst a degree of simplification has been achieved, the resulting Act – the largest substantive Act in the history of the State – is nonetheless an extensive and extremely complex piece of legislation, running to more than 1,100 pages, comprising 25 Parts, 17 Schedules and more than 1,400 sections.

The simplification is more apparent in the way the legislation has been designed than as regards its content.   It is structured around the most common type of corporate form used in Ireland, namely the private company limited by shares. Almost 90% of the companies registered in Ireland fall into this category.

It has been structured so that the law applicable to this category of company is set out in the first half of the legislation, Parts 1 to 15, so that it is readily identifiable and accessible in the one place. If one’s company falls into this category one doesn’t need to concern oneself with the rest of the legislation. These fifteen parts deal with all aspects of the private company limited by shares throughout its existence, from the time it is formed, during its operation and until its existence is terminated. The remainder of the Act, contained in Parts 16 to 25, deals with all other company-types provided for under the new legislation, namely the Designated Activity Company (DAC), the Public Limited Company (PLC), the Guarantee Company, the Unlimited Company, the Unregistered Company and the Investment Company, each company-type being covered by a separate Part of the Act. Each of these Parts sets out how the provisions of Parts 1 to 15 will or will not apply and contains additional provisions specific to each company-type.

Key Provisions

The main features of the Act and its principal reforms as regards the private company limited by shares include the following:

  • It will have the same legal capacity as a natural person so that there will be no need for it to have an objects clause, as at present, and it will not, therefore, be subject to the ultra vires doctrine; this will make it easier to transact business with the company and third parties will not have to concern themselves as to whether the company is acting within its powers.
  • It is permitted to have only one director, as opposed to the current minimum of two directors.
  • It may have one or more members up to a maximum of 149.
  • It will have a single-document constitution, replacing the current Memorandum of Association and separate Articles of Association; the extensive provisions commonly found in a company’s articles of association are now to be found in the main body of the legislation and will apply to each company by default, unless the constitution provides otherwise.
  • It will no longer be obliged to hold a physical annual general meeting; the members may decide to hold a “written” meeting instead whereby matters required to be dealt with at an AGM are approved in writing.
  • The duties to which the directors are currently subject, both under statute and under the common law, are codified in the Act making it easier for directors to understand their obligations.
  • It will not be permitted to list any securities – either shares or debt.
  • There is provision for a “summary approval procedure” to be used to authorise a number of otherwise restricted activities (e.g. loans to directors and connected persons, the giving of financial assistance, capital reductions, commencement of members’ winding-up).
  • The legislation provides for four categories of offence under company law, each with its own sanction (category 1 offences being the most serious carrying a fine of up to €500,000 and/or 10 years imprisonment).
  • The legislation contains provisions, modelled on the EU Cross-Border Regulations, which, for the first time under Irish law, will permit mergers between Irish companies.

As already mentioned, the remaining Parts of the Act deal specifically with the other company-types provided for in the legislation: Designated Activity Companies (Part 16), Public Limited Companies (Part 17), Guarantee Companies (Part 18), Unlimited Companies (Part 19), External Companies (Part 21) Unregistered Companies (Part 22) and Investment Companies (Part 24). The provisions of Parts 1 to 15 will also apply to these company-types except where expressly dis-applied, modified or supplemented in the legislation.

The Act (Part 20) makes provision for the re-registration of companies from one type to another, setting out the particular requirements that will apply depending on the type of company involved. It is important to note that this is a completely different conversion process to the one discussed below whereby, once the legislation is formally commenced, existing private limited companies must decide to become either a company to which Parts 1 to 15 of the Act apply (which, for convenience, will hereafter in this article be referred to as a “new private limited company”) or a Designated Activity Company (or “DAC”).

 

Conversion of existing private limited companies – companies must choose

On the enactment of the new legislation all existing private limited companies will be obliged to alter their legal form. They cannot continue in their current form.

The choice will be between (i) opting in to the new regime for the new private limited company and (ii) opting out by re-registering as a Designated Activity Company (or some other company type). Part 2 Chapter 6 (sections 55 to 64) of the Act sets out the options for existing private limited companies and the procedures for re-registration.

Transition Period

The Act (section 15) provides for a transition period of 18 months from the date on which the legislation is enacted, with power for the Minister for Jobs Enterprise and Innovation to extend the period by up to 12 months if any difficulties arise in the operation of the new legislation (section 16).

Default position at end of Transition Period

A general principle enunciated by the Act (section 56) states that at the end of the transition period if an existing private limited company has not already re-registered as a Designated Activity Company or some other company-type it will be deemed to have become a new private limited company with a single-document constitution consisting of (i) the provisions of its existing memorandum of association (to the exclusion of provisions that contain its objects or that provide for, or prohibit, the alteration of all or any of the provisions of its memorandum or articles) and (ii) the provisions of its existing articles of association.

Even though a default position is provided for, it is important to note that under the Act (section 61) the directors of an existing private limited company must, unless the company has already adopted a constitution appropriate to a new private limited company, prepare such a constitution and deliver it to each member of the company and to the Companies Registration Office for registration. Whilst the Act does not provide for the commission of an offence for failure to take any action in re-registering an existing private limited company, as is explained in greater detail below (see Consequences of doing nothing), a failure to do so could entitle a member or creditor of the company to apply to court for appropriate relief.

Position of existing private limited company during transition period

The Act (section 59) provides that during the transition period (or until it re-registers as a new private limited company) an existing private limited company will be treated as if it were a Designated Activity Company and be subject to the provisions of the new legislation (set out in Part 16) applicable to a Designated Activity Company. If the company has adopted Table A articles (in full or in part) these will continue to apply during the transition period (notwithstanding the repeal of the 1963 Companies Act) until such time as the company registers a new form of constitution in accordance with the provisions of Part 2 Chapter 6 of the Act) or has re-registered as another type of company.

Re-registration as a new private limited company

An existing private limited company may become a new private limited company in any one of three ways.

1.    The shareholders may adopt a new constitution by means of a special resolution (under section 60 of the Act), passed in accordance with the company’s existing memorandum and articles. The new constitution must be in the form specified in section 19, which requires it to state:

  • the name of the company.
  • that it is a private company limited by shares registered under Part 2.
  • details of its share capital.
  • the number of shares taken by each subscriber to the constitution; and
  • the supplemental regulations (if any) adopted by the company.

Although the main body of the legislation will regulate most of the matters that one would typically find in the articles of an existing private limited company (and in this regard section 59(3) provides that the constitution need not contain any supplemental regulations, to the extent that the provisions of Parts 1 to 15 of the legislation regulate the matters which would be governed by those regulations), companies and their shareholders will undoubtedly want to include supplemental regulations to suit their particular requirements and to disapply regulations which would otherwise apply.

2.    Unless a new constitution has been adopted by a special resolution of the shareholders or the company is required to re-register as a DAC or is proposing to re-register as a DAC (or some other type of company), the directors of an existing private limited company are required (under section 61 of the Act) before the expiry of the transition period to adopt and register a new constitution which conforms with section 19. It should be noted that the constitution that may be adopted by the directors is limited to containing (i) only those provisions of the company’s existing memorandum of association (but excluding its objects or any provisions that provide for, or prohibit, the alteration of all or any of the provisions of its memorandum or articles) and (ii) its existing articles of association.

3.    By default, as we have already seen, if an existing private limited company is not re-registered under either of the above methods, with effect from the end of the transition period it will be deemed (under section 62) to have become a new private limited company and its constitution will be deemed to comprise (i) the provisions of its existing memorandum of association (but excluding its objects or any provisions that provide for, or prohibit, the alteration of all or any of the provisions of its memorandum or articles) and (ii) its existing articles of association. Until then, the company will be treated as if it were a DAC and subject to the provisions of the legislation that are applicable to DACs.

Any new constitution adopted either by the members or the directors must be delivered to the Registrar of Companies for registration, and on its registration the company will become a new private limited company governed by Parts 1 to 15 of the legislation and a new certificate of incorporation will be issued to it. Where a company is deemed to become a new private limited company it will also be issued with a new certificate of incorporation.

On the re-registration of an existing private limited company as a new private limited company, the name of the company will not be changed and the requirement to include the word “Limited” (or “Ltd”) or the Irish “Teoranta” or “Teo” will still apply (section 26).

Re-registration as a Designated Activity Company (DAC)

It is perhaps appropriate at this juncture to explain what is meant by a DAC and to highlight the differences between it and a new private limited company. In essence, as its name suggests, a DAC is a company that has specified objects designating the activity of the company and thus limiting the company’s capacity. In this respect, it is probably the company form which most resembles the existing private limited company. However, it is interesting to note that the Act expressly provides (section 976) that the validity of any act done by a DAC shall not be called into question on the ground of lack of capacity by reason of anything contained in the DAC’s objects. Rather, the Act places the onus on the directors to observe any limitations on their powers flowing from the DAC’s objects and any action by the directors which would be beyond the DAC’s capacity may only be ratified by a special resolution.

There are two types of Designated Activity Company provided for in the Act – private companies limited by shares and private companies limited by guarantee, having a share capital. It is envisaged that the DAC form of company might appeal to companies engaged in a joint venture or be used for special purpose companies.

A company that lists debt securities will have to register as a DAC (or other company-type) for, as already noted, the new private limited company is not permitted to do so.

A DAC that has more than one member may not dispense with the requirement to hold an AGM and must have a minimum of two directors.

The name of a DAC must be followed by the words “designated activity company” (or the abbreviations “d.a.c.” or “dac”, including either such abbreviation in capitalised form) or the Irish language equivalent “cuideachta ghníomhaíochta ainmnithe” (or “c.g.a” or “cga”, including either such abbreviation in capitalised form). However, this does not apply during the transition period to an existing private limited company which, as already noted, will be regulated as a DAC unless and until it registers as a new private limited company under Part 2.

Consequences of doing nothing      

As we have seen, a company that does nothing will default to the form of a new private limited company to which Parts 1 to 15 will apply and its constitution will consist of a single document comprising its existing Memorandum of Association, excluding its objects and any provision which prohibits alteration of the articles, together with its existing articles. This may not be appropriate for the company’s requirements and, under section 58 of the Act, members holding not less than 15% of the share capital of the company or any class of share and creditors holding not less than 15% of the company’s debentures entitling them to object to any alteration of the company’s objects may apply to the court for an order requiring the company to re-register as a DAC.

In addition, under section 63 of the Act, any member of a company who considers that he or she has been prejudiced by anything the company or its directors have done or failed to do as regards the conversion of the company may apply to the court for appropriate relief. If the directors have failed to comply with their obligations under section 61 to re-register the company as a new private limited company there is a presumption (which may be rebutted) that the directors have exercised their powers in a manner that is oppressive to that member or in disregard of his or her rights as a member.

 

By Mark Ryan, Partner, Corporate Department.

For more information contact Mark Ryan, Therese Rochford, Stephen Walker, Brendan Ringrose, Cillian Balfe or your usual Whitney Moore contact.