Directors of private limited companies have specific responsibilities under company law. The Companies Act 2006 is different from the previous Companies Act in that it places more emphasis on monitoring and accountability, which means directors have more onerous duties. So what should directors know about the new legislation and directors in Company Law. This article summarises key issues that we think directors of private companies (and their professional advisors) should know about the Companies Act. It explains some of the main changes introduced by the new act and identifies areas where vigilance is required to prevent potential problems arising or being overlooked.
Company Registration Process
As before, a company will be incorporated by making a company limited by shares (or “CLiPs”) or a private company limited by shares (or “PCLiPs”). The latter is now a separate type of company with its own distinct regime. Whereas the CLiPs regime is for large, publicly-owned companies, the PCLiPs regime is for smaller, privately-owned companies. The PCLiPs regime has many of the protections that were previously only available to CLiPs. With the exception of the minimum authorized share capital of €100,000, there are no material differences in the registration process between CLiPs and PCLiPs. The process for registration of CLiPs and PCLiPs has not changed. The usual process is as follows: - Both the CLiPs and PCLiPs registration processes have not changed. The main change is that the Companies Registration Office (CRO) now has the power to refuse registration in certain circumstances.
New Company duties and responsibilities
The main change is that the Companies Act places greater emphasis on monitoring and controlling the operation of the company. This means that directors have more onerous duties to discharge. The most significant of these is the requirement to keep proper accounting records. This imposes a continuous obligation to maintain financial records that are sufficient to trace the company’s financial position, results and cash flows. When a company is audited, the auditor will usually undertake an examination of the directors’ accounting records as part of the audit process. Where financial records are missing or inadequate, the auditor will identify this in his/her report and will expect the directors to address the problem as a priority. If you are a director of a private company, you are strongly advised to keep close track of financial records and to be alert to any problems that arise. You should also ensure that your company’s financial records are kept up-to-date.
Changes to Company Documents
The Companies Act has made changes to the key company documents (ie. the memorandum of association and the articles of association). Certain provisions have been added to or are contained in a different place. However, directors should not assume that their company’s articles and memorandum remain the same as they were under the previous Companies Act. The articles of association contain the rules that govern the company, including the rights of shareholders and the rights of minority shareholders when the company is wound up. The articles also contain the company’s financial powers and restrictions, including, for example, the amount of money the company can borrow. They also contain the details of directors’ powers and other provisions. The memorandum of association is the document that sets out the company’s name and registered office. The memorandum also contains the name of the first directors and the proposed share capital of the company. The name of the company should be checked the new name is compliant with the Companies Act and the memorandum of association is amended to record the new name and registered office. The directors’ names should also be checked. If there have been any changes to the directors since the company was incorporated, then the memorandum should be updated to reflect this.
New Accountability Measures
The Companies Act contains a number of measures that are intended to increase accountability among directors and, in particular, among certain senior directors. In addition, the Companies Act imposes a number of regulatory requirements upon all directors. The Companies Act has introduced two new director positions: the “chief financial officer” (“CFO”) and the “responsible person”. The CFO is a senior finance person whose role is to ensure the accounting records are kept properly and that the finance function operates properly. The term “responsible person” is applied to a director who is expected to have significant control over the operation of the company. If the company is an investment fund, then the “responsible person” may be called the “chief risk officer” (“CRO”). In some cases, the company may be required to name a director as the “nominated person”. The nominated person is the person identified by the company as being responsible for the company’s compliance with the Companies Act. The Companies Act also clarifies that, in certain cases, the directors of a private company must obtain an audit of the company’s accounts. If the company is required to prepare financial reports, the directors must obtain an audit unless the company’s gross income during the accounting period did not exceed €750,000.
Key Changes to be aware of
- An increase in the threshold for public reporting from €100,000 to €250,000. This threshold relates to the total income from the company’s activities during the accounting period, rather than the gross income of the specific company, which is the case for private companies. - A change in the terminology used to describe certain classes of share. - The Companies Act now imposes requirements for the preparation, approval and audit of financial statements in relation to investment funds and special purpose acquisition companies. - The Companies Act now requires the approval of both the financial statements and the directors’ report by the shareholders at the annual general meeting of the company.
Summing up
The Companies Act 2006 is different from the previous Companies Act in that it places more emphasis on monitoring and accountability, which means directors have more onerous duties. This article summarises key issues that we think directors of private companies (and their professional advisors) should know about the Companies Act.
