Company law has become highly complex and increasingly inaccessible. There are 13 pieces of primary legislation and more than 20 pieces of secondary legislation. Apart from the sheer volume of legislation, the law has become extremely technical. This situation does not serve the simultaneous drive for better standards of compliance. It is moreover a positive deterrent to the recruitment of company directors to voluntary boards.
The twofold purpose of the Companies Consolidation and Reform Bill is to codify the law and to modernise it. The General Scheme for the Bill was published in May 2007. It is planned to publish the Bill itself in 2009 and to enact it in 2010. Of course there may be slippage in these dates. It is an ambitious undertaking and it seems almost inevitable that there will be delays.
What are the implications for the nonprofit organisation that is already a company or one which intends to incorporate?
A new structural model?
Nonprofit organisations almost always incorporate as companies limited by guarantee without a share capital. Of the available options, this is the most suitable, although it is generally accepted that it is not ideal. The provision of a new structural model has been strongly advocated by the Law Reform Commission and others. The UK has already taken this step in introducing the CIO (Charitable Incorporated Organisation). The Irish Government has however decided to shelve the question and to watch developments in the UK before considering it further. Accordingly, the guarantee company remains the standard for the nonprofit sector.
Fundamentals
The classification of companies by type is a strong feature of the Scheme. The guarantee company will be one of just two types of company to retain its two-document constitution, and the objects clauses contained in the Memorandum of Association. Many of the standard “default” provisions to be found in the Articles of Association of most organisations (relating to matters such as the convening of meetings, voting, proxies, and so forth) will be set out in the Bill, and it will be clear which of these are obligatory, and which are discretionary.
The guarantee company will be required to use the letters “CLG” (Company Limited by Guarantee) after its name, but may be relieved of this obligation in the same way as companies may currently be permitted to dispense with the use of the word “limited”.
Only two members will be required for a guarantee company. This is a significant change which should benefit nonprofits. The existing requirement of seven members is often a problem, especially for start-up organisations.
The existing rules relating to the keeping and auditing of accounts, the management of records and filing of returns in the CRO are all carried over. Similarly, although other types of company will no longer be obliged to hold an AGM, the rules regarding the calling and conduct of members meetings remain essentially the same for the guarantee company.
Directors’ Duties
Directors’ duties currently comprise their statutory duties (set out in various places in the Companies Acts), and their common law or fiduciary duties, which are to be found in case law and are not easily ascertained.
The Bill will give the fiduciary duties a statutory description for the first time. As stated in the Scheme, they are:
- To act in good faith and in the best interests of the company;
- To act honestly and responsibly in relation to the conduct of the affairs of the company;
- To act in accordance with the company constitution;
- To exercise the powers of the company for lawful purposes;
- To refrain from using company property for his or her own use, unless authorised;
- To refrain from agreeing to restrict the director’s independent judgment, except in limited situations;
- To avoid conflicts of interest;
- To exercise the duty of care, skill and diligence which would be expected of a director by a reasonable person with the knowledge and experience which the director has, and that which would be expected of a person in the same position as the director.
- To have regard to employees’ and members’ interests.
Concerning the statutory duties (the usual governance obligations to keep accounts, registers, minutes, make returns and so forth), they are set forth in detail the Scheme for the Bill and are largely unaltered. There is one interesting change. While every director has a duty to ensure that the company is compliant, this general obligation is no longer placed on the company secretary. This does not relieve the secretary of all obligations, but it is an appropriate move, and will be of comfort to the many CEOs who act as company secretary. There is obligation placed on the directors to ensure, when appointing a company secretary, that the person selected has “suitable skills”.
Other Governance Matters
As is the case under the existing Companies Acts, wide powers of management are given to the directors, although these can be altered by the members in general meeting. It is clarified that the members may only control the directors through amending the articles by special resolution, and not by a more informal “direction” given in general meeting, as is occasionally thought to be the case.
The meaning and liability of de facto and shadow directors are clarified. The former is defined as “a person who occupies the position of director but who has not been formally appointed a director”, and the latter as “a person in accordance with whose directions or instructions the directors of a company are accustomed to act” (excluding a professional advisor). Both shall be treated as directors for all purposes.
When a director acts in breach of his duties, he will be liable to account to the company for any gain made, and to indemnify the company against any loss arising. This was the position under common law, although never stated in the Companies Acts. However, it is re-stated that in any proceedings against the director for negligence, default, breach of duty or trust, the court may relieve the director from liability if he or she has acted honestly and reasonably and in the circumstances he or she should fairly be excused.
Some minor additional alterations include the following:
- A person may be disqualified from acting as a director if he or she is absent from board meetings for more than 6 months.
- No one under the age of 18 may act as a director.
- It is clarified that a company may not act as a director.
Offences
Offences consisting of failure to observe the provisions of the legislation will be classified for the first time, into four categories, with a sliding scale of penalties.
Conclusion
It will certainly be of benefit that all of the rules for the governance of every type of company will be set out clearly in one place. Clearly however directors will need to become familiar with the new regime well in advance of its introduction. While the familiarisation exercise will be challenging, it provides an opportunity for boards to become more knowledgeable about their legal obligations, and more comfortable that they know how to discharge them.
© Linda Scales, 2010
