The Return of Directors’ Compliance Statements under the Irish Companies’ Acts Reform
April 15, 2014
The requirement for an annual Directors’ Compliance Statement to be included in an Irish company’s financial statements was placed on the statute book by Section 45 of the Companies (Auditing & Accounting) Act 2003. Its purpose was to foster a culture of Irish corporate compliance. However, in response to concerns from the Irish business community in 2003 that the benefits would be outweighed by a disproportionate cost for business, the Irish Government held back and in 2005 referred the issue to the Company Law Review Group to examine and to report back to Government. Following compromise proposals recommended by the Company Law Review Group, the requirement for Directors’ Compliance Statements is set to be re-enacted in a modified form in the long awaited Companies Bill 2012 which is scheduled for enactment later this year or in the first few months of 2015. Sean Nolan examines the reintroduction of Directors’ Compliance Statements. Sean Nolan is a Partner in the Dublin Office of Kerman & Co Solicitors and a member of the Irish Law Society’s Business Law Committee.
The debate regarding the issue as to whether directors should be required to issue a Compliance Statement as part of their company’s financial statements has been ongoing since 2000. The requirement for such a Compliance Statement was originally enacted in Section 45 of the Companies (Auditing & Accounting) Act 2003, which inserted new sub-sections 205 E & F into the Companies Act 1963. However, these provisions were never commenced due to the concerns which were raised by various professional bodies and interest groups as to the disproportionate impact and financial cost which such an obligation would impose on Irish companies.
The rationale for a Directors’ Compliance Statement in the context of the 2003 Act was succinctly summarised by the Company Law Review Group in its Report on Directors’ Compliance Statements 2005 in the following terms [“it] is to encourage companies to be compliant by fostering a culture of compliance. [Section 45 of the 2003 Act] does not impose any new primary obligations on companies; rather it is a compliance-verification measure, intended to encourage companies to demonstrate their commitment to obeying the laws to which they are already subject. Its benefits are therefore intangible and it is difficult to point to any particular mischief that its introduction will remedy. As our Report shows, the direct and indirect costs of [Section 45 of the 2003 Act] are, however, manifest and readily identifiable in nature if not completely in scale. The existence of these direct and indirect set-up and ongoing cost is accepted by almost all members of the CLRG”.
The issue as to whether Irish Company Law should impose an obligation on directors to report on legal compliance in their company was comprehensively addressed by the Company Law Review Group in its above referred to Report in 2005. Essentially, the Company Law Review Group recommended that a more proportionate and targeted measure should be introduced in place of sub-sections 205 E & F of the Companies Act 1963. It recommended a compromise form of Directors’ Compliance Statement coupled with increased financial thresholds. Section 226 of the Companies Bill 2012 gives effect to the draft provisions as recommended by the Group. This provides that all PLCs (irrespective of the value of their assets or their turnover and whether or not they are listed) and those private limited companies, designated activity companies and guarantee companies which have a balance sheet total exceeding €12.5m and a turnover exceeding €25m will be required to issue a Directors’ Compliance Statement (the thresholds under the exiting provisions being €7,618,248 and €15,236,856, are regarded as being too low). Unlimited companies and investment companies will be excluded from the obligation as will other categories of company if designated by the Minister for Jobs, Enterprise and Innovation.
Essentially, the directors of those companies within the scope of the section will be required to include a Statement in the Directors’ Report to be annexed to the financial statements which (a) acknowledges that they are responsible for securing the Company’s compliance with its “relevant obligations” and (b) with respect to each of the three matters specified below confirms that the matters have been done or if they not been done it specifies the reasons why they have not been done. The three matters mentioned are:
- The drawing up of a statement (a “Compliance Policy Statement”) setting out the company’s policies that in the directors’ opinion are appropriate to the company respecting compliance by the company with its “relevant obligations”.
- Putting in place of appropriate arrangements or structures that are in the directors’ opinion designed to secure material compliance with the company’s “relevant obligations”.
- Conducting a review during the relevant financial year to which the Directors’ Report relates of any arrangements or structures referred to in paragraph 2 that have been put in place.
The new obligation will not in fact require a Compliance Policy Statement to be drawn up or for the directors to put in place arrangements or structures that are designed to secure material compliance with the company’s relevant obligations or to conduct a review of the arrangements or structures. However, if the company is not in a position to confirm that these matters have been done the Directors’ Compliance Statement must specify the reasons why they have not been done. While it may be strictly open to a company to claim that it does not have sufficient resources to satisfy the requirements in paragraphs 1 to 3 above, given that Section 226 will only apply to PLCs and companies with a balance sheet total of €12.5 M and a turnover of €25 M, such an admission is unlikely to convey an alluring corporate message to investors and others having an interest in the company or having dealings with it.
“Relevant obligations” in relation to a company are those obligations under the Companies Acts where a failure to comply would constitute a category 1 offence (one which on a summary conviction carries a sanction of imprisonment not exceeding 12 months or on indictment a term not exceeding 10 years) or a category 2 offence (one which on a summary conviction carries a sanction of imprisonment not exceeding 12 months or on indictment a term not exceeding 5 years), a serious Market Abuse offence or a serious Prospectus offence and obligations under “tax law”, which broadly includes all obligations relating to tax imposed under the Taxes Acts (as defined). The new restrictive definition of relevant obligations represents a significant dilution of the existing definition. The existing definition includes all obligations under the Companies Acts, tax law and “any other enactments that provide a legal framework within which the company operates and that may materially affect the company’s financial statements” (this latter catch all having introduced considerable uncertainty into the scope of a Directors’ Compliance Statement under the existing provision).
The arrangements or structures in paragraph 2 above may, if the directors of the company so decide, include reliance on the advice of one or more persons employed by the company or retained by it under a contract of services being a person who appears to the directors to have the requisite knowledge or experience to advise the company on its compliance with its relevant obligations. Thus, it would be possible for a company to outsource some of the arrangements and structures which are designed to ensure that the company is in material compliance with its relevant obligations.
The reintroduction of Directors’ Compliance Statements is part of a wider theme which runs through the Companies Bill which places greater corporate responsibility on the directors, secretary and other officers of the company. This is exemplified by the codification of the panoply of existing common law directors’ duties, the creation of an express requirement whereby directors acknowledge their legal duties upon taking office and the imposition of an express duty to ensure that the company secretary has the necessary skills to undertake his or her record keeping role in the company.
While companies and practitioners can draw comfort from the fact that the more onerous non commenced provisions of Section 45 of the Companies (Auditing and Accounting) Act 2003 will be repealed and replaced by the less burdensome Section 226 of the Companies Bill 2012, it should be noted that a legal requirement for a Directors’ Compliance Statement does not apply in many other comparable jurisdictions. To that extent the Irish Companies Acts will impose a higher burden of compliance on Irish companies than exists in other comparable jurisdictions. Some practitioners urged the Government to continue to defer the introduction of Directors’ Compliance Statements and to await any EU Company Law Directive on this subject. It seems however, that in the absence of any EU initiatives, Irish Company Law will be breaking new ground and companies who will be subject to Section 226 and their advisers will need to address now whether their policies, arrangements and structures enable them to satisfy the requirements of the Section once it is enacted and brought in to force next year. The author’s view is that the majority of companies have been addressing the policy and cost implications of Directors’ Compliance Statements for the past decade, and having been reconciled to the inevitable, now have a far better understanding of the scope of the areas of compliance which must be addressed in the new regime for their Directors’ Compliance Statements.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.