The In-House Lawyer

The Companies (Amendment) Act (CA) 2009 came into effect in Ireland on 12 July 2009. The Act is being met with considerable attention in the business community as a result of the changes it has introduced to the supervision, regulation and investigation of financial arrangements between companies and their directors, and persons connected with those directors.₁ The introduction of CA 2009 was prompted in part by the government’s desire to overhaul the regime for regulating Irish banks, following revelations in late 2008 of the extent to which an Irish bank had made loans to one of its directors. The bank relied on a provision of the Companies Act (CA) 1990 that exempted licensed banks from the disclosure obligations imposed on other companies in respect of loans to directors and persons connected with them. The bank instead presented details of the ‘aggregate amounts’ outstanding on those loans as at the balance sheet date in its financial year-end accounts. The political and public controversy that ensued once the extent of the loans was discovered (in particular to the bank’s former chairman) prompted the government to review the law, seek input from the Office of the Director of Corporate Enforcement (DCE) and enact legislation intended to:

• increase the disclosure obligations of licensed banks relating to loans to directors and connected persons; and
• increase the powers of the DCE to investigate breaches of, and further enforce compliance with, the Companies Acts.

CA 2009 removes the requirement for Irish companies to have an Irish resident director, something that has been welcomed by practitioners and companies. This should alleviate concerns at EU level on the compatibility of this requirement with EU law and ease the administrative complexity experienced by overseas businesses in establishing a presence in Ireland. The main provisions of CA 2009 are summarised below.

Increased Sanctionsfor Loans to Directors

In what is likely to be the most significant amendment introduced by CA 2009, the criminal sanction for breach of s31 of the CA 1990 (prohibition of a company from making loans (and effecting certain other transactions) to its directors or persons connected with them) has been altered to make it a strict liability-type offence. Prior to CA 2009, an officer who authorised or permitted a company to enter into a transaction or arrangement that was in breach of s31 of CA 1990 was guilty of an offence only if there was an element of wilful default. A criminal offence would not be committed unless the officer ‘knowingly’ authorised or permitted the breach or had ‘reasonable cause to believe’ that a breach would take place (s40(1) of CA 1990).CA 2009 now purports to make this a strict liability offence by replacing the earlier s40(1) with the following:

‘If a company enters into a transaction or arrangement that contravenes s31, every officer of the company who is in default shall be guilty of an offence.’

Surprisingly, s40(2) has been removed altogether. This provided for criminal sanction of persons who ‘procured’ a company to breach s31 of CA 1990. There are mixed views on how the new provision will be interpreted and whether it will apply only to officers who themselves are in default or to all officers of the company that is in default. If the former applies (which we anticipate to be the case given the use of the word ‘who’), some comfort will be taken from the explanation of what constitutes an officer in default under s383(1) of the Companies Act 1963. An officer in default is one who authorises the default or who, in breach of their duty as an officer, permits the default to occur. Officers are presumed to have permitted a default unless they can establish that they took all reasonable steps to prevent it or, by reason of circumstances beyond their control, were unable to prevent it. Where officers can prove that they have taken positive steps to prevent a breach, liability should not arise. The removal of the earlier defences will have serious repercussions for officers who do not actively participate in the day-to-day operations of the company and fail to take positive steps to ensure compliance with s31. An officer who is guilty of an offence under s31 is liable on summary conviction to a fine of up to €1,900 or, at the court’s discretion, imprisonment for a term of up to 12 months, or to both. On conviction on indictment, an officer is liable to a fine of up to €12,700 or, at the court’s discretion, imprisonment for a term of up to five years, or to both.

Disclosure Obligationsfor Licensed Banks

CA 2009 has amended areas of CA 1990 that allowed licensed banks to disclose only limited information relating to loans, quasi-loans and credit transactions (which, for the purposes of this article, will be referred to collectively as ‘loans’) with their directors and connected persons. A licensed bank is one to which a licence has been granted by the Central Bank of Ireland authorising it to carry on banking business in Ireland. Credit institutions that have not been granted a licence but are authorised in other member states of the European Economic Area (EEA) to carry on business in Ireland will continue to be regulated in accordance with the laws and regulations of those member states, and will not be subject to the increased disclosure obligations under CA 2009.

Directors

CA 1990 requires companies (and their holding companies) to include in their financial year-end accounts details of all loans to directors and connected persons, agreements to enter such loans and details of other transactions in which directors or connected persons have a material interest. Licensed banks were expressly excluded from this requirement in respect of loans to directors and their connected persons. Instead, limited disclosure of ‘aggregate amounts’ outstanding at the end of its financial year was required. CA 2009 has removed this exclusion in so far as it relates to bank directors (but not connected persons) and details of each loan with a bank director (including the amount of the liability at the beginning and end of the financial year, together with the maximum amount of the liability during the year) must now be disclosed in the annual accounts in the same manner as has applied to non-banking directors up until now. The change will prevent bank directors from drawing significant loans from the bank during the financial year, paying down those loans by year-end, and reporting only the aggregate amounts outstanding at the balance sheet date in their year-end accounts.

Connected persons

The standard of disclosure for loans to connected persons of bank directors is not as extensive. The annual accounts of licensed banks must now include the following information relating to loans to connected persons of each director:

• the aggregate amounts outstanding at the end of the financial year;
• the aggregate maximum amounts outstanding during the financial year;
• the number of persons connected to the director to whom the loans (which subsisted at the end of the financial year) were made; and
• the maximum number of persons connected to the director to whom loans (which subsisted at any time during the financial year) were made.

Disclosure is not required for loans advanced to connected persons in the ordinary course of the bank’s business and for a value less than, and on terms no more favourable than, those ordinarily offered by the bank to an unconnected person of the same financial standing. Loans for amounts less than €3,174.35 will also be excluded. Given the reduced disclosure requirements applicable to connected persons under CA 2009, bank directors might in the future seek to channel their loans through connected persons to avoid the full rigours of disclosure in the bank’s year-end accounts. Submissions were made to the government on this point prior to the formal enactment of CA 2009, but an amendment was not made to the bill.

Register of transactions

Prior to CA 2009, a licensed bank was required to maintain a register of transactions and arrangements with directors and connected persons exempted by CA 1990 from disclosure in the bank’s annual accounts. CA 2009 has altered this to ensure that details are entered into the register of all transactions that are disclosed by the bank in its annual accounts, together with details of transactions that are still not required to be disclosed in those accounts (ie details of individual loans to connected persons). The DCE is entitled to inspect and take copies of this register. We suspect that Irish banks may not have complied with the requirement to maintain this register in the past and the DCE will be closely monitoring the situation going forward.

Sanctions for breach

Where a licensed bank defaults in complying with the above requirements, it and every director (at the time of the default) will be guilty of an offence. It is a viable defenceto prove that all reasonable steps were taken to ensure compliance with the relevant requirement. An officer who is guilty of an offence is liable to the same sanctions as are set out above for breaches of s31 of CA 1990. It is worth noting that regulatory authorities (which would include the Financial Regulator) continue to be entitled to issue additional disclosure requirements. These could conceivablybe more rigorous than those introducedby CA 2009.

Increased Powers of the DCE

Since the creation of the DCE in 2001, extensive powers have been granted to the DCE allowing them to demand the production of books, documentation and other information relating to companies under investigation. Many of these powers have been tailored to deal with specific obstacles the DCE has encountered in carrying out investigations. CA 2009 has further extended these powers to include:

• Register of director’s interests: the DCE is entitled to inspect and take copies of the company register that records directors’ interests in company contracts. This is a departure from the earlier requirement to simply maintain a register of those interests.
• Original documents: the DCE can request original books or documents potentially related to the books or documents of a company under investigation from any person who appears to hold them.
• Search and seizure: the DCE has widespread powers of seizure under search warrants issued by the district court. In carrying out a search, the DCE may seize property before determining whether it contains information relevant to the investigation. In addition, where the DCE finds something at a premises (or in possession of a person on the premises) that is attached to or contained in another item (which cannot be separated on the premises) the DCE can seize the attached item. The DCE’s seizure of items such as computer hard drives or other technical devices could have serious implications for the continued operation of businesses under investigation, pending a technical separation of the items. The provision is therefore ill-conceived and we expect there to be challenges through the courts to prevent seizures of this kind from being carried out.
• The DCE’s powers may not be exercised unless it provides appropriate storage for the seized items, allows reasonable access to the owner and maintains confidentiality. The determination of whether or not relevant information has been seized and separation of attached items must be carried out as soon as practicable, and in any event within three months, and non-material information must be returned to its owner within seven days of the determination or separation.

Under CA 1990 disclosure of information can be refused on grounds of legal professional privilege. While CA 2009 has retained this right, it allows for disclosure of information to be compelled in spite of it being ‘apprehended’ that the information is privileged. The information must be maintained by the DCE as confidential pending determination of the matter by the High Court, which in turn may appoint a person with ‘suitable legal qualifications’ to prepare a report to assist the court in determining whether or not the information is privileged. While the issue of professional privilege is always sensitive (given the scope for constitutional challenge), the fundamental principal has not been altered by CA 2009. Instead, a new overlay has been introduced to allow for information to be seized and kept confidential pending a court determination on the point. It will be interesting to see how these new provisions are applied in practice.

Irish Resident Directors

A provision has been included in CA 2009 to address concerns expressed by the EU Commission regarding the compatibility of s43 of the Companies (Amendment) (No 2) Act 1999 with EU law. This section required one of the directors of an Irish incorporated company to be an Irish resident (or alternatively for an insurance bond to be put in place to meet potential liabilities to the Revenue Commissioners and liabilities for breaches of the Companies Acts).CA 2009 replaces this with a requirement that one of the directors must be a resident of a member state of the EEA. Many overseas businesses with Irish interests have greeted the change with enthusiasm as it makes incorporating companies with non-Irish-resident directors considerably easier. Those companies still requiring an insurance bond may apply to the registrar of companies for a certificate demonstrating that the company has a real and continuous link with one or more of the economic activities being carried on in Ireland. Once a certificate has been issued, the insurance bond is no longer required. Particulars of the conditions to be met to establish this real and continuous link are now set out in detail in CA 2009.

Conclusion

CA 2009 has made significant changes to the regulatory framework in which companies are permitted to enter into financial arrangements with directors and their connected persons. While the primary focus of CA 2009 has been to increase the regulation and supervision of arrangements involving licensed banks, the changes will affect all companies entering into loan-type arrangements with directors and connected persons. The sanctions for breach are now much more onerous and, to avoid criminal prosecution, officers must ensure that they take positive steps to prevent breaches of the company law provisions that govern this area. The changes introduced to the disclosure requirements for licensed banks will have implications for banks that have advanced loans to directors in the past year. Full particulars of those loans must now be disclosed in the year-end accounts and repayment prior to the end of the year will no longer circumvent the requirement for detailed disclosure. The significant number of licensed banks in Ireland (many of which are subsidiaries of overseas operations) should carefully familiarise themselves with the new requirements and adopt procedures to accommodate disclosure at year-end. While some suggest CA 2009 has crossed the line in terms of over-regulating financial arrangements between companies and their directors, it is likely to meet the objectives that prompted its enactment. In particular, it should lead to a greater transparency of loans to directors and connected persons and this will ease public and political concerns surrounding the proper supervision and regulation of those arrangements. As for the DCE, it will be interesting to see if the increased powers granted to them will stand the test of time and the scrutiny to which they will be subjected in the months ahead.

Andrew McIntyre, partner, William Fry.

E-mail: andrew.mcintyre@williamfry.ie.