The new Companies Act 2014
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- Created: Wednesday, January 07 2015 15:10
A long-awaited revamp of Irish companies legislation was signed into law by President Higgins on 23rd December 2014 and is the Companies Act 2014 (“the Act”).
The principal objective of the Act is to consolidate and simplify company law. The Act will come into effect in June 2015, and companies and their directors should immediately consider the implications of the new legislation and how they should prepare for it.
What is in the new Act?
The primary change is the introduction of some new company models, namely a private company limited by shares (i.e. “ltd” company) and a Designated Activity Company (“DAC”). Most companies will chose a private company limited by shares.
The main features of the Act 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”, and a doctrine known as the “ultra vires doctrine” is being abolished.
§ It is permitted to have only one director, as opposed to the current minimum of two directors. A separate company secretary will also be required.
§ It will have a single-document constitution, replacing the current Memorandum of Association and separate Articles of Association.
§ It will no longer be obliged to hold a physical annual general meeting and the members may decide to hold a written meeting.
§ The duties to which the directors are currently subject, both under statute and under the common law, are listed in the Act making it easier for directors to understand their obligations.
§ 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).
What happens to your company?
The Act provides for a transition period of 18 months from June 2015. 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.
Existing private limited companies can choose one of the following options:
1) Convert to a DAC:a company can pass an ordinary resolution up to three months before the end of the transition period resolving to become a DAC.
2) Convert to a private limited company:the company can by special resolution choose that a company becomes a private limited company before the end of the transition period.
3) Do nothing:following the 18-month transition period, any existing private limited company that has not taken active steps to re-register as either a DAC or a private limited company will be automatically deemed to have become a private limited company.
During the transition period, existing private limited companies that have not re-registered will be subject to the law applicable to DACs.
At the end of the transition period if an existing private limited company has not already re-registered as a DAC or some other company-type, it will be deemed to have become a new private limited company and its Memorandum and Articles of Association 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.
It is likely that most companies will opt for the private limited company structure. The DAC is likely to be suitable for charities, insurance undertakings and credit institutions.
How does an existing company become a new private limited company?
An existing private limited company may become a new private limited company in any one of the following three ways:
1) The recommended approach is for the shareholders to adopt a new constitution by means of a special resolution, passed in accordance with the company’s existing memorandum and articles. Companies and their shareholders will need to include supplemental regulations to suit their particular requirements, such as provisions requiring an offer round prior to the transfer of shares.
2) The directors of an existing private limited company may adopt and register a new constitution. However, the constitution that may be adopted by the directors is more limited and unlikely to be sufficient.
3) By default, 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 its existing Memorandum and Articles of Association will effectively be deemed to have been amended and a new single document adopted. Again, this is unlikely to be sufficient.
What do you need to do?
Directors of existing limited companies should immediately do the following:
§ Decide on a corporate structure – either a private limited company or a DAC.
§ Pass a special resolution and adopt a new constitution so that there is no ambiguity as to the governing provisions of the Company.
§ If a private limited company is being chosen, the company may wish to consider if there is a need to have two directors. Often, the second director is not active in the affairs of the company and it makes sense for that non-active director to resign, leaving just one director.
A company that does nothing will default to the form of a new private limited company to which the Act will apply and its constitution is unlikely to be appropriate for the company’s requirements.
Another important change for private companies to consider is that director’s loans must be documented. If they are not documented, then advances by a director to a company are presumed not to be loans.
A company’s accountant or solicitor can assist in implementing the required changes.