Legal
Whilst being a director of a company with a community development objective on a voluntary or unpaid basis could be a prestigious position, it could be an onerous one too.
Every director of a company has full legal responsibility for ensuring the company is in compliance with the Companies Act 2014, tax legislation, employment law, health & safety legislation and the Data Protection Acts as the case may be and failure by the company to comply with same could lead to serious consequences for both the directors and the company. Readers should note that the standards of performance, skills and knowledge expected and indeed demanded by Company Law do not make a distinction between directors of companies such as those described above and directors of small, medium or large trading and manufacturing companies.
No distinction between “executive”, “non-executive” or any other director
The Companies Act 2014 (“the Act”) which came into effect on 1st June 2015 introduced the requirement for each director to sign an acknowledgement of his/her duties to comply with the Act “and other statutes” (s.223) before consenting to act as a director of the company. Consequently it is important for all directors (i.e. “executive” and “non-executive” directors including de facto directors and shadow directors) to ensure the company is compliant with all relevant regulatory regimes.
Failure to comply with duties
Aside from the effect that negative publicity of non-compliance with the above legislation could have on your company and its objectives, failure to comply with the Act or other relevant statutes could have the following consequences for the directors:-
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An obligation to indemnify the company;
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A liability for loss incurred by the company;
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A liability to account for profits made by the director as a result of the breach; or
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Criminal liability for the breach of some statutes. For example, a breach of the obligation to ensure a safe place of work under health and safety legislation could result in a conviction, fine, sentence and/or imprisonment.
General Duties of Directors
Part 5 of the Act codifies the general duties of a director and specifically lists their fiduciary duties in s.227 thereof. Broadly speaking general duties are the duties (duties other than fiduciary duties) that existed in the legislation in force prior to the commencement of the Act. Fiduciary duties are those that have been identified through case law over time and were not included in previous companies’ legislation. The fiduciary duties listed below recognise that a company director is a trustee of the company’s assets and must act in the best interests of the company.
The general duties of a director of a company are to:-
1. Ensure compliance with the Companies Act, tax acts, data protection legislation, health and safety and employment law legislation (s.223).
This means directors are obliged to:
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Keep accurate books of account
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Keep an up to date register of members
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Hold general meetings (at least one AGM each year)
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Have an annual audit performed, unless an exemption applies
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Ensure that Annual Returns are filed in the Companies Registration Office (CRO)
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Furnish information to the CRO including a list of each directors’ residential address, a list of other directorships, etc. (see form CRO Form B10).
2. Ensure that the company secretary is suitably qualified.
3. Acknowledge the existence of his/her duties by signing a declaration to that effect (see above) upon their appointment.
4. Take into account the interests of the members of the company and have regard to the interests of the employees.
5. Observe the legal restrictions that exist on loans, quasi loans, security, guarantees and credit transactions between the company and directors.
6. Disclose any interests they may have in contracts made by the company.
7. Where a company has a share capital, notify the company of any interests in shares held representing more than 1% of the share capital of the company (note this does not apply if the shares held do not have voting rights). Note: a company limited by guarantee and not having a share capital would be the preferred model for a company such as that described above.
Directors are permitted to act for the company in a professional capacity provided they are not prohibited from doing so under the company’s constitution – section 230 of the Act.
Fiduciary Duties of Director
The eight fiduciary duties of directors set out in the Act are as follows:-
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To act in good faith in what the director considers to be the best interests of the company : This imposes a subjective duty on a director to act in what he/she believes to be in the interests of the company.
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To act honestly and responsibly in relation to the conduct of the affairs of the company : Directors who fail to answer questions, provide explanations, make statements or produce, lodge or deliver materially incorrect returns, reports, certificates, balance sheets or other documents required by the Act, either knowingly or recklessly, will be guilty of an offence.
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To act in accordance with the constitution and exercise powers only for the purposes allowed by law : It remains the duty of the directors to observe any limitations on their powers flowing from its constitution.
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Not to misuse the company’s property, information or opportunities : A director may be relieved of this duty by means of a provision in the company’s constitution or by resolution in a general meeting.
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Not to fetter independent judgment : A director may be relieved of the duty not to fetter his independent judgment by means of a provision in the company’s constitution or by resolution in general meeting. There is also express statutory recognition that a director may fetter his independent judgment in certain circumstances where to do so is in the best interests of the company.
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Avoid conflicts of interest : A director may be relieved of this duty by means of a provision in the company’s constitution or by resolution in general meeting.
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Exercise care, skill and diligence : Directors are required to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having (1) the knowledge and experience that may reasonably be expected of a person in the same position as the director; and (2) the knowledge and experience that the individual director has.This means a director may be rendered liable for any loss arising as a result of his/ her negligent behaviour.
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Have regard to members’ interests; This equates to a duty to act in the best interest of the company since “company” has been interpreted as meaning the members as a whole.
It should be noted that the above described duties are not exhaustive and additional duties may arise under “any other statues” as described in section 223 of the Act.
Good Corporate Governance
One useful way to ensure compliance with the Act and other relevant statutes is to have in place a system of good corporate governance. Following one of the systems referred to below would assist in reducing risks and saving time and costs. It could also reassure funders and members that their money is being managed by a well-run organisation.
An effective board will practise the fundamentals such as budgets, risk management, internal controls, strategic leadership and avoid interfering with management. The Corporate Governance Code for voluntary organisations in Ireland see link here is followed by some charities and voluntary organisations and could be implemented by the board of your company for guidance.
Directors’ and Officers’ Insurance Cover
Directors’ responsibilities and liabilities are becoming increasingly onerous. If a person is sued in his/her capacity as a director that person may not be able to rely on financial assistance from the company especially where the company is a not for profit organisation. Therefore a Directors’ and Officers’ Liability Insurance policy is important in our ever increasingly litigious society.
Director’s and Officer’s Liability Insurance is a very complex area of insurance and each individual case requires the skilled advice of a competent broker. A director can be indemnified by his company under section 235 of the Act if he is involved in proceedings arising from negligence, default, breach of duty or breach of fiduciary duty but only if the director can prove that he acted honestly, reasonably and that he ought fairly to be excused. This could be time consuming and expensive and, as previously mentioned, an indemnity from the company may be worthless if the company does not have sufficient assets to indemnify the director.
Useful links
The Governance Code
www.governancecode.ie |
Guide for the governance of Community and Voluntary organisations. |
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The Wheel
www.wheel.ie
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The Wheel is a non-profit, independent
resource centre and advocate for Community and Voluntary organisations. It offers support, advocacy and leadership for Community and Voluntary activity across Ireland. |
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The Office of the Director of Corporate Enforcement
www.odce.ie
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Offers general information on the role, powers and activity of the ODCE plus associated material on Irish company law. |
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Institute of Directors Ireland
www.iodireland.ie
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A joint initiative between the Institute of
Directors in Ireland and University College
Dublin. The Centre’s main aim is to promote excellence in corporate governance in Ireland. |
For more information in relation to any of the above contact Deirdre Farrell, solicitor and AITI Chartered Tax Adviser, Amorys Solicitors - deirdre@amoryssolicitors.com or telephone 01-213 59 40.