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Duties and Liabilities under Company Law

 

Company Directors and secretaries have a growing number of duties and liabilities that derive primarily from two sources ? case law and the Companies Acts. This fact sheet aims to outline these duties and liabilities. The first section of this document relates to directors? duties, which have been developed through case law over the years, and to statutory duties arising from the Companies Acts.  The second section of the document deals with the office of company secretary.  The third section deals with liability of company officers for breaches of company law.

 

 

Section 1 - Duties of Directors

 

A. Duties of Care and Skill under the general law

 

A director is obliged to carry out his or her functions with due care, skill and diligence according to the following guidelines:

 

(a) A director need only show the degree of skill that is reasonably to be expected from a person of his knowledge and experience.  He or she cannot be held responsible for errors of judgment but can be held responsible for negligent behaviour.

 

(b) A director is not bound to give continuous attention to the affairs of the company, for instance he has no duty to attend every board meeting.  A director may delegate duties to another official of the company where such an official can properly carry out these duties.

 

B. Fiduciary Duties

 

(a) A director cannot do anything which is illegal or outside the powers of the company, as set out in its Memorandum.

 

 

(b) The directors must always act in good faith in the interest of the company as a whole and not in the interest of only a section of the members.  They must also act in the interests of employees.

 

 

(c) A director may not enter into a contract, which fetters his or her discretion in any way, e.g. he or she could not agree to always vote in a particular manner.

 

(d) A director is not allowed to make an undisclosed personal profit from his or her position as a director and must account to the company for benefits, which he receives as a result of this office.

 

(e) A director must disclose to the company any interest that he has in a contract being entered into by the company and must also disclose any loans, quasi-loans, credit transactions or guarantees or securities to other directors, shadow directors or persons connected with them.

 

C. Duties arising from legislation

 

A director, as an officer of the company, is under a duty to comply with the company?s obligations under the Companies Acts.  The Company Law Enforcement Act, 2001 (?the 2001 Act?) gives a new definition to the circumstances in which an officer of the company is in default in relation to his duties to comply with the Companies Acts.  Section 100 of the 2001 Act provides that an officer of the company will be presumed to have permitted a default by the company unless the officer can establish that he took all reasonable steps to prevent it or that by reason of circumstances beyond his control was unable to do so.  Prior to this, to be in default an officer had to have ?knowingly and willfully authorised or permitted the default or breach in question?.

 

The new definition makes it easier to convict a director or secretary for breaches of the Companies Acts and places the burden of proof of showing that reasonable steps were taken to prevent the breach on the company officer.    It is important that a director is aware of this test and the circumstances in which he will be held in breach as breach of the Companies Acts can lead to personal liability of directors and to fines or imprisonment.

 

Some of the most significant duties of directors contained in the Companies Acts are as follows:-

 

(a) Directors are required to present annual accounts at each Annual General Meeting.  The accounts should be proper books of account sufficient to enable directors to ensure that income and expenditure complies with the Companies Acts.  Accounts should be audited and should contain entries from day to day of all sums of money received and expended by the company.  Accounts should be preserved for at least six years.

 

(b) Directors must furnish a report at each Annual General Meeting relating to the state of the company?s financial affairs, setting out details of development of the business of the company during the financial year highlighting any important events affecting the company and giving an indication of likely future developments in the business of the company.

 

(c) Directors have a general obligation to file with the Register of Companies a notification of any of the following:

? Change in the constitution of the company

? Change in the registered office

? Change of directors and secretaries

? Alterations in share capital

? Annual returns

? Mortgages and charges relating to company property

? Resolutions passed by the company

 

(d) Where a company is wound up, a director is under a duty to co-operate with the liquidator and, in the case of a members? voluntary liquidation, directors are obliged to make an accurate declaration of solvency. 

 

(e) A director must ensure that the annual returns of the company are filed on time.  The rules for filing of annual returns have been changed by the 2001 Act.  Until this Act came into force recently, the date by which a company should file its annual return was linked to the date on which a company held its Annual General Meeting.   This was unsatisfactory because, the Registrar of Companies, not knowing the date of a company?s Annual General Meeting, would not have been aware that a company had missed the deadline for filing the annual return.

 

The new arrangements under the 2001 Act are as follows:-

 

 

(i) The date by which a company should file its annual returns will in future be a specific date known as the ?Annual Return Date?.

 

(ii) A company must file its annual return within 28 days of its Annual Return Date to avoid a late filing penalty.  Formerly, the period was 60 days.  The reduction in the time allowed is bound to catch many company officers unawares.

 

(iii) The Annual Return Dates for companies, as determined under Section 60 of the Act, will be as follows:-

Company incorporated before the coming into force of Section 60

The Annual Return Date will be the anniversary of the date to which the then most recent annual return is made up.

Company incorporated before the coming into force of Section 60 but which has not yet delivered an annual return

The Annual Return Date will be six months after the anniversary of incorporation.

Company incorporated after the coming into force of Section 60

Six months after incorporation.  These companies will not have to annex accounts to their first annual return.

The annual return is to be filed no later than 28 days after the Annual Return Date.

 

(iv) Subsequent annual return dates fall on the anniversary of the first Annual Return Date.

 

(v) A company may change its Annual Return Date:

? by delivering an annual return which is made up to a date earlier than 14 days before the annual return date.  The Annual Return Date is thereafter the anniversary of the date to which that annual return was made up.

 

? If a company delivers an annual return not more than 28 days after the Annual Return Date (and it will not be required to annex accounts to this) and nominates a new Annual Return Date within six months of the old Annual Return Date, the new date will become the Annual Return Date.  A company, which avails of this procedure, may not use the procedure again for a period of five years.

 

(vi) In addition to the standard ?30 filing fee, an increased late filing penalty of ?100 plus ?3 per day for each day after the late filing penalty commences now apply.  As regards penalties, Section 66 of the Act provides that the Registrar may deliver a warning notice to an officer of the company, which will provide that if the annual return (or other similar document) is filed within 21 days, no prosecution will issue.

 

It is very important for company directors and secretaries to be aware of the changes to the annual returns procedure under the 2001 Act because they involve substantial penalties for late filing of annual returns and the possibility of criminal prosecution being taken against a director personally.

 

 

Section 2 - Company Secretary

 

Every company formed under the Acts is required to have a secretary.  He/she may be one of the directors but it should be noted that where something is required or authorised to be done by a director and a secretary, such as the execution or witnessing of a document, it cannot be done by the same person acting both as director and as secretary.  The functions of the secretary are as follows:-

 

(a) Administrative functions such as keeping charge of the register of members, register of directors and secretaries, register of debentures and register of directors shareholdings.

(b) Making the annual return to the Registrar

(c) Keeping the minutes of general meetings and meetings of the board of directors.

(d) Notifying the registrar of any alterations in the Memorandum and Articles of Association.

(e) Giving notice to members of meetings and communicating with members generally.

(f) Furnishing the Registrar with particulars of charges entered into by the company.

(g) Making out the statement of affairs in a winding up or receivership.

 

Anything required to be done by the secretary may be done by any assistance or deputy secretary of the office of secretary is vacant and there is no secretary capable of acting.  The company secretary, as an officer of the company, is under an indirect duty to comply with the company?s obligations under the Companies Acts and is in default where he or she authorises or permits a default to take place in breach of his or her duty as secretary.

 

 

Section 3 - Liability for breaches of the Companies Acts and penalties

 

A. Breaches

 

Some significant breaches of company law by directors are as follows:

 

(a) A director who carries on the business of the company with intent to defraud creditors or for any fraudulent purposes can be made personally liable for some or all of the debts of the company.  This also applies where a director is found guilty of reckless trading or if the company has not maintained proper books of account.  Fraudulent trading is also a criminal office. (Companies Act 1963, s.297)

 

 

(b) Any director who misapplies or retains any money or property of the company or is guilty of any breach of duty or trust in relation to the company may be compelled to repay the money or restore the property or compensate the company.  There may also be criminal liability for this. (Companies Act 1964, s298)

 

 

(c) It is both a criminal offence and a civil offence for a person connected with a company, including a director, to deal in shares of the company, knowing that he has inside information in relation to the value of the shares.  The criminal offence has a penalty of up to 10 years imprisonment and fines of up to ?253,950.  The civil liability extends to compensating any other party to the transaction who is not in possession of the relevant information and accounting to the company for any profit made on the transaction. (Companies Act 1990, Part V)

 

 

(d) There are significant restrictions on companies making loans to a director or to any person connected with a director.  Until the Company Law Amendment Act

2001, which has very recently come into effect, the making of a loan by a company to a director, a shadow director or a ?connected person? was forbidden.  (A connected person will include any near relative of the director, someone in partnership with the director, or someone acting as trustee for a trust the principal beneficiaries of which are the director, his near relatives or a company which he controls.  A company is connected with the director if it is controlled by that director.) 

 

Also forbidden were the making by the company to such persons of ?quasi-loans?, i.e. transactions where the company pays or agrees to pay or reimburses or agrees to reimburse a sum for the director or connected person, credit transactions, i.e. hire purchase agreements, leasing transactions etc. and guarantees or provisions of security given by the company in relation to loans or quasi-loans for the benefit of the director or connected person.

 

It is now permitted for a company to make a loan to a director in certain circumstances.  You should take further legal advice if you wish to avail of this procedure.

 

(e) A person shall not at any one time be a director or shadow director of more than 25 companies.  However, there are some exceptions to this rule, which are set out in Section 45 of the Companies Amendment (No 2) Act, 1999.

 

B. Enforcement of the Companies Acts

 

(a) The 2001 Act established the Office of a Director of Corporate Enforcement whose main functions are to enforce and encourage compliance with the Companies Acts and to investigate and prosecute offences under the Acts.

 

(b) The 2001 Act also increases standard fines for breach of the Companies Acts to ?1,500 and increases the maximum period of imprisonment for breaches of the Acts to five years. 

 

 

C. Disqualification and restriction of directors

 

(a) Any person who has been a director of a company within 12 months of it going into liquidation or receivership who fails to satisfy the High Court that he or she acted honestly or responsibly in relation to the conduct or affairs of the company will be restricted for five years from being a director or secretary or being involved in the formation of the company unless the company is adequately capitalised.  In the case of a private company, the capital requirement is ?63,487 in allotted paid up share capital and in the case of a public company ?317,435.  (Companies Act, 1990, s.150)

 

(b) A director can be disqualified from standing as a director of the company if convicted of the offence of carrying on business to defraud creditors.  If a person acts as a director while disqualified he is guilty of a criminal offence, the period of disqualification will be extended for a further 10 years and he will be personally liable for the debts of the company if it becomes insolvent during or within a period of 12 months after the disqualification order.  (Companies Act, 1963, s.297)

 

 

 

Conclusion

 

The above is by no means an exhaustive survey of the law relating to duties and liabilities of directors and secretaries, and it is only intended to give an idea as to the salient duties of directors and secretaries.   The Memorandum and Articles of the company should be read in conjunction with this explanatory note and further legal advice should be sought in relation to specific points. 

 

To discuss Directors Duties and Obligations in greater detail or any commercial matter contact LawPlus Commercial  today

 


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