By Sinéad Floody, 10th July 2015
The Companies Act 2014 introduced a general guideline for Directors to abide by when making the decision to run a company.
Before the introduction of the Companies Act 2014 last month, Directors of Irish companies had to ensure they adhered to the duties imposed on them by both common law and statutory requirements. The new legislation, however, has codified express duties which enforce the notion that the Directors owe a duty to the Company and not its shareholders. Directors’ duties are imposed upon shadow Directors as well as de facto Directors. Rules regarding Directors’ loans have also been reformed under the new legislation and is briefly cited at the foot of this blog.
The old law focused predominantly on the following three fiduciary duties:
- To act not only in line with the objects of the company but with proper purpose
- A duty not to fetter their discretion
- A duty to ensure no conflict occurs between personal interests & interests of the company
The general meaning of fiduciary is a person who holds a legal or ethical relationship of trust with another person or in this case, the company and its members.
The Companies Act 2014 has paid tribute to the old fiduciary duties in the introduction of a new eight-duty code set out in section 227 and contextualised by section 228 of the Companies Act 2014 and is based on certain common law rules and equitable principles:
- To act in good faith and best interests of the company.
- To act in accordance with company constitution and exercise powers only for lawful purposes. This was a ready-existing common law duty and is especially relevant to Designated Activity Companies.
- Not to misuse the company’s property, information or opportunities – unless expressly provided for in constitution approved by special resolution. This duty reflects the common law position that a Director is similar to a trustee in that he is controlling the property owned by someone else. This duty also refers to the unauthorised disclosure of confidential information to third parties.
- Not to fetter independent judgment – unless provided for in constitution or conveyed by way of special resolution
- To avoid conflicts of interests – this duty precludes the company entering into a contract with a Director and can be excluded via express statement in constitution
- To exercise care, skill and diligence – the courts will test on the basis of the “reasonable person (who is a Director)”.
- Have regard to members’ interests – manifestation to act in best interests of the company because the company includes its members as a whole.
- To act honestly & responsibly – this duty was strongly recommended in the Report on the General Scheme of the Companies Consolidation & Reform bill in 2007.
Introduced in the New Companies Act is the categorisation of offences which have been simplified and ranked on a scale from 1 to 4 for breaching company law. Depending on the severity, directors found guilty of breaching the companies act can be liable to punishments that will range from €5,000 – €500,000 in fines or a maximum jail sentence of 10 years.
Category 1: If you are found guilty of breaching company law which falls under category 1, it can result in a fine of up to €500,000 and/or a maximum 10 years imprisonment.
Category 2: If you are found guilty of breaching company law which falls under category 2, it can result in a fine up to €50,000 and/or a maximum 5 years imprisonment.
Category 3: If you are found guilty of breaching company law which falls under category 3, it can result in a Class “A” fine and/or a maximum of 6 months imprisonment.
Category 4: If you are found guilty of breaching company law which falls under category 4, it can result in a Class “A” fine.
Note: A Class “A” fine falls under the Fines Act 2010 which is a sum of up to €5,000.
If a Director takes a loan from a company unless otherwise stated in writing it will be presumed that the loan is payable on demand and for any period before repayment, the amount has borne interest at the appropriate rate.
On the other hand, if a Director lends money to a company and the terms of which are not expressed in writing, it is presumed that the matter was not a loan. If it has been proven that the transaction was in fact a loan but the rate of interest was unclear, the courts will assume there was no interest incurred. If the security on the loan was unclear, it will be presumed that there was no security and it will be considered to have the least precedence over other debts, if the priority of the repayment is unclear.
If you would like more information on Director’s duties, please do not hesitate to contact us +353 1 6461625 or alternatively you can complete our contact form and a representative will be in contact as soon as possible.