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A new era for directors

The Companies Act 2014 led to increased responsibility for directors, but it also clarified what the law requires of them.

The role of a company director is an interesting but onerous one. As we all settle into life with the Companies Act 2014, it may seem that the responsibilities of the role have increased, which to some extent may be true. However, while the Act has introduced new provisions that affect directors and the scope of their responsibility, the Act has also clarified much of the law relating to directors. This helps those holding the position to understand exactly what the law requires of them. Examples include:

Codification of fiduciary duties

The fiduciary duties of directors are now written into law. The principal effect is that there is now a clear statement of the standards of conduct that the law requires of directors.

Directors’ compliance statement

Directors of PLCs and certain large companies are now required annually to confirm that policies and arrangements have been put in place, and reviewed, so that the company can achieve material compliance with certain company and tax law obligations. While at first glance this may appear to be a particularly burdensome obligation, the directors’ compliance statement is actually proportionate in nature. It is not a blanket confirmation that the company has complied with its company and tax law obligations, but a statement that measures are in place so that the company can achieve compliance with some of its more onerous obligations. The statement is also a “comply or explain” requirement, meaning that the measures don’t have to be in place but if they are not in place, the directors must explain why. It has been our experience that companies of the size required to comply with this obligation have these measures in place already. This requirement of the Act has facilitated the proper documenting and review of this process which has, in turn, enhanced companies’ governance practices.

Directors’ loans

There is now an incentive for directors to ensure that any loans made by them to a company or any loans made by a company to them (and made in accordance with the requirements of the Act) are properly documented. Where these loans are not documented, company favourable (but rebuttable) presumptions are essentially deemed to be read into the terms on which the loans were made. This means that in the absence of a written agreement to the contrary, loans when made to the company are either a gift or are made interest free, unsecured and subordinated, and loans when made by the company are repayable on demand and bear interest at the appropriate rate.

Directors in default

The Act goes into detail on directors’ responsibilities and defines “in default” in the context of sanctions specified in the Act in respect of officers. The Act also classifies the offences under the Act in respect of which a director can be prosecuted. This classification of offences is another clear statement of the standards of conduct that directors are, by law, required to maintain, particularly in light of the stated consequences for them if they are in breach of those standards. In addition, the focus in the directors’ compliance statement on a company having policies and arrangements in place so that it can achieve material compliance with (among other things) provisions in the Act, the breach of which gives rise to an indictable offence, again helps directors to focus on ensuring that breaches of the Act do not occur.

Conclusion

In matters of corporate governance, clarity – and particularly statutory clarity – can only serve to enhance compliance. When it is easy for those in a position of responsibility to understand what is required of them, it is easier for them to comply with those requirements. The provisions of the Companies Act 2014 that, on first glance, may appear to add to the onerous responsibilities of directors may not, on further examination, be an imposition only; they are measured, governance-enhancing provisions that also allow directors to perform their role within clearly prescribed parameters that can also protect them.
Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.
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