Duties Of Directors Under Irish Law - Insurance Sector - Corporate Governance

DUTIES OF DIRECTORS AND OTHER ASPECTS OF DIRECTORSHIPS

Introduction

An Irish incorporated company must have a minimum of two directors. There is no single code of conduct for directors in Ireland as the duties of directors are derived from various sources, including case law, legislation and the articles of association of the company concerned.¹ However, it should be noted that the directors of a regulated entity may be subject to an industry specific Corporate Governance Code.²

Under the Companies Act, 1963, the Companies Act, 1990, the Companies (Amendment) (No. 2) Act, 1999, the Company Law Enforcement Act, 2001, the Companies (Auditing and Accounting) Act, 2003, the Investment Funds, Companies and Miscellaneous Provisions Act, 2006, and the Companies (Amendment) Act 2009 (each an "Act", together the "Acts") duties of directors can be classified under four headings:-

Those arising at common law, which can be further classified as:
1. fiduciary duties; and
2. duties of care, skill and diligence.
Those arising under statute;
Those arising under contract; and
Those arising by regulation, whether under the Purple Book (Model Code³) or otherwise.

A. Common law duties⁴

(i) The fiduciary duty of a director

These duties are principally owed to the company, but as discussed later, a director may owe parallel duties to the company's creditors and/or to individual shareholders.

A director must act in good faith and in what they consider to be the best interests of the company as a whole rather than in the interests of a particular shareholder or shareholders. A director is prohibited from entering into transactions with the company in the absence of full disclosure or unless permitted by the articles of association of the company. Furthermore, a director may not make a secret profit or take a bribe, or personally avail of business opportunities properly belonging to the company;
A director is under a fiduciary duty not to act ultra vires, i.e. outside, the powers of the company or in an illegal manner. In essence, directors must not act in breach of the law or in breach of the limitations set out in the memorandum and articles of association. If directors act in breach of company law or the memorandum and articles of association, they may be personally liable for such acts.

Section 8 (i) of the 1963 Act provides that although an ultra vires transaction may be enforced against the company by outsiders who are unaware that it was beyond the company's capacity, any director or officer of the company who was responsible for the doing by the company of such act or thing shall be liable to the company for any loss or damage suffered by the company in consequence thereof.

It is also established law that ultra vires acts are incapable of ratification by the company in general meeting. Under the Companies Bill 2012, private companies will not have an objects clause and therefore, will not be subject to the ultra vires doctrine which will make the law more transparent. It removes concern around a company's capacity to take certain actions and gives the private company "full and unlimited capacity to carry on and undertake any business or activity, do any act or enter into any transaction". In effect, the private limited company will have legal capacity equivalent to that of a natural person.
Directors must not exceed their powers as directors even if their actions are intra vires the powers of the company. An example of this situation is where the articles of association put a limitation on the amount directors may borrow without a shareholders resolution. Acts which are intra vires the powers of the company but are ultra vires the powers of directors under the articles of association are capable of ratification by the company in general meeting; and
Directors must avoid putting themselves in a position where their personal interests conflict with those of the company.
1. In dealing with the company, a director must disclose any interests which he has in a contract being entered into by the company. If he does not, the contract may be avoided at the instance of the company. If rescission is no longer possible, the company may still be able to recover from the director any profit he made from the transaction.
  
  The effect of this rule is modified in most cases by the articles of association which usually provide that the director may enter into a wide range of contracts; and
2. In accordance with his duty to avoid a conflict of interest, a director must not divert to himself a business opportunity which the company would otherwise have obtained. If he does, he will be accountable to the company for the profits.

(ii) The duty of care, skill and diligence

There is a duty on directors of a company to exercise their powers with reasonable skill and care. However, the skill and care required is the skill and care of a reasonable person placed in the position of that individual director and with the expertise and experience of that individual.

Neville J. in a case Re: Brazilian Rubber Plantations and Estates Limited⁵ stated this in the following terms:-

"He is, I think, not bound to bring any special qualifications to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance; while if he is acquainted with the rubber business, he must give the company the advantage of his knowledge when transacting the company's business."

Interestingly enough, if a director expresses great expertise in a particular field, he will be judged on what he professes to know and not on his actual knowledge, if it falls far short of what he professes.

Directors therefore at common law will not be liable for errors of judgement but will be liable for gross negligence.

Clearly, the subjective test applied at common law has been overtaken by the somewhat higher objective standard imposed by statute at least where the company has become insolvent.

Commenting on the common law duties imposed on directors, it would have to be said that although the standard of skill and competence imposed upon directors has traditionally been fairly minimal, it can be seen that as regards the director's fiduciary duties, a rigorous and exacting standard is applied. Directors must keep within their powers; they must avoid any conflict of interest and must exercise their powers in good faith and for the benefit of the company as a whole. The practical problems which have arisen in enforcing these duties have been to a large extent, overcome by the growing number of statutory provisions.

B. Statutory duties and obligations

The overriding principle of company law is that a director's duties are owed to the company and not to individual shareholders or employees. However, the duty of a director to the company can be extended to each of the shareholders, the employees and the creditors in certain circumstances. For example, directors will have a duty to shareholders where they have undertaken, often implied by their actions, or volunteered to act on the shareholders behalf. In this regard, a director is considered to be the agent of the shareholders.

The provisions of section 205 of the 1963 Act impose a duty on directors not to conduct the affairs of the company so as to cause oppression to any member. Similarly, under section 188 of the 1963 Act, directors are obliged to take all reasonable steps to ensure notice is sent to the shareholders of any compensation payable to directors for loss of office in the event of a take-over bid. The groups to whom duties are owed have been further extended by section 52 of the 1990 Act which provides that a director shall, in the performance of his functions, have regard to the interests of the company's employees.

The duties to creditors and the consequences for breach of these duties have been extended by the provisions of the 1990 Act. In particular, section 297 of the 1963 Act which rendered persons found guilty of defrauding creditors liable for the debts of the company has been expanded⁶ to include the concept of reckless trading. In other words, directors are under a duty not to trade recklessly.

There is a very comprehensive list of duties, obligations and liabilities imposed by statute on directors set out in the Acts. Many of these provisions are very onerous and in some cases, while they undoubtedly help to provide protection against suspect practices, they inadvertently make certain legitimate business and financing transactions fraught with dangers for the unwary. Accordingly, every director of an Irish company should become familiar with the duties and obligations he or she owes to the company. The following represents a summary of the provisions under the Acts relating to directors:

(i) Duty as company officer

It is the duty of each director to ensure that the requirements of the Acts are complied with by the company. Section 100 of the Company Law Enforcement Act, 2001 provides that a director, as company officer, is presumed to have permitted a default by the company unless the director 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.

(ii) Loans to directors

The 1963 Act does not contain any provisions restricting the making of loans by the company to directors although it was a requirement that such loans be disclosed in the company's accounts. Section 31 of the 1990 Act has altered this situation and prohibited the making of loans by companies to directors except in a limited number of circumstances. The section catches quasi loans, credit transactions and similar transactions including the giving of guarantees. Inter-group transactions are not caught. A director or person connected with him who enters into any of the prohibited transactions is liable to account to the company for any gains he made as a result, as is any director who authorised the transaction. Such persons must also indemnify the company against any loss or damage which it suffers. A director will not be liable if he can show that he took all reasonable steps to secure compliance with section 31. In addition, a prohibited transaction can be set aside at the option of the company. Section 78 of the Company Law Enforcement Act, 2001 replaces section 34 of the Companies Act, 1990 and sets out a procedure whereby certain transactions, previously prohibited by section 31, are now valid provided the requirements of the amended section 34 are complied with. Section 7 of the Companies (Amendment) Act, 2009 extends the scope of section 31 to encompass not only directors, but all officers of the company who are in default. There is also a potential personal liability for the director if the company goes into liquidation.

(iii) Other transactions with directors

Part III of the 1990 Act has introduced special rules and restrictions in relation to certain specific transactions in which directors, including shadow directors or persons connected with them are interested. The following is an additional list of transactions which are now regulated by the 1990 Act:-

Dealings in options in listed securities.

Section 30 makes it an offence for a director of a company to deal in options over existing quoted shares or debentures of that company or any company within the same group where such shares or debentures are dealt in on a stock exchange.
Contracts of employment

Section 50 of the 1990 Act provides that a company may not enter into a contract of employment or a consultancy or similar contract with a director under which his employment in the company or within the group may continue for a period of more than five years if during that time the company may not terminate the contract by notice or may only terminate it in specific circumstances unless that contract or rather the relevant term thereof is first approved in general meeting by the shareholders. The effect of breaching this provision (that is, if shareholders' approval is not obtained) is that the relevant provisions of the employment contract will be void and the company will be entitled to terminate the employment agreement at any time by giving reasonable notice.
Substantial property transactions

Section 29 of the 1990 Act requires that certain property transactions entered into between a company and its director, or a person connected with him must first be approved by a resolution of the shareholders in general meeting. The provisions catch transactions involving non cash assets in excess of €63,487 or 10% of the amount of the company's relevant assets. The effect of breaching the provisions is to make the contract voidable at the option of the company. The director or any person connected with him who authorised the transaction will be liable to account to the company for any profit and to indemnify the company for any loss. A connected person under the Act includes the director's spouse, parent, brother, sister, child, partner or a company controlled by a director and/or one or more such people. The provisions do not apply to inter-group transactions.

(iv) Disclosure of interests

Part IV of the 1990 Act contains special provisions relating to the disclosure of interests in shares and Chapter I of that part deals with share dealings by directors, secretaries and their families.

There is an obligation upon the directors and secretary of every company to notify the company of his interest in shares or debentures in the company or an associated company and every company must maintain a register of such interests. For the purposes of notification, a director includes a shadow director and the interests of directors and secretaries include the interest of their spouses and children under eighteen. Any notification under section 53 must expressly state that it is given in fulfilment of the obligation under that section or the obligation to notify will not be fulfilled. This is to avoid the situation where a person might claim that the company was fully aware of the director's interest. As well as a criminal sanction, any breach of these provisions will render the director's right or interest in respect of the shares void and they will be unenforceable by him.

A director of a company must notify the company in writing of the occurrence, while he is a director of any of the following events and the date on which it occurred:-

Any event in consequence of which he becomes, or ceases to be interested in shares in, or debentures of, the company or any other body corporate, being the company's subsidiary or holding company or a subsidiary of the company's holding company;
The entering into by him of a contract to sell any such shares or debentures;
The assignment by him of a right granted to him by the company to subscribe for shares in, or debentures of, the company; and
The grant to him by another body corporate, being the company's subsidiary or holding company or a subsidiary of the company's holding company, of a right to subscribe for shares in, or debentures of, that other body corporate, the exercise of such a right granted to him and the assignment by him of such a right so granted, stating the number or amount, and class, of shares or debentures involved.

A director shall be taken to have in interest in shares or debentures if:-

he enters into a contract for their purchase by him (whether for cash or other consideration); or
not being the registered holder, he is entitled to exercise any right conferred by the holding of those shares or debentures or is entitled to control the exercise of any such right.

Section 194 of the 1963 Act places an obligation on a company director to declare, at a meeting of the company, the nature of any interest he has in a contract or proposed contract with the company. The importance of compliance with this section should not be underestimated, as section 2 of the Companies (Amendment) Act, 2009 has amended section 194 to provide the Office of the Director of Corporate Enforcement ("ODCE") with the power to inspect the register or book within which such contracts are noted.

(v) Section 60 declarations

Subject to certain exceptions, section 60(1) of the 1963 Act prohibits a company from giving financial assistance for the purpose of or in connection with a purchase or subscription by that person of shares in the company or in its holding company. Section 60(1) is drafted in very wide terms in that it prohibits such assistance from being given "directly or indirectly" and "whether by means of a loan, guarantee, the provision of security or otherwise".

If a company carries out a transaction which is prohibited by section 60, the transaction is voidable at the instance of the company against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach. Every officer (including directors) who is in default is liable to imprisonment for a term not exceeding two years and to a fine not exceeding €3,175.

(vi) Section 256 and declarations of solvency

Where a declaration of solvency is sworn in a members' voluntary winding up, any director who did not have reasonable grounds for an opinion that the company would be able to pay its debts may become personally responsible without limitation of liability for the debts of the company.

(vii) Section 297 and 298 - fraudulent and reckless trading

We have already referred to circumstances where directors can be made liable for fraudulent or reckless trading.

(viii) Residence requirements

Part IV of the Companies (Amendment) (No. 2) Act, 1999 contains miscellaneous provisions including provisions relating to directors. Section 43 (as amended by section 10 of the Companies (Amendment) Act, 2009) provides that subscribers to new companies will have to ensure that the company has a director who is resident in a Member State of the EEA. An alternate director appointed to the company does not satisfy the above residency requirements.

Alternatively, the provision provides that where none of the directors of the company are resident in the EEA a bond of the value of €25,394.80 has to be maintained by the company. The object here is to ensure that the revenue authorities and the Companies Registration Office (the "CRO") have a definite person within a Member State of the EEA to pursue where a company fails to comply with its obligations. It is possible to obtain an exemption to the requirement to hold a bond if the company can satisfy the Registrar of Companies that there is a real and continuous link with one or more economic activities being carried on in Ireland.

(ix) Maximum number of directorships

Section 45 of the Companies (Amendment) (No. 2) Act, 1999 introduces a limitation on the number of companies of which a person can be a director, or shadow director, to 25. Directorships in companies within the same group of companies are aggregated for the purpose of this requirement.

For instance, where there is prior screening of directors, as happens in the case of companies that operate in the regulated sectors, holding of such directorships can be exempted from the prohibition on holding more than 25 directorships. The section contains a mechanism whereby applications can be made in the first instance to the Registrar of Companies and subsequently in certain instances appeals can be made to the Minister for Jobs, Enterprise and Innovation.

Further restrictions as to the number of directorships that may be held may apply in particular regulated industries (i.e. collective investment schemes, credit institutions and insurance undertakings. For the latter, see Appendix 2).

(x) Resignation of directors

A director may resign from office at any time by serving notice in writing on the company secretary. The company secretary is obliged to notify the CRO of the resignation in the prescribed form.

(xi) Duty to keep proper books of account

Section 202 of the 1990 Act requires all companies to keep proper books of account. Section 204 of the 1990 Act provides that, if a company is wound-up and is found to be insolvent, if Section 202 has not been complied with, any director may have unlimited liability for all or part of the company's debts (and may be liable to criminal prosecution) where that breach contributed to the insolvency or resulted in substantial uncertainty regarding the company's assets or liabilities or otherwise interfered with the liquidation.

It is a defence to such an action if the director concerned took all reasonable steps to secure compliance with the acts or has reasonable grounds for believing and did believe that a competent and reliable person acting under the supervision or control of a director of the company had been formally allocated the duty of insuring the proper books on account where kept.

(xii) Duty to file accounts

Section 148 of the 1963 Act requires the directors to prepare and present to the annual general meeting a profit and loss account and balance sheet prepared in accordance with the Acts. Subject to certain exceptions, the directors are also obliged to ensure that the profit and loss account and balance sheet are submitted to the Companies Registration Office on an annual basis with the company's annual return. A company which has not filed its annual return in respect of any one year is eligible to be struck off the Register of Companies and dissolved. Directors are also liable for prosecution in this event.

(xiii) Duty to have company audited on annual basis

Directors are generally obliged to have the accounts audited at least once a year, subject to certain exceptions.

(xiv) Duty to maintain a register of members

Companies, and by extension directors, are obliged to maintain the following registers and other documents:-

Register of members;
Register of directors and secretary's interests;
Register of debenture holders;
Minute books;
Director's service contracts;
Contracts to purchase own shares.

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Footnotes

1 The Companies Bill, 2012 was published in December 2012 and aims to reform the structure and constitutional make up of the existing Irish private limited company. See Appendix 1 for further details.

2 Such as the Corporate Governance Code for Credit Institutions and Insurance Undertakings, the Corporate Governance Code for Captive Insurance and Reinsurance Undertakings and also the Corporate Governance Code for Collective Investment Schemes and Management Companies (For more details see Appendix 2) .

3 Irish Stock Exchange Listing Rules (Appendix 1 to Chapter 6).

4 The Companies Bill, 2012 confers directors' common law and equitable duties as they have been developed by case law.

5 [1911] 1CH.

6 By section 137 Companies Act, 1990.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ireland: Duties Of Directors Under Irish Law - Insurance Sector