OPINION:The Companies Bill, more than a decade in gestation, will replace the forbidding thicket of existing legislation
THE DRAFT Companies Bill published last week by Minister for Enterprise Richard Bruton does not just replace an existing piece of legislation. It replaces more than 25 pieces of legislation.
The legislation under which Irish companies must operate
has evolved in more than 25 enactments since the 1963 Companies Act replaced the British legislation inherited upon Irish independence in 1922. Some of this legislation has been rendered anachronistic by the passage of time.
More of it was written in a language that is not immediately easy to understand.
For small and medium-sized private companies the complexity and diverse sources present an added burden. There will always be limits to how simple company law can be but if this new legislation makes life easier for Ireland’s small and medium-sized businesses, it will be a success.
The Bill is the result of more than a decade’s work by the Department of Enterprise and Employment, the Attorney General’s office and the Company Law Review Group. Charged with modernising and simplifying Irish company law, the group recommended a radical overhaul.
I believe the draft legislation will simplify company law to the maximum extent prudent. The Bill seeks to remove red tape and with it wasteful costs to business and the State.
The group, a Government- appointed advisory body, consists of the users of company law and the main social partners. Our key recommendation was to rewrite company law from the perspect- ive of the private company.
The private company is the workhorse of small and medium-sized Irish business. It provides a simple legal structure which facilitates the holding of assets; the sharing and succession of ownership; and limited liability. Limited liability (in which the shareholders’ liability for the debts of the company is limited to the amount they invested through their shares) is a concession by the State to business and comes with a cost to business. That cost includes regulation to protect creditors’ interests and ensure company law is not abused.
Private companies account for more than 90 per cent of all Irish companies. Yet the Companies Acts still treat the public company limited by shares (which accounts for 1 per cent of companies) as the standard company type, and the law is therefore written largely with these generally more substantial and complex companies in mind. The result is that the current law is overcomplicated and impenetrable to many of its users.
Users of the private company will soon be able to look to a single body of law. By volume, almost one-third of the existing Companies Acts which does not apply to private companies can safely be seen as irrelevant to private companies and ignored.
There are many other changes proposed. Private companies will not be required to have an objects clause (a statement of a particular purpose) and instead can engage in any lawful activity, just as an ordinary person can.
The current requirement that every company must state its objects has resulted in pages and pages of possible objects being listed out in virtually every company’s memorandum.
Providing that every private company has the capacity to do anything that is lawful deals with this effectively. Apart from saving tonnes of paper, this change should result in lower legal fees as, for example, banks will not be required to check whether companies have the capacity to borrow for particular purposes.
It will be possible for private companies to have a single- document constitution. Currently all companies are required to have a two-document constitution made up of a memorandum of association and an articles of association. The Bill provides that most of the standard provisions in the articles of association of companies will apply automatically, unless they are disapplied in a particular company’s constitution. This will permit companies to have a very short constitution.
Private companies will be permitted to have just one director. The current requirement for two directors, where one is there as just a nominee, is anathema to good governance. It leads to the common situation where what is effectively a sole trader adds their uninvolved spouse as a second director to comply with the law. It is more transparent and honest to allow small companies have only one director who is fully accountable for decisions made on behalf of that company.
Similarly, the Bill will allow small companies with more than one shareholder to dispense with annual general meetings.
The current Companies Acts do not set out a clear list of directors’ duties. The Bill will address this by listing all directors’ duties, making it easier for directors to understand their responsibilities and more difficult to deny their existence.
The Bill’s benefits will not be confined to private companies. The Minister has committed to publishing its second part, dealing with all other types of companies (eg PLCs, guarantee companies, unlimited companies, etc), in the next 12 months, after which the Bill can be initiated in the Oireachtas.
Although enactment of this legislation is still some way off, the early publication in draft of the Bill is very significant and is to be welcomed. It will help users of company law to understand its benefits in advance of enactment.
Tom Courtney is chairman of the Company Law Review Group, author of The Law of Private Companies and partner in charge of company compliance and governance in Arthur Cox solicitors