The Companies Act 2014 - New Compliance Requirements for Charities
20 April 2015
New law from June 1 2015
The Companies Act 2014 was signed into law in December 2014 and is expected to commence on Monday, 1 June 2015. Until then, companies remain subject to the existing Companies Acts 1963 to 2013. The 2014 Act consolidates, with reforms, the 18 Acts and 15 statutory instruments from the past 50 years into one single piece of legislation.
Does the 2014 Act affect Charities?
It is estimated that almost three-quarters of charities in Ireland are companies limited by guarantee, without a share capital (CLGs). If your charity, hospital, foundation, not-for-profit or other entity is established as a CLG, then the 2014 Act applies.
Most of the remainder of charities are established as charitable trusts or unincorporated associations. The 2014 Act does not apply to these.
A very small number of Irish charities are established as private companies limited by shares. The 2014 Act applies to these companies. This article does not deal with specific changes that the 2014 Act imposes on such companies.
What are the changes in the 2014 Act for CLGs?
Directors’ Compliance Statement
Section 225 of the 2014 Act introduces a requirement for a Directors’ Compliance Statement in the CLG’s Report of the Directors in the CLG’s financial statements. This obligation applies to CLGs where both the balance sheet is greater than €12.5m and turnover is greater than €25m.
The Compliance Statement is a confirmation by the Directors that they have:
- Drawn up a compliance policy statement as to compliance by the company with company law and tax law,
- Put in place appropriate arrangements or structures designed to secure material compliance with that law,
- Conducted a review, during the financial year of those arrangements and structures.
Directors may rely on the advice of company employees or advisers, if they have requisite knowledge and experience. If the above three things have not been done, the directors must confirm this, specifying the reasons why not (i.e. on a comply or explain basis).
Reduction in number of members
Currently CLGs must have a minimum of seven members. If a CLG has fewer than seven members, the remaining members are aware of this and do not rectify it within six months of becoming aware, those remaining members lose the benefit of limited liability and each become severally (i.e. individually personally) liable for the debts of the CLG.
The 2014 Act permits CLGs to have one member only. There will be no upper limit of members for CLGs.
The name of the CLG
A CLG will be required to end its name with “Company Limited by Guarantee” or “CLG” (i.e. the name of a CLG cannot end in ‘Limited’ or ‘LTD’).
If your existing CLG has been granted a licence authorising it to dispense with the use of the word ‘Limited’ in its name, that exemption continues to apply and it will not be necessary to end the name of your charity with “Company Limited by Guarantee” or “CLG”.
Newly established CLGs under the 2014 Act can likewise apply to the Registrar of Companies for the exemption if the new company meets the criteria.
Change to Articles of Association
Table C (which currently sets out model articles for a CLG) will no longer exist. Instead, certain default provisions under the 2014 Act will apply to the internal administration of a CLG, save to the extent that its Articles of Association provide otherwise.
Your existing Memorandum and Articles of Association will continue to apply. However, certain provisions will be deemed to be “struck-out” by virtue of having been superseded by the 2014 Act. Interpreting this document could therefore prove cumbersome.
Currently, all CLGs are obliged to have their annual accounts audited. CLGs will be entitled to avail of an audit exemption under the 2014 Act if they fall within the group company or small company exemption, although one member can object and insist that statutory auditors are appointed. The availability of this audit exemption to CLGs will not change the condition imposed by the Revenue Commissioners (re CHY charities) that the accounts must be audited where the annual income exceeds €100,000.
Fiduciary Duties of Directors
The 2014 Act, for the first time in Irish company law, sets out the fiduciary duties of directors of an Irish company (s 228). A director must:
- Act in good faith in what the director considers to be the company’s interests
- Act honestly and responsibly in the company’s affairs
- Act in accordance with the constitution and exercise powers only for lawful purposes
- Not use company property for own or others’ use unless approved by members or in the constitution
- Not to fetter discretion unless permitted by constitution or entered into in the company’s interests
- Avoid conflicts of interest unless released by members
- Exercise care, skill and diligence (subjective test)
- Have regard to interests of members and employees
What steps should a CLG take?
I. Any CLG whose name currently ends in “Limited” or “LTD” should apply for an exemption immediately and definitely before the end of the “Transition Period” under the 2014 Act – 18 months from 1 June 2015. If the name is not changed during that period, it will be deemed to have changed to end in “Company Limited by Guarantee”. Do this as soon as possible.
II. Review your Articles of Association so that no unintended statutory defaults apply and to update references. Best practice would suggest that the introduction to your Articles of Association should note that none of the option provisions in the 2014 Act apply, but rather include all relevant provisions in your Articles of Association.
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