June 1, 2015, is D-Day for the biggest ever overhaul in Irish company law. That’s when the Companies Act 2014 comes into effect, and the measure that affects every SME business is the phased abolition of the current limited company structure.
The new regime is confusing insofar as current limited companies, which are styled as XYZ Limited or XYZ Ltd, are being replaced by a ‘new model’ limited company called the LTD, under which XYZ will still be called XYZ Limited. The change is at the back-end, the legal foundation for all limited companies.
At the moment, all limited companies have a Memorandum and Articles of Association. These documents are usually off the peg when a company is being formed, and they are lengthy and carefully crafted to give a company legal powers to engage in a variety of commercial activities.
Constitution
From June 1, these are being replaced by a Constitution. One of the central concepts in the new Act is that where a company’s Constitution is silent it defaults to what is provided for in the Act. So by default, a new LTD company will have ‘full and unlimited capacity’ since it will not have an objects clause.
For legal and trading reasons, some companies will want to retain a Memorandum and Articles with an objects clause. They will choose the other new type of company called the Designated Activity Company, or DAC. However, for the vast majority of trading SMEs the ‘new model’ company set-up will be the ‘LTD’ company.
In Association with
During the transition period that concludes in November 2016, companies can undertake a conversion process. If a company does nothing, it will be regarded in law as a DAC company until the end of the transition period, which is basically the same as the existing status. After that, all current limited companies will default to LTD company status.
As the Act provides for default mutation, why should shareholders and directors bother with conversion? With the new LTD company, one director will suffice instead of the current minimum of two. An LTD company has no obligation to hold an annual meeting and another possible benefit is that conversion will simplify the paper trail required when dealing with bank loans.
Distinction
For companies that wish to be proactive on converting to LTD status, the members (shareholders) have to adopt the new Constitution. Alternatively, the directors can prepare the Constitution and deliver it to the members before filing it with the Companies Registration Office (CRO).
This distinction is important when filing the LTD conversion form, the N1. There are then two options to tick: ‘under section 59’, or ‘under section 60’. The section 59 option is ticked if the members have initiated the new constitution and the CRO anticipates that the section 59 box will be ticked in the vast majority of cases.
The Constitution template available on the CRO website is a simple document, designed for self-service. In practice, accountants who file accounts and annual returns for companies will look after drawing up the Constitution and filing the N1 form. They will likely encourage their clients to undertake conversion, and clients should expect a minimal charge for this, as there is no CRO fee for the N1 filing. For the small company owner who wants to do the process on their own, the CRO website has an abundance of advisory leaflets.
Director Loans
The new rules regarding company loans to a director are much the same as before, though there are tweaks. If loan terms are not recorded in writing, the presumption is that it bears interest and is repayable on demand. Where the loan is from a director to the company, unless the terms are in writing it is presumed that the loan does not bear any interest, is not secured and is subordinated to the debt of every other creditor.
The threshold for disclosing director laons in a company’s financial statements has been raised. There is no disclosure requirement if the loan did not exceed €7,500 during the year. The previous threshold was €3,175. Auditors have a reporting obligation to the ODCE if they suspect breaches of the Act regarding director loans. The criminal sanctions range from a fine of up to €50,000 and/or imprisonment.
New LTD Company Model
+ It may have just one director, but it must have a separate secretary if it only has one director.
+ It does not need to hold an AGM.
+ It has a one-document Constitution which replaces the Memorandum and Articles of Association.
+ It has full unlimited capacity to carry on any legal business.
+ It has limited liability and has a share capital.
+ It can pass majority written resolutions.
+ Name must end in ‘Limited’ or ‘Teoranta’
