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Thursday, 25th April 2024 |
| Over-regulation - fact or fiction? |
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| While company directors are increasingly arguing that the increased emphasis new regulations such as the Companies Bill is placing on their role is a bad thing, Fiona Delahunty says that increased director responsibility can only be good for a company and its stakeholders. |
Over-regulation is a phrase often heard today in boardrooms and at the offices of their advisors. While indeed there has recently been a whole raft of legislation following recent high profile scandals which have placed the spotlight firmly on directors and their advisors, most of this legislation serves to clarify or copper fasten existing legislation, some of it going back more years than one would care to remember. So are directors simply squirming under the increased focus on them or is it a valid complaint that they are being overwhelmed by unnecessary bureaucracy?
The Director of Corporate Enforcement insists that the benefit of limited liability comes with costs, those being the burden of the directors’ duties and responsibilities. While modern business has evolved and changed over the years and as a result corporate fraud has become more complex and elaborate, our legislation has been slow to follow, leaving gaping loopholes for unscrupulous directors to take advantage of. One such example is ‘Phoenix Trading’, where directors of insolvent companies just walk away from their responsibilities to creditors and shareholders and incorporate another company and continue trading. While the Companies Act 1990 introduced provisions to attempt to combat this errant behaviour and to try to protect the unsuspecting public, certain weaknesses identified in this legislation were recently clarified and strengthened by provisions of the Company Law Enforcement Act 2001.
Other criticisms levelled on recent legislation are that the casualties will be small companies and their directors - husband & wife type companies. Again, while this may be true, as we struggle to move from the past non-compliant way of thinking to the era of enforcement and penalties, there have been certain provisions enacted to assist such small companies in coming to terms with their responsibilities. As early as 1994 and the implementation of the EU (Single Member Private Limited Companies) Regulations 1994, companies with a single shareholder could dispense with the need to hold an Annual General Meeting or more recently as a result of part III of the Companies (Amendment) (No 2) Act 1999, smaller companies which fall within certain criteria, may be exempt from the requirement to have an audit.
However, even these small companies cannot expect to be exempted from all their duties and responsibilities and while it might appear from the recent prosecutions that the ‘targets’ are the these companies, the reality is that the directors of such companies perhaps do not realise the duties and responsibilities they are taking on when forming limited companies and as such ignorance cannot be their defence.
The Companies Registration Office have been undertaking a substantive program of education and information and have sent booklets to all the registered directors on their register in addition to having an extremely informative website. This combined with the information available on the website of the Director of Corporate Enforcement really leaves no excuse for any director. It might be a useful exercise for directors of smaller companies to examine their reasons for incorporation and whether there might be a more suitable structure for their business and whether the burdens of responsibility outweigh the benefits of limited liability in their case.
Meanwhile there is no end of professional advisors available to assist directors in becoming more au fait with their duties under legislation. Personally speaking, as a chartered secretary, I acknowledge that we are a beneficiary of the increased enforcement drive and that we are enjoying a revival of our profession. I have long considered it one of our main responsibilities as chartered secretaries to keep up to date with new legislation and developments affecting our working environment in order to be able to provide accurate legal and regulatory advice to the boards of directors, which we are employed to advise.
Indeed not only is the secretary expected to know everything, or at least where to find it, but also to predict and often pre-empt future developments. For smaller companies, the services of professional secretarial firms are always an option where there would not be the resources or the workload for a full-time secretary.
Meanwhile, back at the legislation-drafting ranch, the Companies (Audit & Accounting) Bill 2003 has been causing uproar in professional circles. In particular as a result of dire warnings, there have been unconfirmed reports that the breath of the Directors’ Compliance Statement within that legislation has been causing directors sleepless nights. The additional requirement being asked of directors is that they put their name to a formal written statement that they are complying with the provisions of the Companies Acts, the Tax Acts and any other legislation pertinent to their company, including the framework they have put in place to ensure compliance and the arrangements to reviewing such policies - but is that not what they have been charged to ensure by virtue of their appointment?
The outcry against this part of the legislation is vociferous but directors must ask themselves what is new here? Simply that their duties and responsibilities are now in writing and they must ensure that they now take these responsibilities seriously as a result? I am consistently being told by directors that they now think twice about taking on a new directorship given the ‘new’ requirements, however this in my opinion is not a bad thing, indeed it should be compulsory. Long gone are the days of the list of 500 directorships held by individuals.
I don’t want to imply that I am unsympathetic to directors and their burdens of duties under the Acts, I am simply saying that there is very little in the way of new responsibilities in recent legislation, the enforcement of the requirements are now focusing the mind and in this way I suppose, the legislation is having the desired effect.
Corporate governance has been another area, which has spawned a whole new industry of advisors and experts. While corporate governance is not new to us as chartered secretaries, indeed the good governance of companies has been our focus since 1894. The recent Higgs Report on the effectiveness of non-executive Directors and the resultant revised Combined Code issued by the Financial Reporting Council in the UK in June of this year has again focused the mind. While the provisions of the Code are mainly of interest to publicly listed companies, it should be compulsory reading for any director of any company.
All is not doom and gloom however, and it is heartening to know that the Company Law Review Group, which was established on a statutory basis by the Company Law Enforcement Act 2001, is working quietly and diligently away on the long awaited consolidation of Irish Company Law. This is not a straightforward or easy task by anybody’s standards. They are also by virtue of this process attempting to modernise and where possible simplify the legislation.
In the meantime, until we see the product of the work of the Company Law Review Group, we must strive to keep abreast of the legislation, understand its contents and, if directors are not sure of what is required of them, they have an obligation and a duty to seek advice from those who do know. |
Fiona Delahunty is president of the Institute of Chartered Secretaries and Administrators - Irish Region (www.icsa.org.uk) and managing director of CSS Corporate Secretarial Services Limited at Mazars (www.mazars.ie).
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| Article appeared in the November 2003 issue.
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