Company Directors: what are your responsibilities?

As a society, we need to have confidence in the companies that we do business with.  We want to know that they will be run in a responsible way by their directors and officers.

The Companies Act 2014 (“the Act”), for the first time codifies, the duties and obligations of company directors and officers.  Part 4 addresses corporate governance; Part 5 outlines the duties of directors and other officers; Part 14 deals with compliance and enforcement; disqualification and restriction of directors.

Under Section 223, directors are now required to sign the following declaration;

“I acknowledge that, as a director, I have legal duties and obligations imposed by the Companies Act, other statutes and at common law”.

Directors have what is known as a “fiduciary duty” to the company. This means  that the director must act solely for the benefit of the company.

The Act requires directors to take into account the interests of employees. It also requires directors to consider the interests of members/shareholders. However, their ultimate duty is to the company.

Section 228 includes the following requirements of directors:

■ act in good faith; and in the best interests of the company;

■ act honestly and responsibly in relation to the conduct of the affairs of the company;

■ act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law;

■ not to benefit from or use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless the company’s constitution permits it or a resolution is passed in  general meeting;

■ not to agree to restrict the director’s power to exercise an independent judgment unless this is expressly permitted by the company’s constitution;

■ not to agree to restrict the director’s power to exercise an independent judgment unless this is expressly permitted by the company’s constitution;

■ to avoid any conflict between the director’s duties to the company and the director’s other interests unless the director is released from his or her duty to the company in relation to the matter concerned;

■ to exercise the care, skill and diligence which would be reasonably expected of a person in the same position with similar knowledge and experience as a director. A director may be held liable for any loss resulting from their negligent behaviour

A director may be held liable for any loss resulting from their negligent behaviour and required to indemnify the company for any such loss of damage.

Section 235 of the Act states that the company cannot indemnify its directors and officers from liability for negligence, default, breach of duty and/or breach of trust; it can purchase insurance to cover them for allegations of wrongful acts such as the above.

It is prudent for all company directors and officers to ensure that prior to taking office; the company has directors and officers insurance cover in place. In the absence of same, a director faces unlimited personal liability for decisions taken in the role.

A directors and officers policy (“D&O”) is typically divided into Side A cover which relates to protection for directors and officers and their personal assets against liability that the company cannot indemnify them for; Side B which relates to the company balance sheet and liability that the company can indemnify directors for; Side C typically relates to company liability subject to a stated limit.

Given the duties and obligations of directors and officers, it is prudent to ensure that prior to taking up an office; the company has purchased an adequate D&O policy. This can support directors in their role by lessening the exposure of their personal assets when defending allegations of wrongful acts.

Our above memo is prepared for general information purposes; it does not purport to provide legal advice. O’Connor solicitors accept no responsibility for losses that may arise from reliance on information contained in this post. It is intended to identify general issues on which you may require legal advice. Full legal advice should be taken from a suitably qualified professional when dealing with particular circumstances.

Re-branding, change and Employment law

REBRANDING, CHANGE AND EMPLOYMENT LAW

 When a company is contemplating a change of brand, a vital part of the change management process is engagement with employees. A change in brand, focus and company culture affects employees. They are the people who will be tasked with managing and supporting the changes that a rebranding will bring. The company will invest time and money in planning, designing and implementing the new brand. It must also focus on whether the change of brand, focus and company culture complies with employment law.

It is useful to examine two high profile re-branding exercises demonstrating the importance of employee engagement. One rebranding was a resounding success and the other a regrettable mistake. A key factor in the success and failure of each was the manner in which each enterprise engaged with its employees at the time. Two UK cases provide good examples for Irish businesses on the need to vet rebranding changes for compliance with employment law.

 The Success: Arthur Anderson Consulting to Accenture[1]

Arthur Anderson Consulting was an offshoot from the Arthur Anderson accountancy firm. The consulting element of the business overtook the accountancy firm in financial terms; benefitting from a surge in popularity of consulting firms in the 1980’s. This led to a split between the two with the consulting wing paying 15% of profit to the accountancy firm. The inevitable legal battle followed; lasting for two and half years, costing millions of dollars and ultimately being resolved at arbitration in August 2000. Part of the ruling of the arbitrator was that Anderson Consulting had to change its name by December 2000 and it was released from the requirement to pay 15%.

 To begin with, the views of all employees were sought on what the new name of should be. 2,677 suggestions were made by employees from 42 countries. The names were then voted on until Accenture was settled upon. Given the short time frame, the business moved quickly to phase in the new name while phasing out the Anderson Consulting brand. By New Year 2001, employees returning to work post -holiday came back to fully rebranded offices right down to their individual business cards. The CEO and the Chairman communicated directly with the employees through webcasts in each of the global offices. Managers were provided with information packs for clients and the market for immediate delivery. Arguably there was a legal imperative behind the swift efficiency – the arbitrator’s award had to be complied with. It is an impressive example of how to manage a major change beginning with a global workforce.

 The Failure: Royal Mail to Consignia and back again

The origins of Royal Mail can be traced back to the 1500’s. The UK Government under Labour decided that it would liberalise the postal and communications market within the UK in 2001. This led to a decision by Royal Mail to undergo a rebranding exercise. It is understood that work was done on the name change from the self- explanatory Tudor designed Royal Mail to Consignia; without any employee engagement, any customer opinions being tested and without any advertising about the name change. The lack of engagement on the change with employees led to the unions boycotting it. The reaction was neatly summarised by John Keggie of the Communications Workers Union who said “We should be trading on the British Post Office’s worldwide reputation for honesty and integrity. I cannot see the point of inventing a new name to replace a highly respected tried and tested brand which the public hold close to their hearts. We will campaign to persuade the Post Office to change its mind.” [2]

 The result of the exercise was a cost of £2 million including disposal of Consignia branded signage that didn’t comply with UK Company law requirements to begin with. Different interpretations of the new name were possible notably that it was close to Spanish for “left luggage”. The name was ultimately changed back to Royal Mail.

 Employment law issues

Legally, a re-brand and a desire for corporate change or for a particular corporate image can breach employment law.

Lisboa v Realpubs Ltd & Ors UKEAT/0224/10/RN.

Charles Lisboa brought a claim against Realpubs Ltd in the following circumstances; the Coleherne Arms Public House in Earl’s Court, London developed a national and international reputation as London’s first “gay pub”. Realpubs Ltd own and operate “gastropubs” and specialise in buying failing pubs, rebranding them as gastropubs and repositioning them in the market. The Company acquired the Coleherne Arms in 2008 when its fortunes were in decline. It was refurbished and renamed; launched as the Pembroke Arms and opened for trade on the 5th December 2008.

Mr Lisboa interviewed for a role as Assistant Manager and was appointed. At his interview; he was told that the plan was to “transform it (sic the pub) from a ‘gay pub’ into a gastropub”. Evidence was given that the general manager was instructed to display a board outside the pub saying “this is not a gay pub” which Mr Lisboa amended to “under new management- friendly staff”.

An e-mail was sent to an advisor to an investment company with an interest in Realpubs  stating “management are hitting the streets and making sure everyone knows about us and that we are no longer an exclusively GAY pub. We are barring ‘over the top’ old customers but this needs to be done right!!….”

The policy of Realpubs was to encourage staff to seat customers or groups of customers who did not appear to be gay in prominent places in such a way that they could be seen from outside the pub. A director visited the pub at lunchtime with his family on Sunday 14 December 2008 and deliberately positioned himself at a table within sight of the outside. On the same occasion, the Claimant stated in evidence, that the director said;”Charles is gay but another kind of gay.” The director  denied making that remark but the ET accepted the Claimant’s evidence.

The gender balance amongst staff members changed. It was Realpubs policy to have a more even balance between the sexes. At the re-launch on 5 December there were 9 male members of staff: 5 female and 3 male managers. By 5 January 2009, the numbers of male and female non-managerial staff were even at 6 each. 5 male members of staff had left during that month; 2 were dismissed on grounds of unsatisfactory performance.

The Employment Appeals Tribunal had no difficulty with the idea that the new owners wished to broaden the appeal of the pub. However, it found “plainly andunarguably” that gay customers were treated less favourably on the grounds of their sexual orientation by the new owners and that Mr Lisboa was also treated less favourably on grounds of his sexual orientation. The question of remedy was remitted back to a newly constituted Employment Tribunal by the EAT.

  Similarly, in the case of Dean V Abercrombie & Fitch (2203221/2008) Ms Dean was recruited to work in a flagship store in London for the company. She was born without a left forearm and had a prosthetic limb from her left elbow down. She was required to work in the stockroom and on the shop floor. While on the shop floor she wore a cardigan over her uniform polo shirt however her line manager told her to work in the stock room and that she could only work on the shop floor if she took the cardigan off in order to comply with the company “look”.  The Court held that management “conspicuously failed to acknowledge that the claimant might have been justifiably upset at the peremptory way she was told to leave the shop floor, that this could have offended any sensitivity she might have felt about her disability or that any apology might have been appropriate.” An award of £7,800.00 together with £1000.00 for loss of earnings was made in favour of Ms Dean.

Employees are at the forefront of any rebranding process. The chances of success of the process are greatly improved with employee engagement from the very beginning.

 As illustrated by the above UK case examples, employers in this jurisdiction must also vet the proposed changes to ensure that they do not breach employment law. For example, a new requirement for employees to project a particular physical image or lifestyle and/or dress in a particular way may be discriminatory and breach the Employment Equality Acts 1998-2015. In addition, a business that seeks to attract a new customer base or consumer market share may breach the Equal Status Acts 2000-2012 by discriminating in the way that it offers its goods and services to the public. Both the Equality Acts and the Equal Status Acts prohibit discrimination on the grounds of gender, sexual orientation, disability, civil status, age, membership of the Travelling Community, race, religious belief and family status.

Charities

The firm has been advising Charities and Charitable Trustees for many years on various aspects of Charity Law, including :-

  • Obtaining CHY Number from Revenue
  • Drafting Deeds of Trust and Deeds of Appointment of New Trustees
  • Applications to the CRA under the Charities Acts
  • Property matters
  • Governance

O’Connor Solicitors hosted the Charities Conference 2014 where topics covered included an overview of the Charities Act 2009, governance and accountability of charitable trustees and the establishment of the Charities Regulatory Authority.  John C. O’Connor, the firm’s Managing Partner, addressed the conference on the obligations and duties of Charitable Trustees, having regard to the requirements of the Charities Act 2009.

We have several experienced Solicitors in the firm who advise clients in relation to all aspects of Charity Law.

 

Charities Act 2009

CHARITIES ACT 2009

Duties and Liability of Charitable Trustees

The Charities Act 2009 (“the Act”) was, according to its Explanatory Memorandum, introduced to “ensure greater accountability and to protect against abuse of charitable status and greed”. One of the means by which the Act achieves this objective is through the introduction of a number of new obligations for trustees of charitable trusts and a general tightening up of the administration of charitable bodies. However, it is important to note that the case law of the Courts of Chancery has long imposed onerous obligations on trustees, including charity trustees which will continue to apply under the regime established by the 2009 Act.

Definition of Charity Trustee

Section 2 of the 2009 Act states that:-

“Charity Trustee” includes –

(a)          In the case of a charitable organisation that is a company, the directors and other officers of the company; and 

(b)          in the case of a charitable organisation that is a body corporate (other than a company) or an unincorporated body of persons, any officer of the body or any person for the time being performing the functions of an officer of the body, and references to a charity trustee of a charitable organisation shall be construed as including references to a Trustees of a Charitable Trust;…” 

It can be seen that the definition goes beyond persons formally appointed to the role of trustee under a deed or instrument of trust (or indeed by other means such as an order of court). 

In particular, in cases where the charity is a company, it includes all of the officers of that company whether or not they have been formally appointed as trustees.   In the case of charities which are not registered as companies, the definition extends to any person acting for the time being as officers of charities. Thus, even if such persons have not been formally appointed as trustee, these de facto officers are now deemed to be trustees as a matter of law.

In summary, the new statutory definition of “charity trustee” is important in its clarification of the categories of persons subject to the duties and liabilities imposed by other provisions of the 2009 Act.

General duties of Trustees

In order to understand the new duties imposed under the 2009 Act in their context, it is necessary to first understand the existing general duties imposed on all trustees.

Upon appointment the first duty of a trustee is to acquaint himself/herself with the terms of the trust under which he/she acts and the trustee must ascertain the nature and extent of the property in the trust.

It follows that the trustee must also, in the exercise of his/her duties, constantly conform to and carry out the terms of the trust.  The trustee, as a prudent person of business, must take care and safeguard the property of the trust; this forms part of the duty of proper management of the trust fund.

Following on from the duty to protect the trust property, in appropriate cases, trustees may have a duty to institute legal proceedings to secure or recover the trust property.   In a similar vein, the trustee must only invest in a proper manner and, in particular, in all investment, must observe to the letter both the provisions of the trust and the requirements of the law.

Trustees have a duty to keep information in relation to the trust and to give the persons beneficially interested in the trust full and accurate information as to the state of the trust fund, including accounts.

Trustees also have a duty to co-operate, and consult, with their co-trustees in a reasonable manner in all matters connected with the trust.

Trustees must not make a personal profit out of the trust business.

Of course, many of these duties – such as the duty not to make a personal profit out of the trust – reflect a trustee’s overarching duty to act in good faith, reasonably and responsibly in the interest of the trust. Although very few of these duties have been codified in the 2009 Act, they continue to apply to charity trustees with the same force alongside the new statutory duties imposed by the 2009 Act.

Duties of Trustees Imposed by the 2009 Act

While the new duties may be considered to be limited in nature (being, in some cases, a codification or at least clarification of existing duties) they are of considerable practical significance for charity trustees. Moreover, the regime established under the 2009 Act is likely to have broader implications for supervision of trustees’ duties. In this regard, it is important to note that the second general function of the Charities Regulatory Authority listed under section 14(1) of the Act is to “promote compliance by charity trustees with their duties in the control and management of charitable trusts and charitable organisations”.

Duty to Apply for Registration of a Charity

Under section 39(3) of the Act provides that it is the duty of the charity trustees to make the application for registration of the charitable organisation with the Charities Regulatory Authority (“the Authority”).

Under section 40 of the Act, charitable organisations entitled to an exemption under Section 207 or 208 of the Taxes Consolidation Act 1997 or which have a CHY number for the purposes of such an exemption, shall be deemed to be registered in the Charities Regulatory Authority “for so long only as there continues to be an entitlement to such exemption”. However, under section 40(4) of the Act, the Authority may require the charitable organisation to provide similar information to the CRA to that required under section 39.

Duty to Keep Proper Books of Account

Although trustees were already under a duty to keep proper information in relation to the trust, section 47 of the 2009 Act now imposes an express statutory duty on charity trustees to keep, or cause to be kept, on an ongoing basis proper books of account. Such accounts should give a true and fair view of the state of affairs of the charitable organisation and explain its transactions. 

Duty to Maintain Annual Statement of Accounts

The charity trustees are required to prepare an “annual statement of accounts” in such form and containing such information as may be prescribed by regulations made by the Minister, albeit with certain de minimis thresholds. Section 48(3)(a) provides that, for charities with a gross income or expenditure which does not exceed €100,000, an income and expenditure account together with a statement of assets and liabilities may be submitted instead of a statement of account. Section 48(6) provides that the section does not apply to certain charities: those which are companies (a); education bodies or prescribed centres of education ((b) and (d)); and charities the gross annual income and expenditure of which does not exceed €10,000 or such greater amount (not exceeding €50,000) as may be prescribed.

Duty to Submit an Annual Report to the CRA

Section 52 of the Charities Act requires the charity trustees to submit an “annual report” in respect of its activities to the Authority not later than 10 months after the end of each financial year (or such longer period that the Authority may specify).

“Whistleblowing” Duty

There is an important provision which might be described as imposing a “whistleblowing” duty on charity trustees. Where information comes into the possession of a “relevant person” – defined to include an auditor or charity trustee – that causes him or her to form the opinion that there are “reasonable grounds for believing” that an offence has been committed under the Criminal Justice (Theft and Fraud Offences) Act 2001, the relevant person shall “as soon as may be notify the Authority in writing of that opinion and provide the Authority with a report in writing of the particulars of the grounds upon which the opinion was formed”.

Personal Liability

If a trustee fails to fulfil the duties imposed by law, the trustee may be found to be in breach of trust. For example, a trustee will generally be found liable if funds have been misappropriated or applied for an improper purpose.

While the Act imposes a number of onerous new obligations on trustees, it also protects trustees’ positions in certain respects. For example, in the case of a trustee who, despite his or her own best efforts, runs into difficulty, section 90 of the Act confers on the courts the power to grant relief from liability for breach of trust.

This section reflects the common law position as set out by Mr. Justice Keane, and provides that, where a trustee has acted honestly or reasonably, they may, notwithstanding a breach of trust, be excused from the breach in whole or in part.

Liabilities – Specific Offences

It is important to note that the Charities Act 2009 creates a number of offences which directly affect the position of charity trustees.  These include:- 

  1. It is an offence for a charity trustee to knowingly or recklessly provide information or particulars to the Authority that are false or misleading.
  2.  It is an offence to advertise, invite members of the public to give money to, and to accept money on behalf of, a charitable organisation which is not registered or deemed to be registered.
  3. Where a charitable organisation changes its name in contravention of section 42(2) of the Act, the charity trustees of the organisation shall each be guilty of an offence;
  4. It is an offence for any person to hold out that a body, which is not registered, is registered under the Act. This extends to holding out that a body has a seat of management inside the State when it is in fact outside the State;
  5. It is an offence for a charity trustee to contravene the duty to keep proper books of account under section 47;
  6. It is an offence for a charity trustee to contravene the duty to furnish an annual statement of accounts under section 48;
  7. It is an offence for a charity trustee to contravene the audit requirements under section 50 where these are applicable, or to obstruct or fail to cooperate with a qualified person appointed by the Authority to carry out an audit of accounts, or to fail to comply with a direction from the Authority requiring the auditing of accounts;
  8. It is an offence for a charitable organisation not to submit an annual report in accordance with section 52 of the Act, of which each charity trustee can be guilty.
  9. It is an offence to fail to comply with a direction of the Authority under section 41(2) to afford an auditor or independent person appointed by the Authority with any facility to which they are entitled to under the relevant regulations;
  10. Charity trustees who act or purport to act in that capacity while disqualified under section 55 of the Act will be guilty of an offence. In addition, charity trustees (and indeed members of staff of charitable organisations) who comply with directions of persons, who act as charity trustees of the organisation but are not qualified to so act by virtue of section 55 of the Act, will themselves be guilty of an offence where they knew or had reasonable grounds for knowing that the person who gave the direction was not qualified to hold the position of charity trustee.

What is notable about a number of these offences – particularly those reflecting the new statutory duties on trustees – is that, in case of contravention, each trustee is held liable even if a particular trustee had no direct involvement in the conduct complained of; in other cases, liability extends to members of staff. The effects of this broad imposition of liability is mitigated by the defence which is expressly provided for in a number of cases under the Act, where a trustee can prove “that he or she believed on reasonable grounds that a competent and reliable person (other than the defendant) was duly charged with the duty of ensuring compliance with this section and was in a position to discharge that duty”.  Nevertheless, these provisions have potentially far-reaching implications for the work of charitable organisations and highlight the importance of engaging appropriate professional advisers.

Disqualification of Trustees of a  Charitable Organisation

Section 55 of the Act lists certain categories of persons who shall be disqualified from acting as a charity trustee and is in the following terms:

“A person shall cease to be qualified for, and cease to hold, the position of Charity Trustee of a charitable organisation if that person –

(a)       is adjudged bankrupt,

(b)       makes a composition or arrangement with creditors,

(c)       is a company that is in the course of being wound up,

(d)       is convicted on indictment of an offence,

(e)       is sentenced to a term of imprisonment by a Court of competent jurisdiction,

(f)        is the subject of an Order under Section 160 of the Companies Act 1990 or is prohibited, removed or suspended from being a Trustee of a scheme under the Pensions Acts 1990-2008,

(g)       has been removed from the position of Charity Trustee of a charitable organisation by an Order of the High Court under Section 74.”

The consequences of a charity trustee ceasing to be qualified can be extremely significant for the charity itself. In particular, it is open to the Authority to apply to the High Court for an Order authorising the Authority to remove the charitable organisation from the Register.

For members of staff of the charity or other charity trustees who comply with the directions of a disqualified trustee, this may give rise to criminal liability if they had reasonable grounds for knowing this as well as civil liability for debts incurred as a result of such compliance.

Disqualified persons who continue to act are guilty of an offence and may be personally liable for any debts incurred as a result of the commission of acts in purported performance of the duties of trustee.  A disqualified trustee may also be liable to repay to the Charity any remuneration, expenses or benefit in kind received for acting as a Charity Trustee. Notwithstanding disqualification, it is possible to apply to the High Court for an order that the disqualified person may hold the position of charity trustee, an order which the Court may grant if it considers this to be in the public interest and in the best interests of the charity concerned.  

Indemnity Insurance for Trustees

Given the very onerous nature of the charity trustees’ roles, responsibilities and potential liabilities under the Act and the general law, all will welcome the terms of section 91 of the Charities Act.  The provision is somewhat convoluted but essentially provides a practical mechanism through which charities can underwrite the cost of trustees taking out indemnity insurance in their capacity as trustees. It allows charities to enter agreements to pay trustees certain sums for this purpose. The trustees in turn undertake to pay such sums to the insurer. The insurance is “to indemnify the charity trustee in respect of any liability of the charity trustee to pay any damages or other sum to a person in respect of any act done or omitted to be done by the charity trustee in good faith and in the performance of his or her functions as charity trustee.” This will presumably allow charity trustees take out cover for the costs of investigations, damages, or to make good losses incurred in good faith and as such is a welcome addition. In a practical way, it goes some way towards limiting the personal financial exposure of persons taking on the onerous role of charity trustee.

Conclusion

The 2009 Act does change the playing field for charity trustees. While many of the core duties on trustees remain founded on the case law, the new statutory duties are significant and many of the new duties give form and substance to the more general duty of “proper management”. On a more general level, charity trustees will now be acting in a changed regulatory environment in which the Charities Regulatory Authority is entrusted with the function of promoting “compliance by charity trustees with their duties in the control and management of charitable trusts and charitable organisation”.  It is clear that all charities have to adapt to this regulatory environment and that it is more important than ever for charity trustees to be aware of, and to be proactive in the exercise of, their onerous duties.

Disclaimer

This article has been prepared for general information and as such does not purport to provide legal advice. O’Connor Solicitors accept no responsibility for losses that may arise from reliance on information contained in this article.  It is intended to identify general issues on which you may require legal advice.  Full legal advice should be taken from a suitably qualified professional when dealing with particular circumstances.

Wills and administration of estates

The much anticipated changes to the Capital Acquisitions Tax (Gift and Inheritance) regime proved somewhat disappointing in the Budget some months ago which only saw a 24% increase in the tax free threshold for assets transferring from a parent to a child, increasing the threshold from €225,000 to €280,000. The Budget brought about no changes or reductions to the current rate of tax (33%) or to increasing the tax free allowances for beneficiaries of estates, or recipients of gifts, other than children.

Companies Act 2014

On the 23rd of December 2014 the President signed the Companies Act 2014 into law. The bulk of the new Act commenced in the summer of 2015 and now replaces the Companies Act 1963-2013. The Act is the largest single piece of legislation in the history of the State with over 1400 sections and runs to over 1100 pages. Notwithstanding this, the purpose of the Act is to simplify the law for private limited companies with shares, and to simplify a number of procedures and to up-date and codify matters such as directors’ duties.