The Role and Powers of the Director of Corporate Enforcement Presentation to ACCA

2. The Role and Powers of the Director of Corporate Enforcement Presentation to ACCA District Society Members Ian Drennan FCCA Compliance Manager, ODCE

3. Presentation Overview • CLEA – principal provisions • Functions of the ODCE • Auditors’ Duty to Report • Liquidators’ Duty to Report • Consequences of Non-Compliance • Likely Future Developments • Appendices

4. CLEA - Principal Provisions • Content flows largely from the McDowell Working Group • Established the ODCE • Transferred Minister’s powers to the the Director • Introduced the concept of an ARD • Introduced certain reporting obligations on auditors etc. • Amended the provisions governing transactions with directors • Established the CLRG on a statutory footing

5. Overview of the ODCE • Independent • 37 staff • Divided into 5 Units: • Compliance - Enforcement • Investigations - Corporate Services • Insolvency

6. Functions of the ODCE • In broad terms, under the Company Law Enforcement Act 2001, the Director is responsible for: • encouraging compliance with the Companies Acts; • enforcing the law in instances of non-compliance, and; • undertaking a supervisory role in relation to liquidators and receivers.

7. Encouraging Compliance • Company law is complex and voluminous. • Historically, non-compliance with company law has been high in Ireland. • This has, in part, been due to the lack of clear, accessable guidance to participants in companies. • Addressing this information deficiency is an ODCE priority.

8. Encouraging Compliance • The information deficit is being addressed through: • education • issue of information and guidance publications • provision of an ODCE information service • engaging with professional and business representative bodies with a view to facilitating and promoting compliance.

9. Encouraging Compliance • Information Books – provide guidance on: • principal duties and obligations of company directors and secretaries (see also Appendix 1) e.g. • statutory registers and minutes • books of account • financial statements and audit • meetings, notice etc. • filing obligations • transactions with directors.

10. Encouraging Compliance • rights and powers of shareholders and creditors e.g.: • notice of, and attendance at, meetings • voting rights • right of access to certain information e.g. financial statements • rights regarding dividends • right to petition for relief in cases of oppression • the respective roles and functions of auditors, liquidators and receivers • the consequences of non-compliance.

11. Encouraging Compliance • ODCE website – www.odce.ie • guidance for directors and secretaries etc.; • commentary on corporate governance best practice and access to main reports on the subject; • public notice information e.g. civil enforcement action, prosecutions, insolvency information; • access to full complement of company law statutes etc.; • information on ODCE services.

12. Enforcement • ODCE receives information regarding suspected non-compliance from a number of sources: • complaints from the public • Companies Registration Office referrals • auditors’ reports • liquidators’ reports • accountancy/professional bodies’ reports • authorised officers’/inspectors’ reports • other sources with which ODCE has a relationship.

13. Enforcement • The CLEA 2001 introduced reporting obligations on: • auditors • liquidators • accountancy/professional bodies (e.g. Law Society, Bar Council, Institute of Taxation etc.)

14. Enforcement • Auditors: • suspected indictable offences • Liquidators: • report on the conduct of company directors • reporting of suspected criminal offences to the Director & the DPP • Accountancy/Professional Bodies: • suspected indictable offences by auditors, liquidators and receivers • failure of a liquidator or receiver to maintain appropriate records.

15. Auditors’ Duty to Reportunder S194(5) CA, 1990 • Obligation applies to indictable offences only • Does not apply to accountants’ non-audit work • However, auditors must have regard for matters coming to attention during the course of non-audit work • No requirement to seek out offences (over and above normal audit procedures). However, auditors are expected to react to information coming to their notice • SAS 120 and 620 of particular relevance

16. Auditors’ Duty to Reportunder S194(5) CA, 1990 • In making their reports, auditors are required to furnish the following: • details of the subject (i.e. company or person(s)) of the report • whether the matter has been discussed with the directors • details of the suspected offence(s) • details of the grounds for the auditor’s opinion • context of the report e.g. the extent of the investigations that have been conducted by the auditor, whether the matter has been rectified etc.

17. Auditors’ Duty to Reportunder S194(5) CA, 1990 • In furnishing details of the grounds for their opinions, auditors should provide sufficient information to ‘facilitate appropriate action’ by the Director (SAS 620.5). • Where insufficient information is provided, ODCE will seek elaboration. Non-compliance with obligations is an offence and ODCE may, in addition to appropriate enforcement action, consider involving the relevant professional body. • Joint guidance issued by ODCE, APB and the CCAB-I.

18. Auditors’ Duty to Reportunder S194(5) CA, 1990 • As at the end of January 2003: • 489 reports received • 64% of those reports received from ‘Big 4’ firms • reports contain 663 suspected offences • of which: • 81% relate to filing offences • 6% relate to breaches of directors’ loans provisions • 6% relate to failure to convene EGMs under S40(1) CA, 1983

19. Liquidators’ Obligation to Report under S56 CLEA 2001 • Applies to liquidators of insolvent companies only. • Required to report within 6 months of appointment and thereafter as designated by the Director. • Reports must express an opinion as to whether the directors (and shadow directors) have acted honestly and responsibly prior to the insolvency. • Unless the Director is satisfied that the directors have acted in an honest and responsible manner, the liquidator is required to seek the restriction of the directors in the High Court. • Court can award costs against the restricted individual(s).

20. Liquidator’s details Type of liquidation Date of appointment Company details Directors’ details Liquidator’s opinion as to whether each director acted honestly and responsibly in the conduct of the company’s affairs Statement of affairs Audited financial statements Report to creditors (including of minutes of creditors’ meetings) Whether the liquidator intends to apply for restriction or disqualification Details of any other civil or criminal proceedings in train or anticipated Presence of any criminal offences Liquidators’ Obligation to Report under S56 CLEA 2001

21. Liquidators’ Obligation to Report under S56 CLEA 2001 • As at end of January, 2003: • approximately 300 reports had been received • of which, approximately 50% have sought exemptions (i.e. approximately 150 liquidators) • of the 150 not seeking exemption, approximately 75 have been found to merit further investigation • a relatively small number of reports suggest serious criminal activity e.g. fraud etc.

22. More Common Breaches • On the basis of information coming to ODCE attention the following are some of the more common breaches: • failure to file returns with the CRO • illegal transactions with directors e.g. breaches of directors’ loans provisions (see Appendix 2 for further information) • failure by directors to hold AGMs and/or EGMs • failure to keep proper books of account • trading while insolvent • unqualified auditors.

23. Enforcement • How are matters coming to ODCE attention dealt with? • Examination of available material and preliminary evaluation of the facts – is there a prima facie case to answer? • If so, further investigations will be conducted including e.g. correspondence, searches, interviews and taking of statements. • Appropriate enforcement action selected and pursued.

24. Enforcement Options • ODCE has a number of enforcement options open to it depending on circumstances. These include: • seeking voluntary compliance • imposition of fines • initiation of investigations (directly or via the Courts) • civil remedies e.g. injunctions, applications for restriction, disqualification, imposition of personal liability etc. • criminal prosecution (summary or on indictment) • referral to other enforcement agencies.

25. Supervision of Liquidators and Receivers • The Director: • receives a copy of each notice of appointment of a liquidator or receiver filed with the Registrar of Companies; • may require production of a liquidator’s/receiver’s books and records; • may seek explanations of their conduct.

26. Consequences of Non-Compliance Admininstrative fines • Maximum €500 (probably) • Upon service of notice specifying the breach(es) • No prosecution will ensue where the fine is paid and the default is remedied within the prescribed time period (21 days).

27. Consequences of Non-Compliance Civil Enforcement • In addition to the criminal sanctions provided for under the Acts, there are a number of civil sanctions and remedies available e.g.: • service of notice to comply with obligations (injunctions) • seek restriction • seek disqualification • seek the imposition of unlimited liability for debts and liabilities of a company. See Appendix 3 for further detail.

28. Consequences of Non-Compliance Prosecutions • In general, maximum penalties under the Companies Acts are: • €1,900 and/or 12 months imprisonment on summary conviction, and; • €12,700 and/or 5 years imprisonment on conviction on indictment (any offence for which the maximum sentence is 5 years or more is an arrestable offence).

29. Consequences of Non-Compliance • Significantly higher penalties are available for certain offences e.g. • fraudulent trading: €63,500 and/or 7 years, and; • insider dealing: €254,000 and/or 10 years.

30. Likely Future Developments • New Companies Act 2003 (flowing primarily from the Review Group on Auditing) • Establishment on a statutory basis of IAASA. • Introduction of a directors’ compliance statement. • Consolidation of the Companies Acts and more regular legislation. • Increase in the audit exemption threshold (being examined by CLRG).

31. End of Presentation Thank You

32. Appendix 1 • Company Directors’ Duties comprise: • directors’ common law duties, and; • directors’ statutory duties.

33. Directors’ Common Law Duties • Directors must exercise their powers in good faith in the interests of the company as a whole. • Directors must perform their duties with due care, skill and diligence. • Directors are not permitted to make undisclosed profits from their position as directors.

34. Directors’ Statutory Duties • Main statutory duties include: • maintenance of Registers • filing obligations • operational duties • accounting related duties.

35. Registers etc. • Register of Directors and Secretary • Register of Directors’ and Secretary’s interests (in the company and related companies) • Register of Members • Register of Debenture holders • Directors’ service contracts • Minutes of board, board sub-committee and general meetings.

36. Filing Obligations • Companies are required to file certain documents with the CRO, including e.g.: • Annual Return • Financial Statements (full or abridged, dependent on company size) • Changes in directors and secretary • Mortgages and charges • Change in registered office • Certain resolutions.

37. Operational Duties • Required to hold AGM (every 15 months maximum). • Hold EGMs where necessary e.g. where the net assets of the company are less than half the called up share capital. • Provide members with required notice of meetings and, prior to AGM, furnish members with a copy of the financial statements.

38. Accounting Related Duties • Maintain proper books of account which • correctly record and explain the company’s transactions; • at any time, enable the financial position of the company to be determined with accuracy; • enable the directors to ensure that the financial statements comply with Companies Acts requirements; • allow the financial statements to be readily and properly audited. Note: Auditors are required to report to the CRO where proper books are not being (or have not been) maintained (CRO Form H4).

39. Prepare annual financial statements: • Directors’ Report • Profit & Loss Account • Balance Sheet • Cashflow Statement (where applicable) • Notes to the financial statements • Have financial statements audited (subject to exceptions).

40. Appendix 2 • Main Provisions Relating to Transactions with Directors: • S29 CA, 1990 – Substantial Property Transactions • S31 CA, 1990 et seq. – Prohibition on loans etc. to directors.

41. Substantial Property Transactions • Where a director of a company (or a person connected with that director): • purchases an asset from, or sells an asset to, the company, and; • the value of that asset exceeds €63,500 or 10% of the company’s ‘relevant assets’, • the transaction must be approved in advance by the shareholders in a general meeting of the company.

42. Prohibition on Loans etc. • In general, a company is prohibited from making a loan or quasi-loan to a director (or person connected to that director) (S31 CA, 1990). • Similarly, a company is generally prohibited from entering into a credit transaction as creditor for a director, entering into a guarantee on behalf of a director (or person connected to the director) or from providing security in respect of a loan or quasi-loan etc. to a director. • There are, however, a number of exceptions to the above.

43. Prohibition on Loans etc. • Exceptions to general prohibition on loans etc.: • The prohibition on directors’ loans, quasi-loans and credit transactions does not apply where the aggregate value of the loan(s) is less than: • 10% of the company’s ‘relevant assets’. NB: this exception applies to loans, quasi-loans and credit transactions only i.e. it does not apply to the granting of guarantees and/or the provision of securities by the company.

44. Prohibition on Loans etc. • A company’s ‘relevant assets’ are: • the company’s net assets as shown in the last preceding financial statements to have been laid before an AGM of the company, or; • where there are no last preceding financial statements, or where they have not been laid before an AGM, the company’s called up share capital.

45. Transactions with Directors • Exceptions to general prohibition on loans etc.: • A company is not precluded from entering into a guarantee or providing security for a loan if the granting of the guarantee or security has been pre-approved by a special resolution of the shareholders. • The shareholders must be provided in advance of the meeting with full details of the transaction and the directors must express the opinion that the transaction will not affect the company’s ability to pay its debts as they fall due. Auditors must report thereon.

46. Transactions with Directors • Exceptions to general prohibition on loans etc.: • Loans between group companies are permitted. • Directors’ expenses are excluded for the prohibition. • Business transactions are also excluded e.g. where the company’s ordinary business involves granting loans.

47. Transactions with Directors • Breach of the provisions relating to directors’ loans etc. is a criminal offence (indictable and therefore reportable). • Civil consequences of breaching either the substantial property transactions provisions or the directors’ loans provisions include having to: • account to the company for any gain made, and; • indemnify the company for any loss or damage suffered.

48. Appendix 3 • Civil injunctions • Restriction • Disqualification

49. Examples of Civil Injunctions • Section 371 CA, 1963 Procedure • Requires the making good of any default under the Acts (therefore a very powerful tool) • Service of 14 days notice by ODCE • Failure to comply with notice - application before the High Court • Continued failure to comply will result in the incurring of High Court costs. • Section 131 CA, 1963 Procedure • ODCE can, on the application of any member, call or direct the holding of an AGM • Failure to comply is an offence.

50. Restriction • Provision for the restriction of directors (and secretaries) was originally introduced by S150, CA 1990. • S150 allowed, but did not require, liquidators of insolvent companies to apply for the restriction of company directors. • CLEA 2001 requires the liquidators of insolvent companies to apply for the restriction of the directors unless relieved of the obligation. • Director can also apply for restriction orders.