Committee Reports > List of Committees > Joint > 1989 > Committee on the Secondary Legislation of the European Communities (5th Committee) > Report No. 13 - Proposed Company Law Directives

A. INTRODUCTION

Proposals Considered

1.The Joint Committee has completed consideration of the following proposals by the Commission all of which are for Council Directives in the field of company law:-

Eleventh Council Directive concerning disclosure requirements in respect of branches opened in a Member State by certain types of companies governed by the law of another State;

Twelfth Council Directive concerning single member private limited companies;

Council Directive amending Directive 78/660/EEC on annual accounts and Directive 83/349/EEC on consolidated accounts as regards the scope of those Directives (partnerships, limited partnerships and unlimited companies), and

Council Directive amending Directives 78/660/EEC on annual accounts and 83/349/EEC on consolidated accounts with respect to the exemption for small and medium-sized companies and to the drawing up and publication of accounts in ECU.

Consideration by Sub-Committee

2.These proposals were examined in detail for the Joint Committee by a Sub-Committee under the Chairmanship of Senator Mary Robinson. The Joint Committee acknowledges its indebtedness to Senator Robinson and her colleagues for their painstaking work on its behalf.

Acknowledgements

3.The Joint Committee wishes to express its gratitude for the assistance it received from the Department of Industry and Commerce, the Consultative Committee of Accountancy Bodies in Ireland, the Confederation of Irish Industry and the Law Society which supplied most helpful memoranda on the Commission’s proposals. The Joint Committee is especially indebted to Mr. Denis Colfer of the Department, Mr. John Bowen-Walsh, Mr. Sean Kelleher and Mr. Charles MacCarthy of the Consultative Committee and Mr. Ray Bowman of the Confederation all of whom attended a meeting of Senator Robinson’s Sub-Committee to give it the invaluable benefit of their expert advice.

B. BRANCHES OF FOREIGN COMPANIES

Proposed Requirements of the Eleventh Directive

4.The proposed Directive will make it obligatory to disclose certain documents and particulars where a branch is set up in a Member State by a foreign company. In the case of an EEC company the disclosure will cover the following:-

(a)the address of the branch;

(b)the activities of the branch;

(c)the register in which the company file is registered and its registration number;

(d)the name of the company and the name of the branch (if different to the name of the company);

(e)the appointment, termination of appointment and particulars of persons authorised to represent the company in dealings with third parties and in legal proceedings and whether they may do so alone or must act jointly;

(f)the winding-up of the company, the appointment of liquidators, the termination of the liquidation, bankruptcy proceedings, composition or any similar proceedings affecting the company;

(g)the closure of the branch;

(h)the accounting documents (i.e. of the company and not of the branch) as audited and disclosed in accordance with the law of the Member State by which the company is governed in accordance with the 4th and 7th Directives.

A Member State may also make it compulsory to disclose any securities on the company’s property situated in the State where the branch is situated and may require the deposit in the register of:-

5.There will be no limit on a Member State’s right to require disclosure by a non-EEC company but it must at least require the disclosure compulsorily required of an EEC company as well as the following:-

(a)the law of the State by which the company is governed;

(b)the instruments of constitution and memorandum and articles of association with all amendments;

(c)the legal form of the company, its seat, its name, its object and the amount of share capital.

The accounts of a non-EEC company must be drawn up in accordance with or in a manner equivalent with the Fourth and Seventh Directives and if this is not possible branch accounts may be required.

Present Irish Law

6.Under section 354 of the Companies Act, 1963 every public company incorporated overseas, including EEC companies, which establishes a branch in Ireland, must make out on an annual basis a balance sheet and profit and loss account and deliver copies thereof to the Registrar of Companies. If the company is a holding company, it must make out group accounts in such form and containing such particulars as it would have been required to lay before the company in general meeting had it been a company within the meaning of the Companies Act, 1963.

7.Section 352 of the 1963 Act requires branches of companies incorporated outside the State to deliver to the Registrar within one month of establishment the following documents:-

(a)a certified copy of the charter, statutes or memorandum and articles of the company or any other instrument defining the constitution of the company;

(b)a list of the directors and secretary of the company containing their Christian names and surnames, addresses, nationalities, business occupations and particulars of any other directorships held by them of bodies corporate incorporated in the State (where any director is a body corporate, its corporate name and registered or principal office should be supplied), and

(c)the names and addresses of some one or more persons resident in the State authorised to accept on behalf of the company service of process and any notices required to be served on the company and also the address of the company’s principal place of business in the State.

The provisions of Part IV of the 1963 Act relating to charges which apply to Irish companies apply equally to branches of overseas companies. The charges set out in section 99 of the Act will be void against a liquidator or a creditor unless duly registered.

Legal Effect of Adoption of Directive

8.If the proposed Directive is adopted and implemented in Ireland all foreign companies, both public and private, may be required to publish accounts. At present only foreign public limited companies are required to do so. As far as EEC based companies are concerned disclosure requirements would be confined to those set out in paragraph 3 above so that it would no longer be permissible to require publication of the names, addresses, nationalities and particulars of directors and secretaries.

Some of the requirements would be new as far as Irish law is concerned, namely, items (c), (d) and (f) as set out in paragraph 3 above which refer to the register in which the company is registered and the registration number, the name of the company and branch and the details of winding up etc. As far as non-EEC companies are concerned, there would be no restriction on the information which could be required under Irish law but there would be an obligation to require at least the disclosure described in paragraphs 4 and 5 above. Disclosure of branch accounts for branches of non-EEC companies could be required where agreement on equivalence could not be reached.

Views of the Joint Committee

9.The Joint Committee is not in favour of imposing more onerous obligations which might have an impact on the level of investment in Ireland coming from non-EEC countries such as the USA and Japan. It was suggested by the Confederation of Irish Industry that companies might be relieved from the obligation to publish accounts if they gave a guarantee of their Irish branch’s liabilities on the lines of that provided for in section 17 of the Companies (Amendment) Act, 1986 in the case of subsidiaries. However the Joint Committee does not think that branches can be equated with subsidiaries and a guarantee of a branch’s liabilities amounts to no more than a guarantee of the company’s own liabilities. Moreover the Joint Committee is not persuaded that any such solution is necessary. The proposed Directive appears to leave sufficient discretion to the Member States that it might be implemented without making any radical changes in the obligations of companies under the law as it is. The Joint Committee accordingly recommends that in implementing the Directive changes in the present law be kept to a minimum.

C. ONE MEMBER COMPANY

Proposed Twelfth Directive

10.The proposed Twelfth Directive would apply in Ireland to the private company limited by shares or by guarantee and would require Irish law to allow the single member company either on formation or by the shares coming to be held by a single person. Where the sole member is another company Member States have the option of either (a) making the sole Member liable without limit for the company’s obligations though it would be permissible to allow that liability not be incurred where the sole membership arises because all the shares come to be held by the member provided another member is found within one year or (b) fixing a minimum capital for the company and providing that the company and its member do not exceed the limits of two of three criteria, namely, (i) balance sheet total of 6,200,000 ECU, (ii) net turnover of 12,800,000 ECU and (iii) 250 employees provided that if one of them exceeds those limits the single member shall have unlimited liability for the company’s obligations unless the situation is regularised within a year.

11.All the shares would have to show the name of the person owning them and be held by a single shareholder. The sole member would have to:-

(a)exercise personally the powers of the general meeting;

(b)record in minutes the decisions taken under those powers;

(c)draw up in writing any agreement between the sole member and the company; and

(d)provide for such an agreement in the company’s articles in certain circumstances.

Position in Ireland

12.In Ireland membership of a private company may not fall below two and if it carries on business with a single member for more than six months that member will be severally liable for the company’s debts under section 36 of the Companies Act, 1963. Moreover such a company must have at least two directors. The proposed Twelfth Directive contains no requirement that in the proposed single member company the sole member should also be the sole director. The Department points out that the adoption of the proposal will probably involve “a wide range of amendments to the Companies Acts” but apparently it “has no great opposition to the principle”.

Views of Joint Committee

13.The Joint Committee notes that both the Jenkins and Cox Committees whose reports had considerable influence on the Companies Act, 1963 considered but rejected the idea of a single member company on the grounds that it would encourage irresponsible incorporation. Whether the non-availability of the single member company has had any affect on the number of companies formed in Ireland must be doubted. Ussher (Company Law in Ireland, page 79) comments on the statutory requirement that every company must have at least two directors as follows:-

“It is by no means obvious that the adoption of this measure in Ireland discouraged ‘irresponsible incorporations’. Every year, a significant number of companies are struck off by the registrar under the section 311 procedure for not carrying on business. In many small companies only one person is the effective proprietor, and to force upon him a cipher as second director is artificial. Whatever its effect upon irresponsible incorporations, this measure certainly proliferates directors who do not expect to be responsible.”.

14.It appears to the Joint Committee that in practice there is no difficulty in forming a private company in which only one person is financially interested and actively concerned. The requirement of a second member is easily met by a second person taking a single share as a nominee of the principal shareholder. Neither does the requirement of a second director present any problem. A director does not even have to own shares in the company unless the articles of association so provide. Allowing the single member company therefore would do no more than recognise what is the reality in many cases. The advantage of having two directors (at least) is that it avoids the situation where on the death of a sole director there is no one under a duty or with a power to run the company.

15.For these reasons, the Joint Committee considers that the proposed Twelfth Directive is not objectionable in principle and that its implementation will do no more than recognise in law what is the practical situation in many instances. However, the Joint Committee believes that its adoption will highlight a problem which has spasmodically received attention in the UK over the years and is currently the subject of debate in that country. It is a peculiarity of British company law, which we have inherited, that it applies a single basic model to economic organisations regardless of the differences that exist in their size, role in the economy or purpose. This has led from time to time in the UK to agitation for the introduction of a more simplified regime for small private companies which run family type businesses and are in the nature of quasi-partnerships. A Green Paper on the subject was issued by the Department of Trade and Industry in 1981 and in 1986 the Institute of Directors produced proposals which, it is understood, have been accepted in principle by the Department of Trade and Industry and will in due course be included in a new UK Companies Bill.

16.Features of the Companies Acts which in the past have been highlighted as too complicated for small companies include (a) the formalities of formation, (b) operating formalities connected with the holding of annual general meetings, and the keeping and filing of accounts and filing of annual returns and (c) other matters including the distinction between members and directors and their respective functions, requirements relating to resolutions and notices and the distinction between ordinary and special resolutions. In relation to the annual return and accounts it should be noted that private companies did not have to file accounts with the annual return until the Fourth Directive was implemented by the Companies (Amendment) Act, 1986. Certain exemptions for small and medium sized companies were permitted by the Fourth Directive and it will be noted that these are to be extended under the proposed Directive which is dealt with in Section E of this memorandum.

17.One proposal of the UK Institute of Directors has been incorporated in Irish law since 1963, namely, the validity of a written resolution of a private company signed by all members (provided that the articles so provide). Their central proposal, however, is that small companies should be able to opt out of identified requirements of company legislation which are of internal significance only but redundant to the company’s own needs.

18.The Commission justifies its proposal for the mandatory introduction of the single member company by the need for harmonisation but apart from the rules laid down in the proposed Directive it envisages that “for the rest the ordinary law on limited liability companies would apply”. It might be thought preferable if the Commission were to produce a harmonised simplified code for small companies (of the family business type) throughout the EEC. In the Joint Committee’s view this would be in line with the proposal made by the Commission on 1st March, 1989 for a Council Decision relating to the improvement of business environment and the promotion of enterprises, in particular, of small and medium-sized enterprises in the Community. If this is unlikely to be forthcoming then the Joint Committee believes that consideration might be given to reforming the law at national level and it recommends that the Department of Industry and Commerce examine the proposed changes in the UK to see if they are suitable for adoption in this country.

D. ACCOUNTS OF PARTNERSHIPS, LIMITED PARTNERSHIPS AND UNLIMITED COMPANIES

Proposed Directive

19.The current draft Directive proposes to extend the scope of the Fourth and Seventh Directives to cover partnerships, limited partnerships and unlimited companies where all the members with unlimited liability are limited or unlimited companies or partnerships. The Fourth Directive requires the preparation and publication of annual accounts by all limited companies and was implemented in Ireland by the Companies (Amendment) Act, 1986. The Seventh Directive requires the preparation and publication of consolidated accounts in relation to groups of companies. This Directive was due for implementation by 1st January, 1988 - to take full effect by 1990 - but has not yet been implemented in Ireland.

Existing Legislation

20.A partnership carrying on business in Ireland is subject to the Partnership Act, 1890. It is not a legal entity separate from the individuals who comprise it each of whom is the agent of the others and is liable for the partnership debts without limitation of liability. Except in case of solicitors and accountants the number of partners may not exceed 20. A limited partnership is regulated by the Limited Partnership Act, 1907 under which there must be one or more “general partners” who must assume personal liability for all debts and obligations of the business and one or more “limited partners” who are only liable for the money or money’s worth which they contribute on joining the partnership and who are not entitled to share in its management. There is no statutory provision dealing with the accounts of either type of partnership. Unlimited companies are governed by the Companies Acts but are at present exempt from the requirement to file accounts. The members of an unlimited company do not enjoy the benefit of limited liability for, if the company is wound up, section 207(1) of the Companies Act, 1963 obliges them to contribute to the company’s assets “an amount sufficient for the payment of the debts and liabilities and costs, charges and expenses of the winding up”.

21.It may be that in one set of circumstances an unlimited company may incur an obligation to file group accounts. If an unlimited company wished to secure an exemption from disclosure requirements for a subsidiary by availing of section 17 of the Companies (Amendment) Bill, 1986, it would seem that it would not only have to guarantee the liabilities of the subsidiary but also to file group accounts.

Views of the Joint Committee

22.It would appear from the Sub-Committee’s investigation of this proposal that there is some doubt as to how it should be interpreted. From the explanatory memorandum it would appear that the intention is that a partnership, limited partnership or unlimited company, if all its members having unlimited liability are public or private limited companies, will become subject to the requirements of the Fourth Directive or, if it constitutes a “holding company”, to the requirements of the Seventh Directive.

However as the proposal itself is worded the Fourth Directive would also apply if the members having unlimited liability are partnerships, limited partnerships or unlimited companies and the Seventh Directive also would apply where either the parent company or one or more subsidiary is a partnership, limited partnership or unlimited company though in the latter case a Member State would be entitled to grant an exemption where the parent is neither a limited company nor a partnership, limited partnership or unlimited company of the type covered by the proposal.

23.The disclosure requirements of company legislation are seen as the price to be paid for the privilege of limited liability and in principle disclosure ought not to be required where liability is unlimited. However in the interests of harmonisation the Joint Committee considers that a proposal to require the preparation and disclosure of the audited accounts of trading partnerships between limited companies could be accepted but, if this is what is intended, the Joint Committee is of opinion that the proposed Directive requires amendment so to limit the scope of its application. If the provisions of the proposed Directive as regards group accounts remain as they are the Joint Committee recommends that the exemption provided for be availed of in Irish implementing legislation.

E. SMALL AND MEDIUM-SIZED COMPANIES

Proposed Directive

24.The proposed Directive would make it mandatory on Member States to allow, in the case of small and medium-sized companies, those exemptions from the requirements of the Fourth Directive which that Directive gave Member States the option of allowing. At the same time it would allow Member States a flexibility in defining what constitutes a small company. Under the Fourth Directive small or medium companies must satisfy at least two of the following conditions in any financial year:-

The proposed Directive would allow in the case of small companies the two financial thresholds to be increased or decreased by up to 50 per cent. and the maximum average number of employees to go as low as 25.

25.Small companies who wish to avail of the exemptions may not be part of a group, must be managed by their shareholders, none of whom may be a legal person, the shares may not be freely transferable and small companies must make public the fact that they are availing of the exemptions. Small companies may not be required to have their accounts audited. They may keep their published accounting documents available for the public at their registered offices if they so wish. Medium-sized enterprises may also do this but only if allowed by the Member State. Finally under the proposed Directive, companies will be allowed to draw up and publish their accounts in ECU. Consolidated accounts will also be allowed to be drawn up and published in ECU. The method used for conversion into ECU must be described in the notes on the accounts.

Position in Ireland

26.Ireland has already allowed most of the exemptions permitted by the Fourth Directive and also permits publication of accounts in ECUs but has retained the audit requirement. Under the Companies (Amendment) Act, 1986 small companies are allowed to publish an abridged balance sheet showing only certain items laid down in section 11 and in the Schedule to the 1986 Act and are not required to annex to the balance sheet a copy of the profit and loss account or the directors’ report. Medium-sized companies are allowed to combine as one item in its profit and loss account under the heading “gross profit and loss” certain items specified in section 11 and the Schedule to the 1986 Act. They may also publish an abridged balance sheet and this may be annexed to the company report along with the profit and loss account. If the proposed Directive is adopted and implemented small companies will be exempt from the requirement of having their annual accounts audited and small and medium sized companies need not file their accounts in the Companies Registration Office.

Views of Joint Committee

27.In the Joint Committee’s opinion the most significant provision in the Commission’s proposals from the Irish view point is the proposed exemption from audit requirements in the case of small companies. The Joint Committee is opposed to this proposal as it considers that audits are necessary not only for the protection of creditors but also for the prudent financial management of the company itself. Moreover it doubts if the removal of the statutory requirement would in practice relieve small companies of an administrative burden for undoubtedly the revenue authorities and financial institutions would set their own audit requirements.

(24 May, 1989).