Directors' compliance statement regime

Business Law 02/02/2018

The Companies Act 2014 imposed a new obligation on directors of PLCs (excluding part 24 investment companies, and other large companies satisfying thresholds set out below) to put in place certain structures and compliance policy processes, which  include a directors’ compliance statement, in their annual report. This obligation applies to all financial years commencing on or after 1 July 2015, when the Companies Act 2014 commenced.

This practice note is an overview of the directors' compliance statement regime, which is required for all PLCs registered in Ireland and for all other large Irish private limited companies with a balance sheet total exceeding €12.5m and a turnover exceeding €25m.

1. Overview

of part 5 of the Companies Act 2014 ‘reintroduces’ the directors’ compliance statement (DCS) regime in a form intended as a more proportionate and targeted version of the previous highly controversial proposed form of DCS regime legislated for in the Companies (Auditing and Accounting) Act 2003, but never ultimately introduced, following a storm of criticism from the business, financial and legal communities and a critique by the Company Law Review Group following its regulatory impact assessment in 2005.

Key features of the DCS regime as enacted in the 2014 act are:

  1. It applies to all PLCs and to all other large private limited companies (LTDs, DACs, CLGs) with a balance sheet total exceeding €12.5m and a turnover exceeding €25m. It does not apply to unlimited companies.
  2. It requires the directors of in-scope companies to make an annual statement within the directors' report on a comply-or-explain basis, acknowledging the directors' responsibility for securing the company’s material compliance with its relevant obligations and either confirming that certain assurance measures have been taken or, if they haven't been taken, specifying the reasons why that is the case. No distinction is made between executive and non-executive directors in this regard.

2. Directors’ compliance statement

The statement to be included by in-scope companies in the directors' report, forming part of the audited financial statements in respect of any financial year, is known as the directors' compliance statement and (as noted above) comprises an acknowledgement by the directors, on a comply-or-explain basis, of their responsibility for securing the company’s material compliance with its relevant obligations and either confirmation that the required assurance measures have been taken or, if they haven't been taken, an explanation of why that is the case.

Paragraphs 3 and 4 below address the content of the ‘relevant obligations’ and required assurance measures in more detail.

3. Relevant obligations

The relevant obligations in respect of which the directors of an in-scope company must acknowledge responsibility for securing the company’s material compliance in the directors’ report comprise:

  1. Obligations under tax law, including Customs Acts, excise duty legislation, Tax Acts, Capital Gains Tax Acts, VAT Acts, Capital Acquisitions Tax Consolidation Act, Stamp Duties Consolidation Act, and instruments made under any of the above legislation or otherwise relating to tax, and
  2. Obligations under the act where failure to comply would constitute a category 1 or category 2 offence or a serious market abuse or prospectus offence (or for certain listed PLCs or private limited companies whose debentures are admitted to trading on a regulated market of an EEA state, a serious transparency offence) – that is, indictable offences under the act.

4. Three key assurance measures

The three measures that are the subject of the comply-or-explain rule (that is, the directors must confirm in the directors' report that the company is in compliance or explain why it isn't) are:

  1. Confirmation that a compliance policy statement has been drawn up, setting out the company's policies (that, in the directors' opinion, are appropriate to the company) respecting compliance by the company with its relevant obligations,
  2. Confirmation that appropriate arrangements and structures have been put in place that are, in the directors’ opinion, designed to secure material compliance with the company’s relevant obligations, and
  3. Confirmation that a review of the above arrangements and structures has been conducted during the financial year to which the applicable directors' report relates.

5. Breach of DCS obligation

Failure by the directors of an in-scope company to comply with their DCS obligations (as outlined at paragraphs 3 and 4 above) in the relevant company’s directors' report constitutes a criminal offence under the 2014 act, and each director in default will be guilty of a category 3 offence (fine of up to €5,000 (Class A fine) and/or up to six months’ imprisonment on summary conviction, not an indictable offence). In addition to the penalties that can be imposed upon directors, the desire for in-scope companies not to suffer reputational damage by being held in breach of corporate governance standards under the act is likely to be an equally strong deterrent. In addition, breach of any relevant obligation that is an obligation under the act is an indictable offence under the act and, as such, capable of separate enforcement. Clients will need to be advised of what the relevant obligations are for in-scope companies.

6. Protection for directors/standard of compliance

The act acknowledges the reality of corporate management to a certain extent by confirming that directors may rely on appropriate advisers/consultants in complying with DCS obligations and by introducing reasonableness and materiality qualifications into the obligations regarding such arrangements and structures.

In relation to the key assurance measures that are subject to the comply-or-explain rule:

  1. The compliance policy statement must set out the company’s policies (that, in the directors’ opinion, are appropriate to the company) respecting compliance with its relevant obligations,
  2. Similarly, the obligation to put in place appropriate arrangements or structures is qualified such that the arrangements and structures must, in the directors' opinion, be designed to secure material compliance with the company's relevant obligations,
  3. The act provides that arrangements or structures will be regarded as being designed to secure material compliance with relevant obligations if they provide a reasonable assurance of compliance in all material respects with those relevant obligations, and
  4. The act provides that the arrangements or structures that an in-scope company must put in place to secure material compliance with its relevant obligations may, if so determined by the directors, include reliance on the advice of persons employed by the company under a contract for services, being persons who appear to the directors to have the requisite knowledge and experience to advise the company on compliance with its relevant obligations.

As such, while the risk appetite of certain directors (particularly NEDs) will be relevant in this context, directors of in-scope companies are not expected to be infallible or to guarantee full compliance with all relevant obligations. The standard is quasi-subjective, and the view of the directors is relevant – so if the directors are satisfied that they have taken appropriate advice and have designed (or procured the design of) policies, arrangements and structures that provide a reasonable assurance of compliance in all material respects with the company's relevant obligations, and that those arrangements and structures have been reviewed in the relevant financial year, that is sufficient to satisfy their DCS obligations under section 225 of the act.

7. Compliance policy statement

The compliance policy statement for an in-scope company should be read in conjunction with the arrangements in place to mitigate the risk of non-compliance as set out in section 6 above. It is suggested that this policy should involve questioning the following:

  • Are there existing compliance processes and procedures and are they adequate?
  • Arrangements in place and are these documented and sufficient?
  • Is there a chart outlining key roles and responsibilities?
  • Are directors’ familiar with their obligations under the 2014 act (and other relevant obligations)?
  • How are tax and legal risks monitored?

8. Initial steps for in-scope companies

The directors of an in-scope company will need to develop a compliance policy statement and put in place appropriate arrangements and structures to secure material compliance with its relevant obligations.

To achieve this, its corporate activities will need to be mapped to its relevant obligations, areas of risk identified, and appropriate controls designed to eliminate those risks as far as possible in a manner that is also as practical, cost-effective, and efficient as possible.

If the in-scope company is part of a wider corporate group, there may already be a group compliance policy, and there are likely to be relevant group procedures, arrangements and internal controls in the context of financial reporting, tax arrangements, inter-company arrangements, authorisation of key decisions, etc, for the purpose of group compliance with regulatory obligations in other jurisdictions and/or corporate governance best practice. Depending on the scope and effectiveness of existing procedures and arrangements, the focus for the in-scope company may be on identification of potential conflicts/compliance gaps from an Irish DCS compliance perspective and tweaking existing group policies where appropriate, rather than on implementing or documenting procedures and arrangements from scratch. Additionally, where compliance may be dealt with at a level above the in-scope company, it may now be prudent to incorporate an element of input/review at in-scope company level to enable the directors to comfortably make the required compliance statements.

Ultimately, this exercise will, of necessity, be a combined effort by the directors of the in-scope company, together with Irish management (including financial, legal and company secretarial functions) and external advisors (audit, tax, legal) with appropriate input by the relevant in-scope company/group compliance/management functions.

9. Role of solicitors

Many in-scope companies will be initially dealing with their auditors in relation to the DCS, as the statement must be contained in the directors' report that they will prepare. It is important to remember, however, that the ‘relevant obligations’ are legal obligations, particularly insofar as they relate to the Companies Act 2014, and it is hard to see how any director could comfortably give the assurances required in the DCS without the company involved having undertaken a legal review.

Solicitors should remind any of their clients who potentially are in-scope companies (and directors of those companies) of the requirements related to the DCS and the importance of legal advice in this regard.