What is the new Director’s Compliance Statement regime?Thursday, 14 May 2015
One of the key corporate governance changes to be introduced by the Companies Act 2014 (the Act), which will enter into force on 1 June 2015, is a requirement for companies which meet certain stated criteria to comply with the new director' compliance statement regime (DCS Regime).
What are the origins and key features of the Irish DCS Regime?
A previous and controversial form of DCS regime was originally legislated for in 2003, but ultimately not implemented following heavy criticism from the business, accounting and legal communities due to the unrealistic compliance burden, cost and level of exposure. The DCS Regime introduced by the Act is intended as a more proportionate version of the 2003 proposal. While a number of jurisdictions impose compliance verification requirements, frequently they apply only to listed PLCs, financial reporting and/or are contained in principles based corporate governance codes (such as UK Corporate Governance Code) rather than being enshrined in legislation. The Irish DCS Regime is unique in that it is statutory and applies to in-scope private limited companies and unlisted PLCs as well as listed PLCs and is broader in scope than financial reporting obligations. As such, to a certain extent, this is unchartered territory.
What companies are ‘in scope'?
The new DCS Regime will apply to:
- all public limited companies (except investment companies); and
- all other large private limited companies (whether limited by shares or guarantee) with a balance sheet total of >€12,500,000 and turnover of >€25,000,000
Unlimited companies are not subject to the DCS Regime.
What are the obligations on directors of ‘in scope’ companies?
The directors of in scope companies must make an annual statement in the Directors' Report forming part of the company’s audited financial statements (Compliance Statement):
- acknowledging that they are responsible for securing the company’s compliance with its relevant obligations; and
- with respect to each of three specified assurance measures confirming on a comply or explain basis either they have been implemented, or, if not, specifying the reason that is not the case.
What are the 'Relevant Obligations' of an in-scope company?
The Relevant Obligations in respect of which an in-scope company must confirm compliance in the Compliance Statement comprise:
- Indictable offences under the Act - meaning obligations under the Act where failure to comply would constitute a Category 1 or 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 member state, a serious Transparency Offence); and
- 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
What are the 'Assurance Measures'?
The three assurance measures to be addressed by the directors of an in-scope company in its Compliance Statement on a comply or explain basis are:
- confirmation that a compliance policy statement has been drawn up setting out the company’s policies (that are in the directors' opinion appropriate to the company) respecting compliance by the company with its relevant obligations;
- confirmation that appropriate arrangements and structures have been put in place that are, in the directors' opinion, designed to secure material compliance with relevant obligations; and
- confirmation that a review of the above arrangements and structures has been conducted during the financial year to which the applicable Directors' Report relates.
What are the consequences of non-compliance?
Failure by an in scope company to include a Compliance Statement in its Directors' Report, will constitute a criminal offence under the Act and each director in default will be guilty of a Category 3 Offence (i.e., liable on summary conviction to a €5,000 fine or imprisonment for 6 months, or both). However, the desire to avoid reputational damage is likely to be an equal or greater deterrent.
What do in-scope companies need to do?
The directors of in scope companies will need to develop a Compliance Policy Statement and, behind that, put in place appropriate policies, arrangements and structures designed to secure that company’s material compliance with its relevant obligations and regularly monitor the effectiveness of those arrangements and structures.
To do this, in-scope companies will need to map their corporate activities to their Relevant Obligations, identify areas of risk and implement appropriate controls to manage and minimise those risks as far as possible in a manner which is also efficient, practical and cost-effective.
What is the level of exposure for directors?
The Act does not expect directors to be infallible. It takes account of the reality of corporate management by confirming that, while ultimately the directors have responsibility for compliance, that may include reliance on the advice of appropriately qualified and experienced advisors/consultants in implementing arrangements and structures for this purpose. Also the opinion of the directors as to the adequacy of the measures taken is relevant and the standard imposed is that the arrangements and structures put in place provide a reasonable assurance of compliance in all material respects by the company with its relevant obligations, not that they will definitely achieve such compliance. It is likely that, for the majority of in-scope companies, designing and implementing appropriate compliance measures will involve the board obtaining input from audit, tax and legal advisors.
To assist companies in this analysis and navigate this new company law regime, we are publishing a series of practical guides and insights explaining key aspects of the Act within our dedicated Companies Act website.
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If you wish to obtain advice in relation to any aspect of the Act, please contact Gillian O'Shaughnessy, Partner, Corporate Department on +353 (0)1 691 5286, Eileen O'Connor, Head of Corporate Secretarial on +353 (0)1 691 5300 or your usual ByrneWallace contact.