Directors of all private limited companies in Ireland have probably received written notification from the Companies Registration Office to the effect that the Companies Act 2014 (“the Act”) came into force on 1stJune 2015. But what does it mean for a director of a small private company limited by shares incorporated under the ‘old’ legislation?
The Act introduces a significant number of reforms to Irish company law which is designed to make it easier for companies incorporated in Ireland to do business.
More specifically, private limited companies incorporated under the ‘old’ legislation are being phased out and replaced with a new form of company (referred to in this article as “an LTD”) or a “Designated Activity Company” (“a DAC”) or some other form of a private company under the Act. Existing companies cannot continue in their current form and will be treated as DACs from now until conversion.
There is a transition period of 18 months from the date of commencement of the Act (i.e. until 31stDecember 2016) within which an existing private limited company may alter its existing form to one of the other forms provided for under the Act. If no action is taken at all, an existing private limited company will automatically convert to an LTD. However failing to take any action may result in a breach of directors’ duties and a corporate form which might not serve that company’s requirements. It is therefore advisable for directors to make the decision as soon as possible. Once the answer is known, the process of conversion is relatively straight forward. In addition, there are no fees payable in the companies registration office for re-registering as a ‘new’ company.
For the majority of directors of existing private limited companies the decision will be whether to convert to an LTD or a DAC. Below is a brief outline of the principal features of an LTD and a DAC provided for under the Act and a list of queries to which if answered ‘yes’ will most likely mean that your company should re-register as a Designated Activity Company, rather than an LTD.
Main Features of an LTD
An LTD is a more simplified version of the existing private company limited by shares. Whereas the existing private company limited by shares cannot act outside its stated objects clause in its memorandum of association, an LTD has full and unlimited capacity to carry on and undertake any business or activity of the company and is not restricted by an objects clause. Whereas the ‘old’ private company is governed by its Memorandum and Articles of Association, an LTD’s constitutional documentation will consist of one single document called a “Constitution” and will not have an objects clause. An LTD may also dispense with the holding of a physical AGM. A company whose principal activity is that of a charity, an insurance undertaking or financial services is however prohibited from incorporating as an LTD.
Main Features of a DAC
A designated activity company or a DAC closely resembles an LTD but has a number of notable differences. Firstly as its name suggests, it will be more suitable to those companies who wish to confine their activities to those designated in their constitution or not permitted to an LTD such as joint ventures, financial services and charities. Secondly, it must hold a physical AGM and its constitutional documentation includes a memorandum and articles of association. In this regard the DAC closely resembles the existing private company limited by shares.
Differences between an LTD and a DAC in Table format
Below is a table of the differences between an LTD and a DAC
|New LTD Company Model||Designated Activity Company|
|It may have just one director (but it must have a separate secretary if it has only one director).||It must have a least two directors.|
|It can have between 1 and 149 members.||It can have between 1 and 149 members.|
|It does not need to hold an AGM.||It does need to hold an AGM where it has 2 or more members|
|It has a one-document constitution which replaces the need for a memorandum and articles of association.||It has a constitution document which includes a memorandum and articles of association.|
|It will not have an objects clause because it has full unlimited capacity to carry on any legal business, subject to any restrictions in other legislation.||It has a memorandum in its constitution which states the objects for which the company is incorporated.|
|It can claim eligibility for audit exemption (and dormant company audit exemption).||It can claim eligibility for audit exemption and dormant company audit exemption.|
|It has limited liability and has a share capital.||It has limited liability and has a share capital or is a private company limited by guarantee with a share capital|
|It can pass majority written resolutions (special and ordinary).||It can pass majority written resolutions unless constitution states otherwise.|
|Name must end in “Limited” or “Teoranta”||Name must end in “Designated Activity Company” or “Cuideachta Ghníomhaíochta Ainmnithe” unless qualified for an exemption.|
How to choose between an LTD or a DAC
For the majority of existing private companies, directors will need to decide whether to convert to an LTD or a DAC. Below is a list of queries to which if answered ‘yes’ will mean that you should convert your company to a DAC.
- Does the existing private limited company perform a designated activity (i.e. is it a management company or a special purpose vehicle?)
- Is the existing private limited company governed by a shareholders agreement?
- Does the existing private limited company have banking covenants restricting its activities?
- have members holding more than 25% of the ordinary share capital served notice on the company requiring conversion to a DAC?
- Is the existing private limited company in a joint venture arrangement?
- Is there a requirement for an objects clause?
- Does the existing private Limited company have listed debt, securities or shares?
- Is the company a licensed bank, a charity or an insurance undertaking?
For further information and advice in relation to “Conversion of existing companies to an LTD”, please contact Deirdre Farrell, partner, Amorys Solicitors email@example.com, telephone 01 213 5940 or your usual contact at Amorys.