Updated April 2017
The Summary Approval Procedure (“SAP”) is one of the new significant features of the Companies Act 2014 (the “Act”). The SAP (found in Part 4 of the Act) implements the recommendations contained in the First Report of the Company Law Review Group that a streamlined validation procedure, for the carrying out of certain transactions, be introduced, with minor variations depending on the transactions. It replaces the procedures contained in sections 60(2) to 60(11) and section 256 of the Companies Act 1963 and section 34 of the Companies Act 1990. The Act came into force on 1 June 2015.
While the following paragraphs summarise key features of the SAP, they do not constitute legal advice and, accordingly, are not to substitute for a detailed analysis of the relevant provisions of the Act.
Section 201 of the Act provides that the SAP will allow certain transactions, which would otherwise be restricted and generally require High Court sanction in order to be approved by the shareholders of a company, to be carried out once the approved procedure is followed.
The SAP itself is taken, in substance, from sections 60(2) to (11) of the Companies Act 1963 and section 34 of the Companies Act 1990, as inserted by section 78 of the Company Law Enforcement Act 2001. The SAP is comprised of a special resolution and a declaration by the directors in a preceding meeting. Provision is made for the passing of the resolution by a written resolution, as was previously the case. Such transactions (referred to in the Act as “restricted activities”) will include the following:
- financial assistance for acquisition of shares,
- loans to directors and persons connected to them,
- reduction of share capital,
- variation of capital on reorganisations,
- domestic mergers of certain Irish companies,
- members’ voluntary windings-up, and
- treatment of pre-acquisition profits or losses.
In respect of options (3) to (5) above, a company may elect to use the court approval process. The procedures at 4 and 5 are new. For the transactions outlined at 1, 2, 6 and 7, the SAP must be utilised.
Who can avail of the SAP?
The SAP can be availed of by private companies limited by shares, designated activity companies, and companies limited by guarantee. It should be noted, however, that a private limited company which is a subsidiary of a public limited company, cannot avail of the procedure for the purpose of the acquisition of shares in its parent public limited company, other than in accordance with regulations made by the Minister for Jobs, Enterprise and Innovation (and none have been made to date).
Public limited companies can only use the SAP for the following matters:
- To effect a members’ voluntary winding up,
- In relation to treatment of pre-acquisition profits, and
- For the making of loans or quasi-loans to directors or connected persons, (or for the doing of certain other things referred to in section 239 of the Act).
The procedure
The exact procedure will be dependent on the particular transaction. However, there are key steps that will apply to a SAP, including the following:
- The members will be required to pass a special resolution (and in the case of mergers, a unanimous resolution) to approve and provide the directors with the authority to carry out the restricted activity. The resolution must be passed not more than 12 months prior to the commencement of the activity.
- The directors of the company will then be required to deliver a declaration containing the information relating to the restricted activity to the Companies Registration Office (“CRO”) not later than 21 days after the activity commences. If such information is not delivered within the prescribed period, the activity will be invalid, but there is a procedure whereby the Court may, where there has been a failure to so deliver the declaration, declare that the carrying on of the restricted activity concerned shall be valid, if the Court is satisfied that it would be just and equitable to do so.
Declaration of directors – general requirements
The declaration should be signed by a majority of the directors. In companies where there is an even number of directors, in excess of one half of the directors must make the declaration.
The declaration should be made at a meeting of the directors, which has been held not earlier than 30 days before the passing of the special resolution.
If the special resolution of the members of the company validating the transaction is passed by the holders of 90% or less in nominal value of the voting shares, then the guarantee or security cannot be given before the expiry of 30 days after the special resolution has passed.
A copy of this declaration must be delivered to the CRO not later than 21 days after the date of the activity. However as noted above, the High Court can validate an out-of-time filing where it is just and equitable for them to do so. A copy of the special resolution must also be delivered to the CRO within 15 days of the date on which the special resolution was passed.
Three new forms have been prepared by the CRO in respect of directors’ declarations in sections 203, 204 and 205 of the Act. The use of these forms for the declarations is not, however, compulsory. It has been indicated by the CRO that these are administrative forms, which were prepared in order to assist the staff of the CRO in processing directors’ declarations, and also to assist directors in making such declarations. Assuming that a director’s declaration, which is not made using one of these new CRO forms, contains the information required under the Act, it is unlikely that the declaration would be rejected by the CRO.
Declaration in Counterpart
Section 202 of the Act neither expressly permits nor prohibits the use of counterparts by directors making a declaration under the SAP. In the absence of an explicit provision on this, and in light of the previous market practice of non-acceptance of the use of counterparts under the financial assistance “whitewash/validation” procedures contained in section 60 of the (now repealed) Companies Acts 1963-2013, clarity was sought on this point from the Business Law Committee.
Having considered the framework under which SAP declarations are now made, the view of the Business Law Committee, which is supported by the opinion of eminent Senior Counsel, is that section 202 (read in conjunction with section 161(6) of the Act) allows for the SAP declaration to be made using counterparts. It is noted that nothing in section 202 requires directors to be present at a physical meeting when making the declaration, only that it be made at a directors’ “meeting”, which the Act allows to take place by various electronic means. Accordingly, it follows that, when directors are in different locations, they may conference in to a board meeting and may make a declaration simultaneously at the meeting, whilst not being physically present at the same place. To demonstrate that the declaration was made at the same time, it is recommended that directors should note the time and the date on the declaration beside their signature, e.g. 4 August 2017, 5.05pm.
Furthermore, as the SAP declaration is “made” and not sworn, there is no requirement for signatures to be provided in the presence of a single notary/commissioner/solicitor, thus invalidating a rationale for refusing to accept counterparts under the relevant procedures set out in the Companies Act, 1963.
Form of the declaration for particular restricted activities
In relation to particular restricted activities, the Act prescribes certain matters that must be addressed in the declaration. When the transaction relates to financial assistance validation, the directors are required, under section 203 of the Act, to expand on the matters that are to be addressed in the declaration, so as to include the following:
a) the circumstances in which the transaction or arrangement is to be entered into,
b) the nature of the transaction or arrangement,
c) the person or persons to or for whom the transaction or arrangement is to be made,
d) the purpose for which the company is entering into the transaction or arrangement,
e) the nature of the benefit that will accrue to the company directly or indirectly from entering into the transaction or arrangement, and
f) that the declarants have made a full inquiry into the affairs of the company and that they have formed the opinion that the company, having entered into the transaction or arrangement, will be able to pay or discharge its debts and other liabilities in full as they fall due during the period of 12 months after the date of the relevant act.
Each declaration, irrespective of the restricted activity to which it relates, involves some form of similar forward-looking opinion from the directors to that set out at (f) above.
Section 204 provides that, where the restricted activity is a reduction in company capital referred to in section 85(1), or a variation of company capital on reorganisation referred to in section 91(1), the declaration will state the information listed in paragraphs (a) to (g) of section 204 of the Act, and will also include, among other things, a declaration that the directors making the declaration are not on notice of any material, extraordinary, future liability that the company will incur within the next 12 months and that company will be in a position to pay its debts as they fall due during the next 12 months after the transaction.
In the event that the restricted activity concerned is to wind up a solvent company in a members’ voluntary winding up or is a merger, the declaration must, in accordance with section 207 of the Act, also state the total amount of the ongoing company’s assets and liabilities as at the latest practicable date before the date of making of the declaration and in any event at a date not more than 3 months before the date of that making.
Declarations relating to the treatment of pre-acquisition profits and losses will also need to address the amount of profits and losses that will be subject to the alternative treatment, and the total amount of the company’s assets and liabilities as stated in its last statutory or interim financial statements at a date not more than 3 months before the making of the declaration.
The SAP does not require an independent accountant’s report in all cases. In relation to reductions of company capital, variations of company capital, treatment of pre-acquisition profits, and voluntary winding-ups, it will also be necessary for a report to be prepared by an independent person confirming that the directors’ declaration as to solvency is not unreasonable. The ‘not unreasonable’ standard appears to be a lesser standard than the ‘reasonable’ standard previously set out in other legislation.
Directors’ liability
Under section 210 of the Act, if a director makes a declaration that the company will be able to discharge its debts and other liabilities in full within the 12-month period following the transaction or arrangement, without having reasonable grounds for doing so, the Courts, on application by various parties, may find the director to be personally liable without limitation of liability for all debts or other liabilities of the company.
In addition, if the company is subsequently wound up in the 12 months after the date of the making of the declaration, and its debts were not discharged or provided for in full within that period, a presumption arises that the director made the declaration without reasonable grounds for the opinion provided.
Cancellation of the special resolution
As mentioned above, if the special resolution is passed by members of the company holding 90% or less in nominal value of the voting shares, the guarantee or security cannot be given before the expiry of 30 days after the special resolution has been passed.
It is open to the holders of not less than 10% in nominal value of the issued share capital to apply to the court within 30 days after the date on which the special resolution was passed to have the resolution cancelled. A person who voted in respect of the special resolution initially is not entitled to make such an application.
Conclusion
While the SAP will result in relevant transactions being carried out in a more efficient and cost-friendly manner for companies, the applicable provisions are detailed, and it will be necessary that caution is exercised in following the procedure in order for transactions not to be subsequently declared invalid, and to ensure that the directors do not incur personal responsibility for company debts or liabilities, whether under section 210 of the Act, or otherwise.