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Summary Approval Procedure
Companies Act 2014
The Companies Act 2014, which commenced on 1 June 2015, facilitates transactions that would otherwise have been prohibited by way of a Summary Approval Procedure.
One of the most significant features introduced by the Companies Act 2014 (“the Act”) is the Summary Approval Procedure (“SAP”), which provides a standardised process similar to the ‘whitewash’ procedure previously used by companies. The new streamlined procedure authorises certain types of transactions to be carried out that would otherwise be prohibited. It combines several validation procedures from previous Acts, into a single process enabling seven specific activities which, until the introduction of the Act in June 2015, were restricted, prohibited or required Court approval.
The SAP can be availed of by private companies limited by shares, designated activity companies, and companies limited by guarantee. Public limited companies can only use the SAP for a members’ voluntary winding up, treatment of pre-acquisition profits and for the making of loans to directors or connected persons (a private company that is a subsidiary of a public limited company is not permitted to avail of the SAP).
The seven restricted activities provided for under Chapter 7 of Part 4 of the Act on Corporate Governance are:
1. Financial assistance by the company for the acquisition its own shares
Under section 82 of the Act, it is unlawful for a company to give any financial assistance for the purchase of shares in the company or in the company’s holding company (if applicable). This includes the provision of direct or indirect assistance by means of a loan, or guarantee, by the provision of security or otherwise. However, the section provides for the giving of financial assistance by application of the SAP.
2. Loans to directors and connected persons
Under section 239 of the Act, the making of a loan or a quasi-loan, a credit transaction, the provision of a guarantee or security to a director of the company or of its holding company, or to a person connected with such a director is prohibited, unless if it falls within one of the exemptions. However, section 242 of the Act mitigates the restrictions imposed in section 239 of the Act by allowing for the making of loans by application of the SAP.
3. Distribution of the pre-acquisition profits in the holding company
The distribution of certain accumulated pre-acquisition profits (as set out in section 118 of the Act) is prohibited by section 118 of the Act otherwise than in accordance with that section, which provides for the onward distribution by a holding company of pre-acquisition profits by applying the SAP.
4. A reduction in company capital
The reduction of company capital is prohibited under section 84 of the Act otherwise than in accordance with that section. The section provides for a limited liability company to reduce its capital without the need for court approval by applying the SAP. There are three circumstances in which this can occur:
• Extinguishing or reducing the liability on any shares in respect of unpaid capital;
• Cancelling paid-up company capital that is unrepresented by available assets; or
• Paying off any paid-up company capital in excess of the wants of the company.
5. A variation of company capital on re-organisations
Under section 91 of the Act, the transfer or disposal of assets, undertakings or liabilities to another body corporate in return for shares or securities being allotted to the members of the company (or to its holding company) on re-organisisation, is restricted unless certain criteria are met. In addition, section 91 provides that any such transaction shall not be undertaken unless the variation of company capital is approved via the SAP or by the Courts.
6. Domestic mergers
Chapter 3 of Part 9 of the Act places restrictions on the process by which mergers can occur. However, for the first time under Irish law, it is possible to effect a merger between two Irish private companies, as section 464 of the Act permits a merger to take place under the SAP, providing a time- and cost-efficient method for implementation. Merger via the SAP differs from the other SAP procedures in that it requires a unanimous resolution of the members of both merging companies, as opposed to a special resolution, which requires 75 per cent agreement.
7. A ‘members’ voluntary winding up’
The commencement of a members’ voluntary winding up is a restricted activity (as defined in section 200 of the Act). However, section 579 of the Act makes provision for a members’ liquidation via the SAP. The process involves a declaration of solvency, which must be made using a Form E1. In addition, a statement must also be made by an independent person that the declaration of solvency is not unreasonable.
What is involved?
The procedure itself is set out in sections 202 and 203, and is as follows:
Special resolution of members (i.e. 75 per cent of members’ consent) is required for the aforementioned restricted activities (except for mergers, which require a unanimous resolution of the members of all merging companies).
The resolution must be passed within 12 months of the commencement of the carrying out of the restricted activity by the company.
Once passed, the company has 15 days to deliver a copy of the special resolution to the Registrar of Companies.
A declaration by the directors as to the company’s solvency is required for each restricted activity; the specific details to be included in a declaration for each of the restricted activities are set out in sections 203 to 207 of the Act. The specific declaration must be made by all or a majority of the directors at a directors’ meeting not more than 30 days before the members’ resolution is passed authorising the activity. It must be filed at the CRO within 21 days of the commencement of the restricted activity.
The making of a declaration without having reasonable grounds can have serious consequences, as section 210 of the Act provides civil sanctions to creditors, members, liquidators and the Director of Corporate Enforcement. In such situations, the High Court may declare that the directors be held personally liable for all the debts of the company.
An independent person’s report is required in the case of a capital reduction, variation of capital, treatment of pre-acquisition profits and commencement of a winding-up. It is required to state that the declaration of the directors is “not unreasonable”.
The independent person must be a “person who is qualified at the time of the report to be appointed, or continue to be, statutory auditor of the company”.
Moratorium on Restricted Activity
There is a moratorium of 30 days from the date of passing of the special resolution before carrying on the restricted activity unless more than 90 per cent of members consent.
While the process itself can be quite detailed it will be a welcome means of restructuring a group or company balance sheet, bringing it more in line with the reality of the business and assisting companies to progress more efficiently.