“Comply or Explain” – Directors’ Compliance Statements
Directors of certain types of companies are required to include a compliance statement in their Directors’ Report accompanying the company’s financial statements, acknowledging their responsibility for securing the company’s compliance with “relevant obligations” under the Companies Act 2014 (the “Act”) and confirming certain other matters.
What companies does it apply to?
- Public limited companies and large limited and guarantee companies. In the latter case, the company must have a balance sheet total for the year that exceeds €12.5m and turnover for the year exceeding €25m (in respect of the financial year of the company to which the directors’ report relates).
- No application to unlimited companies and non-UCITS investment companies.
- “Relevant Obligations” means certain obligations under the Act where a breach of same results in a significant penalty (i.e. Category 1 & 2 type offences) and various obligations under tax legislation
- In addition to including the compliance statement in the reports as referred to above, the directors must also confirm that the company has drawn up a compliance policy statement setting out the company’s policies regarding compliance by the company with its relevant obligations and has put in place appropriate structures to secure material compliance with those relevant obligations
- The compliance structures must be reviewed (for example, on an annual basis). If those measures are not taken the directors need to explain why not, in their statutory report (“comply or explain”)
- Failure to comply with these compliance statement requirements is a Category 3 offence attracting a term of imprisonment of up to 6 months or a fine of up to €5,000 (or both)
Examples of where such obligations are breached are (amongst others):
- offering shares to the public
- unlawfully acquiring own shares
- failure to keep adequate accounting records
- carrying on the business of the company with an intent to defraud creditors
- non-compliance with financial assistance provisions
- failure to make Companies Registration Office returns
- unlawful making of directors’ loans
- failure to provide requested books and records to the Director of Corporate Enforcement;
- serious “Market Abuse offences; and
- serious “Prospectus” offences
All obligations of a company under Irish tax law constitute relevant obligations, with such obligations not being limited to Category 1 and 2 offences.
In-scope companies will need to identify the relevant obligations applicable to the company and then formalise and document the appropriate arrangements and structures designed to secure material compliance with those obligations.
Compliance Policy Statement
The compliance policy statement tends to be a relatively concise document confirming the company’s commitment to complying with its obligations. It should set out the company’s policies respecting compliance with its relevant obligations. As a company policy, it should be disseminated throughout the company so that its employees are familiar with its content and that they understand that in discharging their functions in the company, they must always do so having regard to the company’s policies on compliance.
The compliance policy statement should be read in conjunction with the specific arrangements and structures that are in place (referred to below) in respect of the company. As previously mentioned, if the compliance measures are not taken, the directors must explain why not in their statutory report.
Having in place appropriate arrangements or structures etc.
The most onerous aspect of the directors’ compliance statement is the requirement to confirm that there are in place appropriate arrangements or structures that are, in the directors’ opinion, designed to secure material compliance with the company’s relevant obligations. In practice, these arrangements and structures may be expressed as a series of controls. This includes reliance on the advice of suitably qualified employees or advisers before proceeding with a course of action.
Actions for in-scope company to take
Affected companies should put in place formal arrangements and structures to allow their directors stand over, and be comfortable with, the compliance policy statement. Specific legal, accounting and tax advice may be required in ensuring compliance with the relevant laws, and on-going monitoring of a company’s relevant obligations will be necessary in the context of entering into transactions or taking other actions.
Considerable management time will be required to be invested in this process at the outset, particularly where no formal arrangements are already in place. Once the process is carried out properly the first time round, subsequent compliance statements will be far more streamlined.
What we can do
- Prepare a matrix document identifying the relevant obligations applicable to the company
- Work with you to identify and document the compliance arrangements or structures that your company has or is implementing, which will allow us to assist you with the preparation of a compliance policy statement
- Provide framework documentation which can be used by you to support the Directors’ Compliance Statement
- Having adopted a compliance policy, assist you in keeping those arrangements under review
 Section 225 of the Companies Act 2014