The conversion option affects all companies – Companies Act 2014

The Companies Act 2014 is due to come into force by Ministerial order on 1st June 2015. This may give rise to significant changes for Irish companies and will certainly put questions in the minds of directors as to what they should do.

Conversion and re-registration

Under the 2014 Act, every private company limited by shares will have to decide if it wishes to become a new form of private company (confusingly described as the LTD company even though it differs in a number of ways from existing private limited companies under the Companies Acts 1963 to 2013). Alternatively, it may prefer to become a designated activity company – which will be identified by the letters DAC. Companies will be deemed to be making significant constitutional changes, something that could give rise to a potential event of default under many facility letters and loan agreements.

An existing private company will have three options:

1. Within 18 months following commencement of the Act, it can “opt in” to the new regime and become a new form LTD; or

2. Within 15 months following commencement, it can “opt out” and become a DAC – designated activity company; or

3. If it does nothing, at the end of 18 months it will be deemed to convert to a LTD.

Until an existing private limited company (limited by shares) converts to a LTD or elects to become a DAC, it will operate as a DAC. The rules governing a DAC are similar to those currently governing existing companies limited by shares under the Companies Acts 1963 to 2013 which will give companies time to familiarise themselves with the changes before converting.

Failing to act is likely to have a number of drawbacks and may well result in a company having provisions in its constitution that do not suit the particular business. The company that does nothing and by default is deemed to become a new form LTD will be deemed to have adopted a standard statutory form of constitution in place of its memorandum and articles of association.

LTD

• The new form LTD will have a one document constitution and will no longer have a separate memorandum and articles of association.

• It cannot have an objects clause in its constitutional document because LTDs are deemed to have full unlimited contractual capacity – the doctrine of ultra vires will no longer apply to the LTD.

• The LTD may have just one director. Working with a post-conversion LTD will simplify the enquiries into a company’s memorandum and articles and its capacity that often precede commercial transactions.

DAC

Unlike the LTD, a DAC – or designated activity company – retains objects and powers that are set out in its memorandum and articles of association, as currently applies to the normal limited company. A DAC may be used where the promoters wish to limit the company’s activities to a specific purpose. However, for a DAC the issue of ultra vires only applies to directors. Directors may breach their duties if they commit an ultra vires act on behalf of the company. Third parties and lenders may ignore the lack of capacity even if they know about it.

Certain types of private companies limited by shares cannot become LTDs and must re-register as DACs. These are:

• Companies which are credit institutions and insurance undertakings;

• Companies which have issued debt securities that are listed on a stock exchange;

• Companies which are required by notice or resolution of their members to become DACs; or

• Companies that are ordered by the High Court to become DACs.

Please contact Gordon Judge (gordon.judge@gordonjudge.ie) or Eoin Dennehy (eoin.dennehy@gordonjudge.ie) if you have any queries.

Other articles related to the Companies Act 2014:

Companies Act 2014 – new procedures for registering charges

Directors’ loans to companies from 1st June 2015 – Companies Act 2014

Please also see the Companies Registration Office website.