Interim Review of ODCE Activity by Goal

Interim Review of Activity in 2004

January 2005

Interim Review of ODCE Activity in 2004 by Goal

Goal 1 – Encouraging Improved Compliance with Company Law Duties

In 2004, the Director of Corporate Enforcement and his staff continued with their work of encouraging directors and others to comply with their obligations under the Companies Acts 1963-2003. This work was undertaken at two main levels:

• by developing presentations, articles and guidance materials for company directors and others in support of their compliance efforts, and

• by promulgating the results of enforcement actions successfully undertaken by the Office and others against persons in default of their company law duties.

Directors’ Compliance Statements

The substantive piece of compliance-related work undertaken by the Director and his staff in 2004 was the preparation of Guidance on the new legal requirement that certain directors prepare statements of their company’s compliance with company law, tax law and other ‘relevant obligations’. This was initially published as a Consultation Paper and Draft Guidance in July 2004.

Following the examination of comments from 36 business, professional and individual interests, the Director prepared and sent a submission to Mr Michael Ahern, T.D., the Minister for Trade and Commerce, in November 2004 dealing with the commencement of the compliance statements provision and the possible exemption of certain companies from the obligation.

In December 2004, the Director published Revised Guidance on the Directors’ Compliance Statements to which the Consultative Committee of Accountancy Bodies – Ireland, IBEC, the Institute of Directors in Ireland, the Irish Financial Services Regulatory Authority and the Revenue Commissioners had all actively contributed.

Advocacy Work

Throughout 2004, some 100 presentations were given by the Director and his staff to business, professional, voluntary and State organisations on the ODCE’s remit and impact, the duties of company directors and others, the sanctions being imposed by the Courts on those defaulting on their duties and aspects of company law where significant non-compliance was apparent.

Articles on the following topical issues were also developed and published:

• Directors’ Duties;
• Property Management Companies;
• the use by Company Directors of company assets for personal purposes and
• Directors’ Compliance Statements.

The article on directors’ duties was published in the business press, while that on management companies was included in the national and professional media. The other two articles were contained in a special bulletin issued in collaboration with the Companies Registration Office to the registered offices of over 100,000 companies.

The Director’s Press Statements dealt with two primary themes, namely Directors’ Compliance Statements and novel aspects of the Office’s enforcement work in 2004.

Office staff continued to deal with a large volume of queries from the general public, and some 8,000 copies of ODCE publications were distributed in response.

Goal 2 – Uncovering Suspected Breaches of Company Law Duties

Volume of Detected Non-Compliance

Overall, the number of cases of possible corporate misconduct on hands within the ODCE in 2004 increased by over 12% from 2,104 to 2,363. Over 1,950 of these were new cases, and about 80% of these came from auditors reporting suspected indictable offences under the Companies Acts. The balance came mainly from members of the public who were concerned principally about the management of company affairs. The Office maintained in 2004 its performance of concluding two out of every three cases reported to it. Appendix 1 contains further details on these figures.

Character of Reported Non-Compliance

Failing to file annual returns on time continued to dominate the reported defaults. As this suspected offence is primarily a matter for enforcement by the Registrar of Companies, the ODCE referred most cases to him for attention. However, the ODCE continues to take account of such defaults if there are other indicated offences warranting attention vis-à-vis the company in question.

The use by directors and connected persons of company assets for personal purposes continues to be a major area of concern. In 2004, some 490 cases were brought to attention, a substantial increase on the 271 recorded in 2003. In many of these cases, the relevant directors have informed the ODCE that the loans in question have now been repaid. In all, some €100 million worth of company assets have been returned to the companies with consequent benefits for company stakeholders in reduced credit risk. In a number of individual cases, these loans were for substantial sums or represented a large part of the value of the company and were very substantially in excess of the permitted limits. The investigation of many of these cases has failed to disclose sufficient evidence that the relevant defaulters knew or had reasonable cause to believe that the company would, by entering into the transactions, be contravening the legislative prohibitions – an essential element of the criminal offence. However, this impediment to successful prosecutions should diminish in the future having regard to the extent to which the ODCE has been to the forefront in raising corporate awareness of these prohibitions.

A feature of 2004 was the receipt of 19 reports relating to the late notification of the acquisition or disposal of interests in a company’s shares or debentures and other defaults relating to the acquisition of company shares. In some of these cases, the law provides that a default disables the rights attaching to those interests. As a result, a number of parties found it necessary to seek High Court relief from the disability. In two cases, the Director indicated to the relevant parties that he had no objection to the High Court granting the required relief having been satisfied that the default was of little consequence.

In all, about 20 offence types were brought to attention in 2004. In a number of cases involving persons disadvantaged by non-compliance with company law obligations, the Office successfully intervened to secure the correction of the default which had prompted the initial complaint or report. If legal action was not initiated, the ODCE often issued a formal warning of legal action in the event of any detected recurrence of the default. The Director regards this type of approach as a satisfactory means of securing future compliance with company law obligations in some less serious cases.

Company Investigations

The ODCE was instrumental in arranging in July 2004 for the publication of the High Court Inspectors’ Report into National Irish Bank Ltd. and National Irish Bank Financial Services Ltd. The Director has been considering the Report in consultation with his legal advisers and expects to determine formally what action he will take in about three months’ time.

Formal company investigations continue to be used by the Director on an occasional basis to help identify instances of corporate misconduct. In 2004, his Office initiated two investigations, one of which was concluded.

Information-Sharing

During 2004, the Director of Corporate Enforcement signed two Memoranda of Understanding on the sharing of confidential regulatory information, the first with the Irish Stock Exchange in February and the second with the Revenue Commissioners in December. While these Memoranda formalise the assistance which currently exists with these authorities, the Director hopes that it will also deepen mutual co-operation over time and widen the incidence of detected non-compliance in the public interest.

Goal 3 – Prosecuting Detected Breaches of the Companies Acts

Outcome of Enforcement Proceedings

In line with the pattern since its establishment, the ODCE achieved a high success rate in 2004 with its enforcement actions. In only one case were any substantive charges dismissed.

Overall, the ODCE secured 67 convictions in 2004, a 56% increase on the 43 recorded in 2003. The Office’s enforcement activity also resulted inter alia in the imposition of three disqualifications, two restrictions and one High Court order for compliance. Appendix 2 contains further details on this enforcement activity.

Enforcement Initiatives

New enforcement developments in 2004 included:

• the first fraudulent trading conviction of a company director by the Office;
• the first restriction of a company director in respect of the operation of an unliquidated insolvent company;
• the first disqualification and restriction of directors whose insolvent company had been struck off the Register of Companies for failing to file annual returns;
• the first conviction and disqualification of a restricted company director for failing to comply with the legal conditions pertaining to his restriction.

Nature of Sanctions Imposed

For the first time in relation to ODCE prosecutions, the Courts indicated a willingness to contemplate custodial sentences. In March, two suspended sentences of six months were imposed relating to convictions for fraudulent trading and failing to keep proper books of account. Later in the year, a further suspended sentence of three months was imposed in relation to a conviction for acting as an auditor while unqualified.

Substantial penalties were also imposed in a number of individual cases. In one case, the District Court imposed fines and costs totalling over €6,500 on an individual.

Character of Concluded Cases

In 2004, the character of prosecuted offences primarily fell into two principal categories:

• offences relating to the inadequacy of company documentation. For instance, 14 cases were taken against companies and directors for failing to keep proper books of account in the company. This is a failure of the most fundamental kind which jeopardises the interests of all company stakeholders;

• offences dealing with the propriety of persons discharging certain responsible positions. Here, persons acted as company directors and auditors when the law precluded their doing so, because the prohibited behaviour gives rise to an unacceptable risk for genuine business.

Cases on Hands

In addition to these concluded cases, the ODCE continued to investigate the circumstances of default in a number of the 350 other cases on hands at year-end. The Office’s ongoing investigative work involved inter alia the acquisition from the District Court of four search warrants and the renewal of existing warrants on a further five occasions. Two bankers’ books orders were also obtained and executed.

At year-end, judgement is awaited in a disqualification case which was heard in 2004. A further nine prosecution cases and six disqualification application cases have also been initiated, and these should be heard during 2005. A number of other enforcement cases are expected to be initiated in early 2005.

Goal 4 – Sanctioning Improper Conduct relating to Insolvent Companies

Companies in Insolvent Liquidation

The liquidator of a company in insolvent liquidation is required by law to report to the Director on its demise and on the conduct of any person who was a director of the company during the 12 months preceding its liquidation. The liquidator must also proceed to apply to the High Court for the restriction of each of the directors, unless relieved of that obligation by the ODCE. In 2004, 624 initial liquidator reports were considered or received, and 529 were determined. Of these, the ODCE granted:

• ‘full relief’ in 67% of the liquidator reports determined (52% in 2003);
• ‘no relief’ in 18% of cases (36% in 2003);
• ‘relief at this time’ in 10% of cases (6% in 2003), and
• ‘partial relief’ or made other decisions in the remaining 5% of cases (6% in 2003).

The significant increase in the Office’s ‘full relief’ decisions and a similar reduction in the proportion of ‘no relief’ cases can mainly be attributed to more responsible conduct by the directors of recently insolvent companies and to a greater familiarity by liquidators and the ODCE with the standards being applied by the High Court in determining what constitutes honest and responsible behaviour by directors.

The Office also keeps under review ongoing liquidations, and further reports are submitted by the liquidators of these companies. In 2004, 636 of these reports were received.

Restricted Directors

In all, the Register of Restricted Persons, which is maintained by the Companies Registration Office, now lists 470 restricted directors at end-2004 (200 at end-2003). The vast majority of restrictions are a consequence of the new reporting regime.

Unliquidated Insolvent Companies

In 2004, the ODCE focused greater attention on the phenomenon of unliquidated insolvent companies. The areas of activity included:

• companies with outstanding registered judgements which have ceased trading. As already mentioned, the Director secured a five year restriction from the High Court against a director of one such company in 2004. Correspondence has issued to the directors of a number of other similar companies, and in the absence of satisfactory replies, restriction proceedings will also be brought against all of their directors;

• companies which are the subject of complaint to the Office. Following the examination of documents and information seized under search warrant in one case, the Director has recently launched disqualification proceedings against two directors of the company in question;

• companies which have been struck off the Register of Companies for failing to file annual returns. As indicated earlier, the ODCE secured in 2004 the disqualification of one company director for two years and the restriction of a fellow director for five years. Proceedings in another five such cases were before the High Court at end-2004.

Liquidators

The ODCE has also been active in monitoring the compliance performance of liquidators. In 2004, the Office found it necessary to correspond formally with liquidators on 81 occasions (71 in 2003) drawing to their attention that they were in default with regard to their statutory reporting obligations to the Director. Court proceedings were initiated in 2004 against two liquidators resulting in High Court orders being made against both.

The Director also corresponded with liquidators on 52 occasions in 2004 in respect of their failure to notify his Office that restriction applications had been taken where no relief had been granted. Late in 2004, four liquidators were issued with formal warnings that legal proceedings would be initiated against them should they continue to be in default in taking the necessary restriction applications.

Further information on the throughput of liquidator reports and insolvency-related issues in 2004 is contained in Appendix 3.

Research on Phoenix Companies

At the request of the International Association of Insolvency Regulators of which the ODCE is a member, the Director and his staff completed an international research project into the phenomenon of phoenix companies in 2004. The research found inter alia that phoenix companies were particularly prevalent in the construction, transport, hospitality and clothing sectors and that many of the legal instruments that had been successfully deployed in other jurisdictions were available in Irish law. The Director remains anxious to detect any such activity in the State, so that he can act to minimise its disruptive impact on genuine businesses. A copy of the Report entitled ‘The Regulation of Phoenix Companies’ is available at

Goal 5 – Providing Quality Customer Services

Market Research Results

In early 2004, the Director of Corporate Enforcement obtained the results of an initial survey of the early impact of the Office undertaken in late 2003/early 2004 to assess the first two years of its work. The results of the TNS/mrbi research were generally positive for the organisation. The following attracted praiseworthy comment:

• the Office’s educational initiatives, including its Information Books;
• its consultations with professional interests;
• its accessibility in facilitating presentations and training seminars;
• the increased regulation of corporate insolvency matters;
• the combination of educational and enforcement activity which has helped to improve overall compliance levels.

During 2004, the Office sought to consolidate these strengths and to develop further its enforcement role in line with the feedback indicated in this research.

ODCE Website

The Office’s website at has continued to attract favourable comment for the quality and quantity of available company law information. In all, some 116,783 visits were made to the website in 2004, a 54% increase on the 75,597 figure achieved in 2003. The website was internally reviewed during 2004 with a view to improving its accessibility, particularly for persons with disabilities. Work has begun at year-end to implement a number of improvements to it.

Other Developments

The ODCE availed of a number of opportunities in 2004 to engage external expertise to assist it in undertaking its investigative and enforcement work in particular. The operation of the Office’s legal and accounting expert panels has been reviewed, and a streamlining of procedures is underway at year-end.

The effectiveness of the Office in 2004 was also enhanced by the implementation of an extended database to record and track its insolvency, investigation and enforcement cases.

Expenditure

Overall expenditure by the ODCE in 2004 amounted to €3.07 million, an 8% increase on the outturn of €2.84 million in 2003. With a large number of investigation and enforcement cases now on hands, a further increase in expenditure is anticipated in 2005.

Office of the Director of Corporate Enforcement

7 January 2005

Appendix 1

Throughput of Reports and Complaints of Possible Corporate Misconduct[1]

Total Cases in the Reporting Period

New Cases Received during the Reporting Period

of which Auditor and Auditing Body Reports

Cases Closed during the Reporting Period

Other Cases

Appendix 2

Throughput of Enforcement Proceedings relating to Suspected Breaches of the Companies Acts 1963–2003[2]

2 Restrictions

APPENDIX 3

Throughput of Liquidator Reports and Insolvency-Related Issues[4]

Total Reports in the Reporting Period

Further/Final Reports received in the Reporting Period