The Gazette 1985

GAZETTE

SEPTEMBER 1985

Persons Responsible

S.40 compels directors to be more conscious of the net

worth of a company, and at a level well above the level of

solvency. Assets may have to be valued more frequently.

Difficulties arise in relation to the practical application

of section 40. It is an onerous task to police the system and

secure compliance with the section. An amendment

originally introduced in the Seanad goes some way

towards meeting these difficulties. The auditors must now

state in their reports whether, in their opinion, there exists

at the balance sheet date, a financial situation which

would require the convening of an Extraordinary General

Meeting under section 40.

There is little doubt that

accountants operating in their role as corporate auditors

have come under increased pressure as a result of the

amendment. This is but part of a wider concern with the

need to promote more effective methods of monitoring

the financial performance of companies.

In the event of a serious loss of capital there is an

obligation on the directors to convene an extraordinary

general meeting within a stated period from "the earliest

date on which the fact is known to a director". Having

regard to this wording could one director shelve responsi-

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bility to another and effectively bring about a situation

where they would not discharge their responsibilities?

Who is to determine what the earliest day would be if the

directors decide to leave it in abeyance until it suited them

to convene the meeting? Some directors decline to take an

active part in the management of a company and function

only intermittently at the board meetings they choose to

attend.

Is the less discerning director exonerated from

responsibility under section 40? Is section 40 to be

construed as referring only to actual knowledge to the

exclusion of constructive knowledge? It seems that this is

the sense in which the section is to be interpreted. During

the Dáil Debates it was suggested that there should be

added to the words "the earliest day on which that fact is

known" the words "or ought to have been known" so as

to incorporate the concept of constructive notice.

This

proposal failed to evince a positive response. Allied to this

are the observations of Kenny J. in

Bank of Ireland

Finance Ltd.

-v-

Rockfield Ltd.

where he said that

constructive notice should not be extended to commercial

transactions; that the type of operation envisaged by

section 60 of the Companies Act, 1963 was commercial,

and thus notice as used in section 60(14) means actual

notice. While this statement of principle is not directly in

point, section 40 of the 1983 Act is susceptible to the same

process of reasoning. There seems little justification,

however, in this discrimination in favour of inefficient

directors. In reality and in the absence of a total collapse

of the Company, directors will depend on the financial

information produced by management to enable them to

form a judgment as to whether or not a state of affairs

exists as envisaged under the section. In small private

companies, the most likely "earliest day" will be the day

upon which draft annual accounts are produced.

The omission of any mention of the company secretary

in section 40 merits attention. The secretary has become

an officer of the company with important duties and

responsibilities compared with his former servile

position. His enhanced stature is recognised by the

Companies Acts and in modern case law.

Panorama

Developments (Guildford) Ltd. -v- Fidelis Furnishing

Fabrics Ltd.

characterised a complete change of attitude

on the judges' part towards the office of company

secretary. Lord Denning said that times have changed.

The company secretary is no longer a minor clerk. He is

now an important officer with extensive responsibilities

commensurate with his improved status.

Under section

6 of the Companies (Amendment) Act, 1983 which

imposes restrictions on the commencement of business by

a public limited company, responsibility is placed on the

secretary as well as on a director. A director or the

secretary can bring about the commission of an offence

under section 6. The omission of the secretary from

responsibility under section 40 is in recognition no doubt,

that the matters addressed by the section relate, not so

much to proper administration of the company's affairs

as to fundamental matters of management and financial

soundness.

A final point arises in relation to the number of days

within which action must be taken. S.40 says "an

extraordinary general meeting of the company for a date

not later than 56 days from that day". From what day? Is

it from the earliest day on which the serious loss of capital

is known to a director or from the last of the 28 days in

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