The Gazette 1985

GAZETTE

SEPTEMBER 1985

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. 8 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. 9 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. 10 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. n 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. 12 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

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. 6 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. 7 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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