‘ODCE Answers Queries’
for Inclusion in ‘In-Practice Ireland’
The content of this article is for information purposes only. Accordingly, nothing
herein should be construed as a representation by, or on behalf of, the Director of
Corporate Enforcement as to his understanding or interpretation of any of the
provisions of the Companies Acts 1963-2001 or as to the interpretation of any
law. Neither the author, nor the Director of Corporate Enforcement, accepts any
responsibility howsoever arising from any errors, inaccuracies or omissions in
this article. In circumstances where auditors are unclear or in any doubt as to
their obligations, independent professional legal advice should be sought. The
Director reserves the right to take action which may or may not be in accordance
with the content of this article.
I am the auditor of a company registered outside Ireland but which operates a
branch in Ireland. Am I required to report to ODCE any indictable offences in
the branch or the company?
This subject is dealt with in Section 8 of the ODCE/APB guidance1. Under the
Companies Acts, the term ‘company’ is defined as ‘a company formed and
registered under this Act, or an existing company’. Therefore, the reporting obligation
as set out in S194(5) of the Companies Act, 1990 does not extend to companies
formed outside the State, even where they may be registered as having an
established place of business within the State under the Companies Acts or where
they operate through a branch. Readers should refer to the guidance for further
detail (Section 8 – ‘Reportable Persons’ refers).
I completed the audit of a client company for the year ended December 2001 in
March 2002 (i.e. in March 2002 I signed the audit report). In June 2002, I
discovered a suspected indictable offence while doing some management
consultancy work for the company. I decided to resign as auditor in August
2002. Do I have a reporting obligation under S194(5) in these circumstances?
Section 194(5) imposes a reporting obligation on auditors in respect of suspected
indictable offences coming to auditors’ attention ‘in the course of, and by virtue of,
their carrying out an audit of the accounts of a company’. Clearly therefore, where
the suspected offence has been detected during the course of non-audit work (in this
case management consulting), no reporting obligation arises at that time. The
The guidance referred to in this article is ODCE Decision Notice D/2002/2 ‘The Duty of Auditors to Report to the Director of
Corporate Enforcement’. Copies of the guidance are available from the ODCE and can also be downloaded from the ODCE
website (www.odce.ie/publications/decision.asp). Similar guidance has been published by the Auditing Practices Board (APB)
in the form of an Audit Bulletin.
1
reporting obligation would ordinarily arise when the auditor comes into possession of
the information suggesting the commission of an indictable offence as part of the
undertaking of the audit. However, in the circumstances outlined above, the auditor
has resigned prior to engaging in any further audit work. The question arises
therefore as to whether the act of resignation as auditor qualifies as being ‘in the
course of, and by virtue of, their carrying out an audit of the accounts of a company’.
In this particular set of circumstances, it seems reasonable to take the view that it
does not and that, accordingly, a reporting obligation does not arise.
However, it is important to note that, under S185 of the Companies Act, 1990, an
auditor who resigns is required to furnish the company with a written notice to the
effect that:

there are no circumstances connected with the resignation that the auditor
considers should be brought to the notice of the members or creditors, or;

where there are such circumstances, a statement of the circumstances.
Within 14 days of service of the above notice on the company, the auditor is also
required to send a copy to the Registrar of Companies. Moreover, where there are
circumstances that, in the auditor’s opinion, should be brought to the notice of the
members or creditors, a copy of the notification must be sent to every person who is
entitled to receive a copy of the financial statements and auditor’s report within 14
days of the notice to the company.
As it is difficult to envisage a situation where an auditor, having reasonable grounds
for believing that an indictable offence has been committed and having decided to
resign as auditor rather than report the matter, could form the opinion that the
suspected commission of the indictable offence does not constitute circumstances
that should be brought to the attention of the members or creditors of the company,
one would expect to see reference to the suspected offence in the auditor’s notice of
resignation under S185, which becomes a matter of public record once filed with the
Registrar.
Under these circumstances, auditors should also have regard to the provisions of
SAS 120, and in particular SAS 120.13, which states that where auditors become
aware of a suspected instance of non-compliance with law or regulations which does
not give rise to a statutory duty to report to an appropriate authority, they should
consider whether the matter is one that ought to be reported to a proper authority in
the public interest. Section 15 of the ODCE/APB guidance elaborates on this topic.
I have clients (a husband and wife) who are the directors and sole
shareholders of two companies (Company A and Company B). They have
signed a contract as directors of Company A giving to Company B:


the sole right to appoint all of the directors of Company A, and;
authority to manage all of the affairs of company A.
My understanding is that, on the basis of the foregoing, they have formed a
‘group’ under the Group Accounts Regulations (which state that ‘an
undertaking shall be deemed to be a subsidiary of another if one company has
the right to exercise a dominant influence over another company by virtue of a
control contract’. My clients propose to provide a loan from one company to
the other and wish to know whether this is permissible under the Companies
Acts. Would your answer be any different if they sold one share each in
Company A to Company B and therefore met the definition of a group in the
Companies Act, 1963?
Before addressing the particular circumstances as set out above, it is worth
examining the general prohibition on loans between group companies. S31 of the
Companies Act, 1990 introduced a general prohibition on companies granting loans
to, and entering into certain other transactions2 with, directors (or persons connected
with directors). S35 of the Companies Act, 1990, as originally enacted, provided that
the general prohibition as set out in S31 did not prohibit a company from making a
loan to its holding company i.e. in cases where this type of transaction would
otherwise be prohibited by S31 by virtue of the companies being connected through
a director or person connected with a director.
However, while S35 allowed subsidiaries to make loans to their holding companies, it
did not permit the making of loans by holding companies to their subsidiaries or by
subsidiaries to fellow subsidiaries i.e. sister companies.
This anomaly was addressed by S79 of the Company Law Enforcement Act, 2001,
which, by amending S35, now also exempts loans by holding companies to their
subsidiaries and by subsidiaries to their sister companies from the general
prohibition set down in S31.
Turning to the particular circumstances set out in the question, it is obvious that,
before seeking to rely on the exemptions provided for in the amended S35, it is of
vital importance that the ‘group’ as constituted actually qualifies as a group under the
Companies Acts. To that end, the terms ‘subsidiary’ and ‘holding company’ are
defined in S155 of the Companies Act, 1963. Under S155(1), a company is a
subsidiary of another company if, but only if, the holding company:
2
e.g. providing guarantees or security in connection with loans to directors or persons connected with directors.

is a member of the subsidiary and controls the composition of its board of
directors, or;

holds more than half, in nominal value, of the equity share capital of the
subsidiary, or;

holds more than half, in nominal value, of those shares carrying voting rights
(other than voting rights which arise in specified circumstances only).
Similarly, under S155(4), a company shall be deemed to be another’s holding
company if, but only if, the other is its subsidiary.
While, as referred to earlier, the term company generally applies only to companies
formed under the Companies Acts, S155(5) provides that, for the purposes of that
section, a company is ‘any body corporate’. Accordingly, companies formed outside
the State can also be holding companies and subsidiaries of companies formed
under the Irish Companies Acts.
If we now look at the specifics of this example, it is clear that the companies in
question are not a group under S155. The second and third bullets above are not
applicable in that neither company has a majority shareholding in the other. In the
case of the first bullet, while Company B controls the composition of the Board of
Company A, it is not a member of Company A and therefore a group does not exist.
As a consequence, the exemption provided for under S35 cannot be availed of in
this instance. It is worth noting however that, notwithstanding the fact that a group
does not exist, there are other exceptions to the general prohibition that it may be
possible to avail of e.g. S32 of the Companies Act, 1990 which allows the granting of
a loan to a director, or person connected with a director, provided that the aggregate
of any such loans does not exceed 10% of the relevant assets of the lending
company.
The question refers to the Group Accounts Regulations (GAR)3. It is important to
appreciate the distinction between S155 CA, 1963 and the provisions of the GAR. As
referred to earlier, S155 defines the terms ‘subsidiary’ and ‘holding company’ and,
accordingly, in order to qualify as a group under the Companies Acts, it is necessary
to satisfy those criteria. The GAR on the other hand set out the circumstances under
which group accounts must be prepared. In that context, under the GAR the
circumstances under which group accounts must be prepared extend beyond a
group as constituted under S1554. Therefore, under the circumstances as quoted in
the question - i.e. where a control contract is in existence - group accounts must be
3
4
European Communities (Companies: Group Accounts) Regulations, 1992
See also FRS 2: Accounting for Subsidiary Undertakings
prepared notwithstanding the fact that the company structure in place does not
qualify as a group under S155.
With regard to the latter part of the question, on the assumption that Company A and
Company B are both €2 companies (with one share in each being held by the
husband and wife respectively), in the event that your clients were to sell the two
shares in Company A to Company B, Company A would become a wholly owned
subsidiary of Company B. Under these circumstances, the structure would qualify as
a group under S155 CA, 1963 and, accordingly, inter-company loans would be
permissible under S35 CA, 1990 despite the two companies being connected
through a director or person connected with a director5.
What is ‘reckless trading’ and is it a reportable offence under S194(5) of the
Companies Act, 1990?
Reckless trading is a civil breach of the Companies Acts rather than a criminal
breach. As such, it does not give rise to a reporting obligation on auditors under
S194(5) of the Companies Act, 1990. The term ‘reckless trading’ is not specifically
defined in the Companies Acts. Instead, it is provided that:

if in the course of the winding up of a company or in the course of an
examinership, it appears that any person was, while an officer of the
company, knowingly a party to the carrying on of any business of the
company in a reckless manner, the High Court, on the application of the
receiver, examiner, liquidator creditor or contributory of the company may
declare that the person shall be personally liable, without limit, for all or any
part of the debts and liabilities of the company6.
The Acts do not define exhaustively the circumstances in which an officer of a
company shall be deemed to have been knowingly a party to the carrying on of the
business of the company in a reckless manner. This is a question to be determined
on the facts of each particular case. Having said that, two particular instances of
what would amount to reckless trading are described in the Act i.e. where an officer
of a company:

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was a party to the carrying on of the company’s business and, having regard
to the general knowledge, skill and experience that may reasonably be
expected of a person in his position, he ought to have known that his actions
or those of the company would cause loss to the creditors of the company, or;
The potential taxation implications of such a share transfer, which are outside the scope of this article, would obviously require
consideration in advance of any such transfer.
6
Section 297A Companies Act, 1990

was a party to the contracting of a debt by the company while not honestly
believing on reasonable grounds that the company would be able to pay the
debt when it fell due for payment as well as all its other debts (taking into
account any contingent and prospective liabilities).
The civil consequences of fraudulent trading are similar to those attaching to
reckless trading in that personal liability can be imposed on directors by the Courts.
However, fraudulent trading is also an indictable offence and is, accordingly, a
reportable offence. Fraudulent trading is defined as ‘knowingly...carrying on of the
business of a company with intent to defraud creditors of the company or creditors of
any other person or for any fraudulent purpose’.7
Ian Drennan FCCA is Corporate Compliance Manager with the Office of the Director of
Corporate Enforcement (ODCE).
7
Section 297 Companies Act, 1990