Company Law Tips for Charitable Companies
In this newsletter, company law expert and author Dr Tom Courtney of Arthur Cox gives ten useful company law tips for those involved as a CEO, a director or a member of companies limited by guarantee.
1. Mind your members!
Members have rights – primarily, in the case of full members of companies, the right to receive notice of and vote at general meetings. Meetings held and resolutions passed can be invalidated where the members were not sent notice of the meeting. So who are the members? The Companies Acts provide that the members of a company are the original subscribers and persons whose names have been entered in the company’s register of members. If your name is not in the register, you are not in law a member. Avoid disputes and keep your register of members in a safe place... and up to date.
2. Distinguishing directors from members
Sometimes the roles and functions of directors and members can be confused. Members are either the original subscribers who formed the company or people who have been admitted as members and whose names have been entered in the register of members. Under most articles of association, the members will delegate the management of the company to the directors and have no role in the day-to-day running of the company. Members do have an important role, however, and will usually appoint the directors and only members can pass ordinary and special resolutions, for example, to change the memorandum and articles of association. Directors manage the company’s business and may delegate day-to-day operations to a chief executive officer and other employees. It is important that the roles and functions of directors and members are distinguished – especially where some of the directors are also members!
3. One strike and you are out!
Every company is obliged by law to file an annual return (Form B1) every year within 28 days of its Annual Return Date (ARD). The people in the Companies Registration Office (CRO) are good people but they take a dim view of companies that do not file their annual return. The CRO will not hesitate to strike a company that does not file its annual return off the register with dire consequences: the company ceases to exist, its property vests in the Minister for Finance and its members and directors will have personal liability for the company’s debts and wrongs. It’s the ultimate company law hell which can be avoided if you religiously file your annual return on time.
4. Remember the object of the exercise!
All companies are required to have an objects clause. Companies are permitted only to do what is authorised by their objects clause. Any activity outside of the objects clause is said to be ultra vires (beyond its powers) and void. This has an even greater significance in the case of charitable companies as their objects must be cleared by the Revenue Commissioners and to act outside of them can result in the loss of charitable tax exempt status.
5. Who’s who on the board?
The appointment and removal of directors and secretaries must be notified to the CRO within 14 days of the event. Although the failure to register an appointment or a removal does invalidate that appointment or removal, besides being a technical offence under the Companies Acts, it can result in other forms filed in the CRO signed by a director whose appointment was not notified being rejected. It can also be the cause of great irritation to people who have ceased to be directors for the public record not to be updated.
6. Revenue giveth and Revenue may taketh away!
Tax exempt charitable status... one of the great advantages of being a charity. This status is granted by the Revenue Commissioners on a number of conditions, one of which is invariably that any changes to the company’s memorandum of association (and often its articles too) must have Revenue’s prior approval. Like the people in the CRO, the people in the charities section in Nenagh are also good people who try to deal quickly and efficiently with proposed changes. However, do remember to seek their approval to changes and the best course of action is to try to have their prior approval even before a special resolution is proposed to change the memorandum or articles as otherwise any change does not take effect until approval is obtained.
7. Seven is the magic number...
Companies limited by guarantee without a share capital are public companies and so must have at least seven members. If there are only seven members of a guarantee company and one resigns or even dies and is not replaced by a new member within six months, the bad news that a member has resigned (or died) will be compounded by the remaining six members being made personally liable for the company’s debts if the company continues to carry on business!
8. It might work in practice but does it work in theory?
It is important that the way things happen in practice is in fact authorised by the company’s memorandum and articles of association. The notice for meetings, the quorum for a valid meeting, the number of directors, how directors are elected, the powers of directors etc must all conform to the requirements in the articles of association. Where anomalies are discovered, they must be addressed and either practice changed to conform with the articles of association or the articles of association changed to conform with practice. Operating a company’s procedures without regard to its articles of association is like running blindfolded through a field of grazing cows... you might be lucky and get to the other side but there is every chance of stepping in a cowpat!
9. Killing the golden goose!
Where the directors decide not to levy a membership subscription, there may be a temptation to remove the ability to impose a membership subscription from the articles of association. Pause for thought! If a future board decides it wishes to reintroduce a subscription and wants to change the articles of association to allow this, that change will only bind members who agree to be bound even where passed by a special resolution.
10. Don’t pay the ferryman (...or the directors or members!)
The chances are that the memorandum of association of a guarantee company with charitable tax exempt status will prohibit the payment of remuneration to directors and the making of any distribution to members. This is why CEOs who are in the employment of the company should not ordinarily be appointed directors of charitable companies.
© Arthur Cox, 2010
