The receipt of a Revenue Audit notification is a stressful event for most taxpayers. However, with careful preparation the worry and cost can be minimised. Our tax partner John Byrne sets out seven steps to consider in preparing for a Revenue Audit – Crowe Ireland
The Companies Act 2014 introduced Summary Approval Procedures (SAP) for certain activities of a company, that are otherwise and normally restricted by the Act. Under the Act, a company is able to use this streamlined procedure to authorise several types of transactions that were previously fully prohibited or were subject to more onerous requirements.
The activities that can be subject to a Summary Approval Procedures are as follows:
1. The providing of financial assistance by a company for the purchase of its own shares (as prohibited by Section 82 of the Act)
The provision of financial assistance for the purchase of own shares, under previous Acts, required what used to be called the “financial whitewash” procedures and involved the directors making statutory declarations and other disclosures. The declarations made under the SAP are not statutory declarations and therefore do not require swearing with a solicitor or a Commissioner of Oaths.
In practice, the ability of a company to fund the acquisition of another company often depends on obtaining some of its funding from the cash reserves or other disposable assets of the subsidiary, or else securing new debt financing on the assets of the new-acquired subsidiary. This constitutes financial assistance and is prohibited under Section 82 of the Act. However, the SAP allows this to be authorised and therefore streamlines the ability of a company to fund acquisitions. When taken in the context of the treatment of pre-acquisition profits (see point 4 below), this provision can have a very beneficial impact on the ability of companies to acquire other businesses.
2. The provision of Directors’ loans not otherwise exempted (as prohibited by Section 239 of the Act)
The provision of directors loans under Section 239 of the Act can also be approved under Section 203 and therefore, director loans that would not otherwise be allowed under the exemptions in Sections 240 to 245, can be allowed. In our firm, this procedure has been used extensively but does need to be planned for. Loans cannot be made to directors and then retrospectively “approved” under SAP. It should also be borne in mind that when the directors make a declaration under the SAP, they need to have due regard to the ability of the company to discharge its debts for a period of 12 months after the act of making the loan. The SAP does not allow loans to be made in situations where such loans could be construed as reckless or compromising the ability of the company to meet its obligations.
3. The reduction in company share capital or a variation in capital on a reorganisation (Sections 84 and 91 of the Act)
The use of the SAP in situations where a company wishes to reduce its share capital has been extensive. We have seen the Procedure applied in situations where a company was heavily capitalised on incorporation and has made losses and the parent company wishes to withdraw its capital, and particularly in situations where large share premium accounts arose on schemes of reorganisation and the directors wish to translate the capital into distributable reserves, to provide flexibility to the business going forward. These provisions have proved to be very useful to all types of companies.
4. The treatment of pre-acquisition profits and losses in a manner otherwise prohibited (Section 118(1) of the Act)
Section 118 of the Act states that profit and losses in a subsidiary company prior to the date that company became a subsidiary, have to be treated as pre-acquisition profits or losses in the parent company. The effect of this provision is that, if a company acquires another company which has accumulated profits and cash, and that company declares a dividend to the new parent, that the parent could not treat that dividend as part of its own distributable reserves. Adopting the SAP can permit the treatment of such dividends as distributable in the parent company. This is useful in situations where a group is being reorganised and the accumulated reserves of the subsidiary are required in the parent to achieve share redemption or other form of capital restructure.
5. The domestic mergers of certain Irish companies
Chapter 3 of Part 9 of the Act deals with mergers as a form of reorganisation and the creation of a new company by way of merging two or more other companies. The Act allows for this to be achieved via the SAP or by Court Order. Needless to say, adopting the SAP in respect of a merger is a less utilised in practice than many other procedures. Mergers are usually reserved for large corporate restructures and therefore are less common.
6. A members’ voluntary winding-up of a company
Save in situations where a company is to be wound up due to the fact that it was a fixed duration company and that period has expired or in the case where some other event as set out in the company constitution has occurred that necessitates the wind up, a company entering into a Solvent Liquidation must now utilise the SAP. The use of the SAP is not fundamentally different, when compared to applications for winding up under the previous Companies Acts.
How we can help
While the Summary Approval Procedure provisions in the Act have resulted in a streamlining of certain procedures as well as permitting activities otherwise not authorised, and are highly effective, there are several critical aspects regarding timing, type of declarations used, use of an expert opinion where appropriate, and filing of documents. These aspects need to be planned properly in advance of a transaction in order to ensure proper procedures are followed and the advantages of using the Summary Approval Procedure are fully harnessed.
Contact a member of our Audit team to assist you with any queries relating to these Summary Approval Procedures.