IAS 24 Related Party Transactions

jay lazy

I have a general question about a company failing to disclose a relalated party transaction.

Company A was paid a significant amount by Company B(both of which share the same director, who personally benefitted by this transaction)

As company A has recently filed their accouts for the period in which this transaction took place, has a Company Law been broken? anything under Section 205e 1990 Acts?

I know from memory that there is a threshold point of turnover that must be declared, I'm guestimating that Comany B's turnover who paid the amount is around €600k and the amount paid is around €40K.

I know this may seem very small but as Company B is now ceased trading and cannot pay it's creditors to the tune of €100k would this transaction be significant? Especially as the shared director personally gained from it? Thsi amount was paid only 6 months before they ceased trading and they knew they were in trouble months before they paid it?

thanks in advance

JL

Little Miss Cutie

My understanding from my own experience is that related party transactions must be disclosed in the accounts unless group accounts are prepared. I have prepared accounts for companys smaller than you desribed and always included related parties. As far I know they are in breach of accounting standards - they be prepared under GAAP and I am not sure of those standards, so they may not be in breach in that case.
Not sure if that helped hopefully it did.

dbran

Hi

It is worth noting that companys are not related parties just because they have directors in common. An element of control is required of both companies for it to be qualified as a related part transaction. It is not just because the director benefits from it.

However if it is a true related party transaction then it should be disclosed if it is material. Failure to disclose means the company's accounts dont show a true and fair view. This in turn means the company is not keeping a proper set of books and is in breach of company legislation.

Also there may be an illegal directors loan which needs to be disclosed. If either company's have an audit the auditor may be required to report this to the ODCE.


Regards

dbran

jay lazy

Many thanks for your replies.

The director in question has complete control over over both companies.

I've also been told that it may not be a related party transaction if it was done at "arm's length" but as the payment made to by Company A to Company B was for fictitious services rendered I'd imagine that it woud certainly not qualify as being carried out at arm's length

JL

dbran

Hi

It being at arms length is irrelevant. It is still a related party transaction which should be disclosed.

However I stand corrected on my previous post because if it is a trade debt in the course of business under commercial terms it is not subject to s31 CA 1990 re an illegal director's loan. However in order for it to be so it would have to be under commercial terms which from what you are saying is not the case.


Regards


dbran

Newaglish

dbran wrote: »

Failure to disclose means the company's accounts dont show a true and fair view. This in turn means the company is not keeping a proper set of books and is in breach of company legislation.

If the accounts do not show a true and fair view, this does not necessarily mean that the Company does not keep proper books and records.

Keeping propery books and records simply requires the Company to maintain journals, ledgers, banking records etc. and to have the ability to produce a P&L and Balance Sheet (there is a specific definition for this).

Failure to disclose a related party transaction is not a breach of company legislation, it is an accounting error.

Obviously, there may be other implications with regard to the appropriateness of the transaction and whether or not there are Revenue implications.

To answer the OP's question, a transaction six months prior to the date the Company went into liquidation is unlikely to be seen as fraudulent preference. However, the liquidator will be required to report to the ODCE and will likely include this transaction in their report, though this depends on the nature and purpose of said transaction.

dbran

Hi Newaglish

Failure to disclose a related party transaction is not a breach of company legislation, it is an accounting error.

This is incorrect.

Under CA 1986 all accounts must show a true and fair view. True and fair view, although not defined in legislation is widely interpreted as following Generally Accepted Accounting Practice (GAAP). FRS8 and the disclosures required for related party transactions are part of GAAP. Therefor failure to disclose them means that the accounts do not show a true and fair view and consequently it is in fact a breach of Company Legislation.

To answer the OP's question, a transaction six months prior to the date the Company went into liquidation is unlikely to be seen as fraudulent preference.

I would have thought that was when most of the fraudulent preference transactions are likely to occur. If you are going to pay off a creditor in preference to another such as a bank loan, a director loan etc. you are going to be more inclined to do so when you are in the last days of trading before liquidation.


Kind Regards


dbran

The CCAinsider

FRS 8 and IAS 24 have similar requirements, but the liquidator is obliged to look at all transactions in the previous 2 years, especially if they are put on notice of a possible fraudulent preference. ODCE can be put on notice as well as the report by the liquidator to ODCE will be more closely looked at if they are put on notice. A liquidator is entitled to demand repayment of a fradulent preference payment.

Non disclosure of a related party transaction is difficult to prosecute (remember certain loans to directors in Anglo!) because you are relying on company law pointing to an accounting standard and while there is a requirement to comply with IFRS, the chances are that they are using UK GAAP and this is not specified in law (the section was never commenced). Irish companies have a choice of IFRS or UK GAAP but most small companies use UK GAAP. The other issue is proving "materiality", FRS 8 and IAS 24 both only require disclosure of "material" related party transactions. Mr Fitzpatrick (Anglo again) may be the first person to challange in court what this means but to my knowledge it has not been decided in court before.

Justintime

The CCAinsider wrote: »

FRS 8 and IAS 24 have similar requirements, but the liquidator is obliged to look at all transactions in the previous 2 years, especially if they are put on notice of a possible fraudulent preference. ODCE can be put on notice as well as the report by the liquidator to ODCE will be more closely looked at if they are put on notice. A liquidator is entitled to demand repayment of a fradulent preference payment.

Non disclosure of a related party transaction is difficult to prosecute (remember certain loans to directors in Anglo!) because you are relying on company law pointing to an accounting standard and while there is a requirement to comply with IFRS, the chances are that they are using UK GAAP and this is not specified in law (the section was never commenced). Irish companies have a choice of IFRS or UK GAAP but most small companies use UK GAAP. The other issue is proving "materiality", FRS 8 and IAS 24 both only require disclosure of "material" related party transactions. Mr Fitzpatrick (Anglo again) may be the first person to challange in court what this means but to my knowledge it has not been decided in court before.

The beayty of FRS 8/IAS 24 of course is that materiality has to be considered from both parties perspective and I look forward to seeing him argue that over €100 million in loans were not material from his perspective. Let's hope the B*****D has a long time to mull things over from behind bars in Mountjoy!!