Dáil Éireann debate -
Wednesday, 31 May 1933

Vol. 47 No. 17

In Committee on Finance. - Trade Loans (Guarantee) (Amendment) Bill, 1933.—Fourth and Fifth Stages.

Question proposed: "That the Bill be received for final consideration."—(Minister for Industry and Commerce.)

Mr. MacDermot

I move:—

In page 2, before Section 3 (c), to insert a new paragraph as follows:—

No loan shall be so guaranteed or made of an amount exceeding the actual net value, at the time such loan is guaranteed or made, of the borrower's investment in the business financed.

The object of course is to produce a safeguard to help in securing that in future this scheme shall work less expensively for the State than it has done in the past, and to prevent the money or the credit of the State being used in financing men of straw, who themselves have not got an adequate interest in the business affected. When we were in Committee on this Bill I put the question to the Minister for Finance (column 1256, volume 47, No. 4 of the Official Debates): "When a loan or guarantee is made, is it normally from the point of view that the State expects not to lose money even if the business proves unprofitable?" The Minister for Industry and Commerce replied "yes." I submit that if the object is to see that even if the business is not a success the State should be reasonably free from loss, it is a very moderate requirement indeed that the amount of the loan shall not exceed the value of the borrower's investment in the business. If a man or a concern has only £10,000 in the business, whether in the form of working capital or in the form of fixed assets, plant and so forth, or divided between the two, it is not reasonable that the State should provide more than another £10,000.

There seems to have been a certain amount of confusion in the mind of the Minister for Industry and Commerce with regard to this matter when we were discussing a somewhat similar amendment on the Committee Stage. He kept referring to the relation of working capital to fixed capital, and he objected to any provision of the kind I am now seeking to introduce on the ground that cases would occur where working capital might be very small in relation to fixed capital, and that one could safely guarantee a larger amount than might appear on the surface. That observation is really irrelevant, because when we speak of the borrower's investment in the business of course fixed capital is included just as much as working capital. I maintain that if the State is to put more money into a concern than the borrower is putting into it, it should do so definitely in the form of an investment and not as a loan at all. You go beyond the bounds of a reasonable loan if you go beyond that limit. The Minister for Industry and Commerce told us that legislation might be introduced making it possible for the State to make such investments. In column 1276 of the same volume he says: "Not merely may we require this Act enabling us to provide long-term loan facilities, but we may also have to provide machinery by which industrialists of another kind may get capital invested in their undertakings—I mean put into the business, left in the business and remunerated in proportion to the profits. We are examining the possibility of meeting that particular deficiency in our financial organisation. It may involve legislation, or it may not." Whether that legislation is introduced or is not introduced I submit that it is clear that if a larger amount of money is to be provided for any individual or concern than that individual or concern is investing in the business, between fixed capital and working capital, it is not proper that it should be by means of a loan. If the State is to do that at all—and personally I should very much look askance at the idea of the State's doing it at all, though it might help out with legislation in such a way as would encourage private individuals to do it—it should certainly do it in a way which holds out a hope of some return to the State commensurate with the risk that is being undertaken. In other words, the State should not merely get the interest on its money that it would expect to get anyhow from a perfectly safe loan, but, if it is going to take a risk like that, it should get a share of profits in the case of the business succeeding, because in the case of the business failing it is perfectly obvious that, under those conditions making a loan of that size, the State will lose a large part of its money in the future as it has done in the past. I wish to appeal earnestly to the Minister to accept this amendment.

Mr. Lemass

The main idea behind this amendment was discussed at some length on another amendment moved by the same Deputy on the Committee Stage of the Bill. I indicated then why I thought that no such limitation as the Deputy proposes should be inserted in the measure. It has been the practice heretofore, since the change of Government, to administer the Act as if there were a limitation similar to that which the Deputy suggests. In other words, we have, as a general rule, refused to guarantee a loan to be raised by any company unless the total assets of the undertaking were twice, or more than twice, the amount of the loan to be guaranteed. I have said that has been the general rule, but there may have been cases where the amount put in by the other party was somewhat in excess or somewhat less than 50 per cent.

I have no hesitation in saying to the Dáil that if this Bill goes through it will be administered by me in the same manner as previous legislation, that is we will require as a general rule, that the amount of the loan to be guaranteed shall not exceed 50 per cent. of the total amount to be put into a new business by an applicant, or the total amount of the assets of the existing business owned by an applicant. At the same time, I think that the Deputy who proposes that the limitation should be made statutory has not attempted to examine the vast administrative problems that would be involved. I will give merely the example of an application by the owner of an existing business who desires to extend that business, and for the purpose of the extension desires to have a loan guaranteed by the State. Before we could give a guarantee, if this amendment were accepted, it would be necessary to have a complete valuation of the assets of the existing concern even if we were reasonably satisfied that these assets were in excess of the amount of the loan. The fact that this amendment was in the Bill would require that we would have to carry out a valuation of the fixed assets, book debts, stock in trade, perhaps, even the goodwill of the undertaking. Only when we have made that valuation and probably secured agreement upon the valuation, which would be most unlikely, would any Minister be in a position to guarantee the loan. At any rate, it is clear whatever assets of the undertaking would be regarded as valid would have to be valued, and we would have to be satisfied on the report of the valuer that these assets did exist against the amount of the loan to be guaranteed. In the case of a new concern that difficulty does not exist against the amount of the ing the money to put up from his own resources a similar amount, but in the case of an existing concern the difficulty would be almost insuperable. There would be considerable delay and expense so that existing concerns would not avail of this at all. The Deputy said the reason for his amendment was to secure that the expenses of the State would be less in the future than in the past. The amendment would secure nothing of the kind. If he examines the cases in which a State guarantee had to be made good he will find that his principle was adhered to, with one or two exceptions, and there were other safeguards such as that which required that the loan guaranteed should only be applied to the erection of fixed assets.

I told the Deputy during the Committee Stage that no amendment he could devise would protect the State against bad administration. The losses incurred in the past were, in my opinion, due to bad administration, and I stated that on the Committee Stage. I do not want to discuss it again now. Each of us will hold his own point of view on that matter no matter what is said. The fact is, even if the Deputy's amendment had been insertion in the previous Act, the whole amount lost would have been lost. The insertion of a provision of this kind would not prevent it. The Deputy suggested there was some confusion in my mind because I suggested that in every industry the amount invested in fixed assets to the total capital varies. I think if he reads again what I said he will see that I was pointing out that the security which exists for the loan varies in each case. Heretofore, loans were secured upon all the assets of the undertaking, but the substantial thing we had to see before the loan was granted was the fixed assets—plant, machinery, buildings, land and other property which could be easily realised. I am not saying that book debts have not proved to be assets in certain cases, but as a rule they are not. What I mean is, that when we have got to the stage of default upon loan repayment, and that the State has taken over control of the assets to be realised for the purpose of diminishing its losses very little can, as a rule, be realised on book debts. The thing upon which the State can seize are the fixed assets.

There is a trade loan under examination, at the moment, in my Department, in which the amount of capital to be invested in fixed assets is six times the amount of working capital. In that case there would be assets representing six-sevenths of the capital available there. The security behind a loan of six-sevenths of the total amount to be invested is just as good as it would be in the case where the fixed assets only represented 50 per cent. of the assets and only 50 per cent. was secured by loan. That is an important consideration I think. I say that whether or not the value of the fixed assets exceeded 50 per cent. of the total liability the general rule of only giving 50 per cent. of the amount would remain in operation; except in very exceptional cases where the industry was of a kind that would be regarded as definitely experimental, and those coming in wanted to have the evidence of the State backing, and the security as to the future that the State backing provides; or where exceptional circumstances existed and the whole development of the industry or its establishment in this country at all depended upon the State being able to guarantee an amount more than 50 per cent. of the total to be invested. These are the considerations which, in my opinion, make it most inadvisable to put a limit of this kind into the Bill. As I said, the Bill will be administered in the majority of cases as though that limitation was there. On the other hand, its inclusion in the Bill might prevent a very useful development which could not, or would not, be undertaken because of the absence of power in the State to guarantee a larger amount than the Deputy is prepared to permit. Under these circumstances, and because of the inadvisability of imposing a limitation of this kind without quite clearly seeing how this is to operate, this amendment must be resisted.

Mr. MacDermot

If the Minister makes a loan, or a guarantee, for an experimental undertaking may we take it that he will only do so if those applying are expert persons who have had experience?

Mr. Lemass

I only use the term experimental in a relative sense. There are industries which have not existed in this country heretofore, but which have been successfully operated in other countries, and we will have to offer certain inducements to get a firm to come in here to undertake these industries.

Mr. MacDermot

We may take it that persons who are inexperienced in business, but who may be of an enterprising turn of mind, will not be encouraged?

Mr. Lemass

Quite definitely.

Mr. MacDermot

In regard to what the Minister said about the valuation I hope he does not mean that when a guarantee or loan is made to persons that there is no very serious attempt made to value the assets of the business. I am astonished that he regards that as a serious obstacle. I should have thought that the collection of sufficient evidence to satisfy him as to what was in the business had to be available in every case before a grant was made.

Mr. Lemass

Quite, but one does not require the detailed examination which a statutory obligation would involve. One would satisfy himself on examination of the accounts of a factory that the assets in fact did exist to the full value or nearly to the full value.

Mr. MacDermot

The Minister could satisfy himself by an examination of the balance sheet to ascertain the fixed assets. If he is afraid that some rigid form of valuation will be forced upon him by this amendment he could do something that would save him from that. I would ask him to reconsider his decision of not accepting this amendment. Even if he is not threatened with any abuse, if this particular proviso would not have saved us from loss, our loss, at any rate, would be greater if the loans were larger in the future.

Mr. Lemass

They might not.

Mr. MacDermot

Well, probably.

Mr. Lemass

I did not even say "probably."

Mr. MacDermot

So far as the future is concerned, regulations in general have been more or less loosened up. Working capital could not have been provided before and, perhaps, there is a more active policy on foot altogether. I can, of course, see that this Minister for Industry and Commerce and subsequent Minister for Industry and Commerce may have great pressure put on them by political supporters to launch enterprises or to put people into undertakings that they have a notion may not succeed.

Mr. Lemass

The applicant must get past the Advisory Committee first.

Mr. MacDermot

I do not want to go into all the arguments I used on an earlier stage, but I pointed out that the reason the Advisory Committee has not done so well is that they did not have any proper principle to guide them. Deputy McGilligan admitted that these were loans that none of us would make out of our own pockets, however rich we were. I submit that that rather takes the gilt off the Minister's Advisory Committee, whereas if one had some principle like this laid down the prospects of successful operation would be considerably greater.

An Ceann Comhairle

Amendment withdrawn?

Mr. MacDermot

No.

Amendment put and declared lost.

Main question put and agreed to.

Mr. Lemass

Would there be any objection to taking the Final Stage now?

Mr. Costello

I think not.

Question—"That the Bill do now pass"—put and agreed to.

Message to be sent to the Seanad accordingly.