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Dáil Éireann debate -
Wednesday, 18 Jul 1934

Vol. 53 No. 13

Agricultural Co-operative Societies (Debentures) Bill, 1934—Second Stage.

I move: "That the Bill be now read a Second Time." Co-operative societies registered under the Industrial and Provident Societies Act of 1893 are debarred from issuing debentures unless such debentures are registered as bills of sale. The issue of debentures under the Bills of Sale Acts is generally looked upon as tantamount to insolvency or to approaching liquidation, and the credit of the co-operative societies is immediately affected whenever they attempt to issue debentures under the Bills of Sale Acts. Consequently, societies whose share capital is insufficient are obliged to borrow mainly from joint stock banks such additional capital as they may require. Where the additional funds are borrowed from the society's bankers the banks almost invariably require a joint and several letter of guarantee to be entered into by certain of the society's members. From the point of view of the co-operative society the joint and several form of guarantee is open to serious objection. It deters more or less wealthy individuals from becoming members lest they should be asked to become guarantors, and it places upon the shoulders of a comparatively small number of public-spirited men a burden which should be borne by the entire body of members. Generally speaking, the guarantors are members of the society's committee of management and remain in office for an indefinite time whether well or ill-qualified for the position.

When a society is compelled to borrow capital for objects which are designed to benefit its members as a whole, it is quite unreasonable that a few individuals should be called upon to guarantee its repayment. The additional funds are needed by the community forming the society, and the responsibility should be borne equitably by the whole community and spread over them in just proportion. As the law stands, there is no such power inherent in any society. That power is urgently needed and can be granted by means of this very brief and, it is believed, non-controversial measure. It will give to co-operative societies the power to create, by debentures, a security charging all their assets — their premises and plant, their book-debts, their stocks in trade and their uncalled share capital. As the law stands, such a debenture would have to be registered as a bill of sale, and such a step would result in a collapse of whatever credit that society might have hitherto enjoyed. The effect of such a contingency need not be stressed, for everybody knows that the bill of sale places an immovable estoppel on the credit of the concern which is obliged to give it.

It is not proposed that power to issue debentures should be granted to all societies, but only to those which may be approved by the Minister for Agriculture. It is anticipated that the provisions of the Bill will very much facilitate the trading and business of agricultural co-operative societies, and will be welcomed by bodies such as the Agricultural Credit Corporation and banks.

The object of Section 6 of the Bill is to give co-operative agricultural societies legal power to obtain advances from the Agricultural Credit Corporation and other bodies on the security of the society's uncalled share capital. It is necessary, as is done in Section 7, to make this provision retrospective, as certain loans have been already given by the Agricultural Credit Corporation to some co-operative agricultural societies on the understanding that the uncalled capital would be regarded as security for the repayment of these loans.

The law relating to co-operative societies requires radical revision in several respects and it is intended, as soon as practicable, to introduce a comprehensive measure dealing with the situation as a whole. The present measure is intended simply as a means of meeting, in the meantime, a particular requirement for which there is urgent need. Most members who are interested in co-operation know that for a number of years a Bill has been drafted in the Department of Agriculture dealing with the whole question of co-operation. This Bill, however, is merely introduced to deal with an immediate problem and it is hoped that it will get an easy passage. It is necessary, in order that a number of societies may raise funds, to give them the means of doing so by giving as a guarantee for repayment the uncalled share capital, instead of having to give debentures under the Bills of Sale Acts.

We are not going to oppose this Bill. The Minister, at the conclusion of his remarks, said the Bill is necessary to solve an immediate problem. He did not say what that immediate problem is. He said that as the law now stands co-operative societies only raise money by a bill of sale and, of course, that damages credit. The Minister has in the Bill the bodies to whom those debentures would be offered. Of course it is a case of offering debentures in all cases to Government institutions or departments.

Or the ordinary joint stock banks.

The Minister will be an abler man than the ordinary man if he can camouflage this S.O.S. on behalf of co-operative societies and pull wool across the eyes of the banks. If a co-operative society is in difficulties and the shares are not fully subscribed, to issue debentures while the share capital is not all called in, to issue them on the strength of the share capital, is very suspicious. It would suggest to a banker that the people who originally joined in the co-operative society were either not able or else unwilling to pay up the full share capital and, in order not to disclose that fact, they go to the banks. According to the Bill the following persons shall be authorised lenders for the purposes of the measure —Any Minister, head of a Department of State, the Commissioners of Public Works, the Agricultural Credit Corporation, the Industrial Credit Corporation, the Dairy Disposals Company, any corporate body lawfully carrying on banking business and any other corporate body approved of by the Minister, either generally or in respect of a particular transaction. I do not see how that will improve the position. I have no association with co-operative societies; I do not know the position and, therefore, I cannot say whether there is or there is not a problem in connection with getting money. The Minister said there is a problem and I accept his statement, but I do not know that this will relieve whatever problem exists.

I quite agree with the observation of the Minister that this practice of certain members of co-operative societies having to go security for a society led in the past to a lot of public-spirited people suffering great loss, which did irreparable damage to the co-operative movement. I wonder has the Agricultural Credit Corporation made advances to such societies that cannot be recovered now? My reading of this Bill is that those debentures can be issued; Departments of State can buy them up and any money due to the Agricultural Credit Corporation on the security of the unsubscribed capital can be collared. Those debentures or the money buying them can be collared by the Agricultural Credit Corporation or any other body to which the society may owe money. It might be a way of recovering a bad debt at, perhaps, the expense of the State—in other words, saving the faces of people who were entrusted with money and did not exercise ordinary prudence in advancing that money; saving their faces in a roundabout way by now bringing in the State and the taxpayer to recoup the losses that have accrued to those societies through the inefficiency of those in whose charge the moneys were placed.

At this stage of the Bill we cannot get to close quarters, but I have no doubt all these matters will come up on the Committee Stage. We are not going to oppose the Bill. We merely offer criticisms founded on suspicion. The law is that a co-operative society has nothing with which to raise the wind except a bill of sale and that is a bad financial test. There is a suspicion attaching to it and there is a loss of credit. I do not think that bad test will be altered by calling it a debenture instead of a bill of sale. It is, however, a sign that the society is not financially sound and what would happen in the case of a bill of sale, namely, loss of credit, will happen equally when debentures are issued. I offer those criticisms merely on suspicion.

There is another aspect of this Bill to which I would like to call the Minister's attention. I am not at all sure that the Government may not find that they are taking away with one hand what they are giving with the other. I see, according to Section 4, that an Agricultural Co-operative Society, which is authorised by its rules to borrow money, may at any time, with such consent of the Minister as is mentioned in the Act, and whether the issue of debentures is or is not authorised, or is not forbidden by the rules of the society, issue debentures to any authorised lender for the purpose of securing the repayment, with or without interest of any capital sum of money lent to such society, and so on. That would be looked upon as an extraordinary procedure for any company. I would like to ask the Minister what would be the effect on ordinary creditors of all credit corporations to find that debentures may at any moment be put in ahead of them and their assets seized, because that is what it amounts to. It is confiscation of the ordinary creditor's goods. Does the Minister think that is not going to have an effect on the credit of all agricultural co-operative societies? The position is that, at one fell swoop, an agricultural credit co-operative society may find its entire assets taken over by one of the bodies mentioned here in the Bill. I should like to suggest to the Minister that that is not doing as you would be done by in relation to the ordinary trade creditors and is not going to improve the position of co-operative societies as a whole. I should like to ask the Minister what portion of an agricultural co-operative society's debts is due to ordinary trade creditors and what effect this Bill is going to have on their outlook in giving present credit to those societies or giving them credit in the future?

The object of this Bill is simply to give authority to co-operative societies to issue debentures. As one who has been associated with a co-operative society for not so very long, I think that the worst thing that could happen co-operative societies is to issue debentures. With regard to the society with which I am concerned, if the money which they owed, or borrowed, rather, was in the nature of debentures, that society would not exist to-day because debentures can press for their money and sell out a society. Now, is not that a bad way? To my mind it is. I understand the position. I am sure that the principle of the Bill is to give capital to co-operative societies. It would be much better if the Agricultural Credit Corporation or some State institution took on the responsibility for that rather than issue debentures; that is, if co-operative societies need capital; and, as I say, the co-operative society that has a big overhead charge to be paid for money advanced is in a very precarious position and is not able to turn around and give to its customers the benefit that it ordinarily should.

I was connected with a society which owed a considerable amount of money to the bank and the bank would not advance any more. In my opinion, if the money they owed to the bank was in the shape of debentures they would probably close down the concern, but a new set of guarantors came into the breach, got some more capital advanced by the bank on Government representation, with the result that it is in a pretty fair and sound financial position at the present time. I take the view that unless the co-operative society is able to turn around and put its finances on a fair and reasonable standing and not be driven to the extremity of issuing debentures, it is not in the position in which it ought to be, and the fact that a society has to issue debentures means that it can only do that when it is in a very precarious position. For the life of me I cannot see how there would be any great response made to an appeal of that kind so far as co-operative societies are concerned, and I think that the functions which this Bill is supposed to perform could be performed in some better way than this, because I think it would be the duty of some Government institution, if co-operative societies need capital, to supply it to them rather than issue debentures.

There is one section here which gives power to issue debentures against uncalled capital. I simply cannot follow the principle at all that is underlying some sections of this Bill I think that, before a co-operative society issues debentures, they certainly would be much more entitled to call in the uncalled capital and if the society is driven to such a financial extremity as to be forced to issue debentures, then, as one who knows something about co-operative societies and their management even for the last couple of years, that society is in a very precarious position and the issue of debentures is not going to help them. If you want to help co-operative or creamery societies the principal thing is to have the State step in if money is not available from the joint stock banks or somewhere else. These debentures are not going to help them even in a small way.

I also wish to query the finance of this Bill. I do not understand its meaning at all. Is it in order to liquidate bad debts incurred by somebody that it is sought to raise debentures on the uncalled capital of an agricultural co-operative society? Some of those societies are 30 and 40 years old and some of the names of the original subscribers are those of men who are dead long ago. Numbers of them are worthless. The Minister, of course, by one remark he made, let the whole cat out of the bag—that these liabilities should be borne by the whole community. That is the meaning of the Bill. That is what is behind this Bill. Let us not go out of this House to-night with gas-masks over our heads. We are here undertaking a liability. Bad debts have been incurred as a result of the bad management, incompetence and blundering of societies, and it is sought to impose that liability on the community. I object to that.

God help the poor farmers.

I know more about the farmers than the Deputy does. We had enough about that last week. The idea of issuing debentures on the uncalled capital of an agricultural co-operative society and calling it finance and that this House is asked to give its imprimatur to it is an outrage. If the agricultural society is in a bad way there are different ways of coming to its aid, but not by imposing on the taxpayers— industrious men and competent men— the obligation to pay off bad debts incurred by men in a local area by issuing debentures on the uncalled capital of an agricultural society. This uncalled capital in many cases, we know, is not only worthless. Is there going to be any enquiry as to the worth of this uncalled capital, whether the capital can be realised or not?

Why not call it up?

Why not call it up, that is the test. If the Agricultural Credit Corporation is going to advance public money to these people will they examine as to the genuineness of the uncalled capital, whether it is worth anything, and give that security to the general taxpayer that might be expected? Will they have that power, or will they splash out the money on the security of the uncalled capital, perhaps in the case of a person who is dead for over 20 years and from whom the money cannot be recovered? To my mind, this is the greatest piece of hogwash that has ever been introduced here.

I do hope to impress upon the Minister the highly dangerous principle involved in Section 4 of this Bill, and for this reason that the committees of management of rural co-operative societies of the kind referred to here are not familiar at all with the principle underlying debenture issue. If the manager of a co-operative society approaches the committee and tells them that the financial position of the society is such that the uncalled capital must be called up, the average committee of farmers immediately gets a pretty fair idea of what the situation is. They are on the qui vive and they will press for enquiries. They will probably turn to the Department of Agriculture for assistance to help them to examine the financial standing of their own society and to help them, if possible, to revive it. Such a suggestion on the part of the management of a creamery would immediately bring out all the keener sense of responsibility and a fuller realisation of the financial position in which they find themselves. But if you make it possible to issue debentures and to charge them on the uncalled capital of the society, you may involve the unfortunate shareholders in a liability they never anticipated and one they never intended to undertake. They have only subscribed 5/- in the £. It is perfectly clear that they do remain liable for the remaining 15/- in the £, but if they are informed by their manager that a situation has arisen where they have to wind up, they will see clearly the position and pay up this 15/- and wind up the society and not go on throwing good money after bad. But if the other scheme is possible they may transfer their right to call up the balance of the capital to “the Agricultural Credit Corporation or to the Commissioners of Public Works or the Industrial Credit Company or the Dairy Disposals Company, Ltd., or any corporate body lawfully carrying on banking business or any other corporate body approved of by the Minister either generally or in respect of a particular transaction.” While they are doing that they will be doing it without a realisation of the full significance of what they are doing. Perhaps in five, seven or ten years after they have done that, to their amazement, proceedings will be started against them to call up the uncalled capital, a thing which they really believed was not possible for anyone to do without their consent.

I consider that this is a very dangerous thing to do. The argument will be made that there is no obligation on them to issue debentures and that people should not embark upon issuing debentures without a realisation of what they were doing. If we were dealing with companies or enterprises conducted by men who were in the habit of handling complicated transactions, that argument would not hold water. But when dealing with men whose knowledge of finance is largely bounded by their own experience and their knowledge of business as transacted in shops, it is not reasonable to expect the same financial sagacity from them as one would expect from people who are in the habit of dealing with financial matters and to whom discussing and dealing with financial corporations is an everyday routine. So much for the principle enshrined in Section 4 and the adjacent section.

I urge strongly on the members of the Minister's Party that they are putting into the hands of agricultural co-operative societies in the country a weapon whereby far more injury than benefits will be done to the societies in these circumstances. Section 7 is a section of the Bill, the significance of which I find it difficult to appreciate.

Whenever the Minister is satisfied, on the application of the Agricultural Credit Corporation, Limited,—

(a) that money is owing to the said corporation by a society registered under the Industrial and Provident Societies Act, 1893, in respect of a loan made by the said corporation to such society before the passing of this Act, and

(b) that when such loan was so made there was an arrangement or understanding between the said corporation and such society that the amount of such loan and the interest thereon would be secured (in addition to any other security which may have been given) by a charge on the uncalled capital of such society, if and when such charge could lawfully be made, and

(c) that when such loan was made the rules of such society authorised the charging (whether generally or in favour of the said corporation) of the uncalled capital of such society.

I do not understand why that section is introduced into this Bill at all. Because when an agricultural society got their loan from the Agricultural Credit Corporation they made their bargain. They gave the Agricultural Credit Corporation certain rights as against them. In consideration of that, they took the loan, and as far as I can see, if an agricultural co-operative society has borrowed some money from the Agricultural Credit Corporation and is unable to meet it, the ordinary process of debt recovery would entitle the Agricultural Credit Corporation to sue the society and get judgment, and if needs be to apply to the courts in the ordinary way for a winding-up order to wind up the company or society, to realise its assets and to apply those assets for the reduction of the debt. They would then be entitled to go for the uncalled capital for whatever may be due.

Mark the difference between that section and Section 4. When a society borrows money in the circumstances obtaining under Section 7 they know what they are doing. They borrow in the ordinary course of business and they know that if the sum borrowed is not available for repayment the place is liable to be wound up, that the society will be liable to liquidation and that the guarantors and the shareholders will be liable for any uncalled capital. Under Section 4, they will be saddled with these debentures, a matter which is going to mislead them into entering into business with a responsibility far different to that which they would have if they had been really advised about their position. The Minister will tell us why Section 7 (1) is put in there at all. Why is it necessary by statute to give the Agricultural Credit Corporation or to give the Minister power to charge the balance of the debt against the uncalled capital? I move the adjournment of the debate.

Debate adjourned.