Dáil Éireann debate -
Wednesday, 11 Mar 1959

Vol. 173 No. 7

Companies Bill, 1959—Committee and Final Stages.

Section 1 agreed to.

SECTION 2.

Mr. Cosgrave

I move amendment No. 1:—

To add to the section a new sub-section as follows:—

(7) Existing preference shares may be converted into redeemable preference shares where all the preference shareholders and the company agree.

This section gives power to issue redeemable preference shares. It has been suggested to me that the section should go further and allow a company, where the preference shareholders and the company agree, to convert existing preference shares into redeemable preference shares. In certain cases, companies have accumulated sufficient cash reserves to do this, but, because of the present position of the law, the only way they can do it is by going to the trouble and expense of making an application to the court.

As this Bill goes a considerable distance towards empowering the issue of the redeemable preference shares, I should be glad if the Minister would consider the suggestion made in the amendment which, I believe, would enable companies which at present are obliged to retain the cash and can use it for the ordinary purposes of the company, but who feel their shareholders are the persons properly entitled to get those benefits. If the amendment is accepted, shareholders will be able to receive the benefit.

Mr. S. Lemass

I have given a considerable amount of thought to this matter, because I have had representations from other sources also in favour of this change. I should like to facilitate companies who wish to make the change, but it will be necessary to have many safeguards and, indeed, I have some doubts whether it will be feasible to provide in law adequate safeguards to cover all cases. I do not wish to suggest that I have reached a final conclusion in the matter, but I certainly would desire not to rush into action in regard to the matter at this stage, without a great deal of further examination of it. I would ask the Deputy to allow it to stand over until the second Bill comes along.

It is necessary to bear in mind in this regard that the interests of others than the preference shareholders are involved. We shall also have to have regard to the interests of the creditors of a company. So far as these creditors are concerned, they would have entered into dealings with the company on the basis that its issued share capital could not be reduced, except in accordance with the procedure set out in existing company law. Any alteration of the basis on which preference shares had been issued might involve a reduction of the assets of a company, with consequent lessening of the security of its creditors. Before existing preference shares could be made capable of being redeemed, not only should the consent of shareholders be obtained in the prescribed manner but dissenting creditors would also have to be given opportunity of appeal to the courts.

The whole theory of the Companies Acts at present is that capital invested in a company should be invested permanently. Those who have business with a company can ascertain from its published accounts what its capital resources are and they should not find that, having extended credit, these resources could be reduced. It would be a serious step to take to facilitate what would in effect be a withdrawal of capital without having complete safeguards for all persons having dealings with the company.

There are provisions in the Companies Acts at present relating to the reduction of share capital. There is a prescribed procedure for an appeal to the courts by creditors who dissent from a proposal to reduce the share capital of a company. The courts must be satisfied before permitting any reduction of capital that every dissenting creditor has been either paid or secured. The courts are entitled to take into account the representations of creditors as well as the representations of dissenting shareholders before deciding on an application to permit a reduction of capital.

It is possible for a company to carry out the alterations which the Deputy has in mind when it has secured the consent of the court to a reduction of its preference share capital. I do not think that we should go any further in the matter until it has been very carefully considered with regard to the adequacy of the safeguards to be provided to prevent such facilities being abused in any way.

Mr. Cosgrave

I agree that it is necessary to provide adequate safeguards, but I feel that the provisos included in sub-section (2) would be adequate. As I have already mentioned, and as the Minister has stated, the companies may make application to the courts for permission to reduce their share capital, but to do this, particularly in the case of small companies, is a very onerous matter indeed. A number of these companies probably feel that the time involved and the procedure to be complied with impose a very onerous obligation on them. For that reason, a number of small companies feel that where they have liquid cash available, the shareholders should get the benefit of it. I do not wish to press the amendment, but I shall be glad if the Minister will consider the proposal in connection with future legislation.

Mr. S. Lemass

I shall do that and I have an interest in devising a solution to the problem. It is generally recognised that because of the inflation over the past ten years, preference shares have fallen considerably in attractiveness and it would be of considerable benefit if preference shares could be made more attractive to investors. That would apply not only to future issues of preference shares but to existing shares.

Mr. Russell

It might not be practicable for all the preference shareholders to agree.

Mr. S. Lemass

If there are preference shareholders who do not agree, they must have the right to go to the courts. Along with the preference shareholders, there are also the creditors of a company who have given credit to the company by reason of the belief that the capital invested in it would not be withdrawn. If part of the capital could be withdrawn, these creditors must have the right to see that their position will be safeguarded.

Mr. Cosgrave

I think this arrangement should apply only to a company where there are adequate safeguards.

Mr. S. Lemass

If I got a balance sheet of a company which showed that there was £100,000 in ordinary shares, £100,000 in preference shares and £100,000 of assets represented by investments outside the company, I should have no hesitation in extending credit to that company, but if the £100,000 in extern investments were used to redeem the preference shares, the whole picture would be changed and the question of the extent of the credit of the company would be raised.

Amendment, by leave, withdrawn.

Question proposed:"That Section 2 stand part of the Bill."

Mr. Haughey

I have some questions. Sub-section (1) uses the words "a company...may if so authorised by its articles..." I should like to know if that covers articles as subsequently changed. In other words, can a company by special resolution change its articles and give unto itself this power to issue redeemable preference shares?

Mr. S. Lemass

Certainly. The company would have to be authorised by its articles at the time this issue was being made.

Mr. Haughey

The section does not necessarily refer to its original articles?

Mr. S. Lemass

Oh, no.

Mr. Haughey

My second point is that the section refers to profits which are otherwise available for dividend. As I understand the position at the moment, it is possible for a company to have an accumulated loss forward and in any one year to make a profit out of which it could pay dividends. Will the same position apply here? Will a company be able to ignore an accumulated loss forward, and, provided it has profits in any one year which would be available for dividends, use those profits to redeem preference shares?

Mr. S. Lemass

No, I do not think so. The answer must be "No". It is quite clear that the company must have over a number of years set aside out of profits the funds which will be used to carry out the redemption.

Mr. Haughey

With respect, then, I submit the wording should be changed, because it is possible that the profits could be available for dividends which could not be used for redeeming preference dividends. One other point—what happens in the case of a preference shareholder holding redeemable preference shares which the company has undertaken to redeem on a certain date and does not redeem? What remedies are available to the preference shareholder?

Mr. S. Lemass

The obligations of the company will be set out in the terms of the prospectus. It may be that the obligation will be to redeem on a specified date, but I do not know that would be the usual practice in regard to these redeemable preference shares, because that would assume the certain availability of profits sufficient to effect the redemption. The more likely procedure would be a provision permitting the company to effect redemption after a period of years or at its discretion. While there will be a fairly close similarity between these preference shares and debentures, nevertheless, the redeemable preference share is not a debenture, and, consequently, it has to be assumed that the company will not accept a specific obligation to redeem on a certain date, unless it has resources which enable it to do so or unless it contemplates another issue of shares to get funds to enable it to do so. I suppose the answer is that if the company fails in its contract, it is subject to the usual legal penalties.

Mr. Haughey

I can see there is no difficulty where the redemption is entirely at the option of the company, but surely the section does envisage, as I read it, that redeemable preference shares would be issued which would specify their redemption date. In fact, if that is not so, if it is not intended that redeemable shares which have a specified redemption date be issued I do not see how the section will be of any great importance. If it does, as I think it does, envisage a specific redemption date, then I think there should be in addition, some specific procedure laid down whereby if a company defaults on its redemption on the specified date, the shareholder can enforce his rights.

I was wondering also what advantages there will be—perhaps the Minister would tell us—in these redeemable preference shares which are not available under the existing debenture system.

Mr. Cosgrave

Is this section not optional anyway?

Mr. S. Lemass

Yes, under the section a company is empowered to do something which it could not do before. If the company defaults in any way on the contract it makes with people who buy these shares, the aggrieved party would have to seek redress in the courts. There is no other way.

Mr. Haughey

Would the aggrieved party seek redress by winding up or on the basis of an ordinary contract debt?

Mr. S. Lemass

Seek whatever protection the court could give him.

Mr. Haughey

This section creates this new thing—redeemable preference shares. I think it should go further and stipulate, if a situation which I envisage arises, the appropriate remedy. It is creating the possibility of a new situation and, therefore, it should correspondingly create a remedy for such a situation.

Mr. S. Lemass

I must confess I do not see that we should necessarily stipulate the procedure——

Mr. Cosgrave

There is a penalty clause in it and I think that is what the Deputy has in mind, that it should be compulsory.

Mr. S. Lemass

I do not think the penalty clause——

Mr. Cosgrave

No, but that Section 2 should be compulsory.

Mr. Haughey

In the existing setup, if a company, for instance, is in arrears with its preference dividend, there are certain stipulated rights available to the preference shareholders in relation to the company laid down in the Acts. I suggest that something similar to that, some specific action for the preference shareholders to take, should be laid down here as well.

Mr. S. Lemass

I do not think that is necessary.

Question put and agreed to.

SECTION 3.

Mr. S. Lemass

I move amendment No. 2:—

Before sub-section (2), page 4, to insert the following sub-section:—

(2) The aggregate amount of any outstanding loans made under the authority of provisos (b) and (c) to sub-section (1) of this section shall be shown as a separate item in every balance sheet of the company.

The object of this amendment is to ensure that the company's accounts will show the amounts which it has provided by way of loan for the purchase of its own shares under provisos (b) and (c). Originally it was intended to leave all accounting matters, including a provision on the above lines, to be dealt with in the second Companies Bill. Representations have, however, been made by the Institute of Chartered Accountants in Ireland to have this provision inserted in the present Bill. As the provisions permitting the making of these loans will come into effect on the enactment of the Bill, it is preferable to provide for disclosure of the loans in the accounts from that date, and provision is being made in the present Bill accordingly. When we come to the second Bill and put all these accountancy matters in a separate section of the Bill, it may be necessary to repeal it for tidying up purposes, but in the meantime this sub-section will be in force.

Amendment agreed to.

Section 3, as amended, agreed to.

Sections 4 to 8, inclusive, agreed to.

SECTION 9.

Question proposed:"That Section 9 stand part of the Bill."

Mr. Cosgrave

What does this section cover?

Mr. S. Lemass

The particular case involved is a company, the name of which has been set out in a statute, and which could not consequently change its name without that statute being amended. It is proposed to enable that company to change its name, with the consent of the Minister, and without the necessity for amending legislation.

Question put and agreed to.

Sections 10 to 12, inclusive, agreed to.

Title agreed to.

Bill reported with amendment.

Agreed to take remaining stages to-day.

Bill received for final consideration.

Question proposed:"That the Bill do now pass."

Mr. Cosgrave

When will the permanent legislation be ready?

Mr. S. Lemass

It is being drafted at the moment. I could not answer that question definitely. The Parliamentary Draftsman is making some special arrangements to permit the drafting to be completed, but in view of the necessity for great care in the preparation of the various amendments, I should not like to rush him. I hope to have it before the winter session.

Mr. Cosgrave

I take it it is on the basis of the committee's report?

Mr. S. Lemass

All the points set out in the committee's report will be considered. We may not find ourselves in complete agreement with the committee in some respects, but all their recommendations will be examined.

Question put and agreed to.