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Dáil Éireann debate -
Wednesday, 14 Nov 1962

Vol. 197 No. 7

Private Members' Business. - Companies Bill, 1962—Second Stage (Resumed).

Question again proposed: "That the Bill be now read a Second Time."

Before the adjournment of the debate, I had expressed my pleasure at the introduction of this Bill and had mentioned that it was a Bill which had more than mere commercial significance. It is a Bill which could have considerable social implications for our people as a whole. One of the most striking features of our economy is the extent to which the savings of our people are invested outside this country. Our commercial development has, for historical reasons, been retarded in the past. This Bill could have a very material effect on our prosperity as a whole by encouraging increased investment in home industry. I think it is not an exaggeration to say that Irish investors, taken by and large, have not got an excess of confidence in Irish public companies.

It is very difficult to estimate how much Irish money is invested outside this country, but it is certain that it runs into hundreds of millions. By boosting the confidence of Irish investors in our home industries, we can get an expanding market for Irish shares and this is a national need. For that reason, one of the big considerations that we should have before us in relation to this measure is the need to encourage the small investor to invest here.

This Bill also gives us an opportunity to ask ourselves in general terms what type of commercial society we wish to create in this country. The Committee on Company Law Reform had very narrow terms of reference. That Committee, which was a technical one, ignored the considerations of social policy. It behoves us in this House to ask ourselves and to ask the Minister to consider what are the paramount interests which should be protected by the State in regard to the encouragement and development of joint stock companies, whether the British blueprint is the best one for us. This Bill is very largely a copy of the British Companies Act of 1948.

We can learn a lot by looking at the structure of commercial society in countries other than Great Britain, in smaller countries where conditions more closely resemble the position in this country. In Germany, for example, it is an established feature of company law that the workers in heavy industry in that country are entitled to a share in the control of that industry and they have appointees on the boards of directors of public companies operating there. It is an anomalous feature of our society that a private individual, by spending £100 to buy shares in a public company, can obtain for himself rights in that company, rights of control in its operations not possessed by an individual who may have devoted 25 or 30 years of his life to its service.

These big issues have not been catered for in this Bill. They have not been referred to by any of the interests most closely connected with this Bill, but they are issues upon which we should examine our first principles. Again, American company law is in very marked contrast to the conservative structure of British company law. I am not going to attempt to answer the query which I have posed but I would like to see those more able than I address themselves to this problem. There are some features of British industrial law which I would not like to see reproduced on a large scale in this country.

I admit that there is considerable force in the arguments of those who say that we should adhere closely to the technical provisions of British company law but that does not debar us from postulating our own principles more suited to our situation upon which those technicalities should be based. It is a fact, moreover, that the British Act upon which this Bill is based is already out of date in Britain. As the Minister said when introducing the Bill, the Jenkins Committee reported in Britain in June of this year recommending several major amendments of existing British law. I feel that in so far as the recommendations of that committee may suit our purpose, we should anticipate a further British Act. We have waited a long time for the introduction of this Bill and it is unlikely that we will have another Companies Bill for many years. For that reason, we shall endeavour to legislate with our eyes on the future. I do not accept the arguments of the Minister that we should wait for the implementation of Jenkins in Britain before we follow suit in this country.

Deputy Cosgrave adverted to the application of this Bill to those State companies which are registered as joint stock companies under the Companies Acts. There are certain provisions which in their present form in the Bill are not quite suitable for State companies. I have in mind in particular the provisions relating to investigation because they are particularly relevant to recent developments in this country. An investigation has recently taken place into the operation of one of our State companies and it would appear that the Minister is precluded under present law from making the report of that investigation public. The public are most closely concerned in the operation of our State companies and it is right and proper that such reports should be made public. For that purpose, this Bill would need amendment and I hope that during the course of the Committee Stage discussion, the Minister will recognise the force of that point of view.

I have referred to the need for social objectivity in regard to this matter and I am very happy to see that the Bill enables Irish companies to operate profit-sharing schemes in the form of share ownership schemes for employees. Such schemes of employee share ownership have not been possible under the existing law. I should like to see more such schemes developed. I should like to see fiscal inducement offered to companies to provide such schemes because it is not enough merely to make them technically feasible as this Bill does.

In regard to Part II of the Bill, I believe the Minister has made the right decision in declining to interfere in the operations of private companies and I believe he has made the correct departure from the British precedent. At the same time, we must always bear in mind that the right of limited liability which is conferred on a private company is a very great privilege. It is one which can be very easily bought. Many people have suggested that it is a privilege which can be too easily bought and exploited to the disadvantage of suppliers of goods and of the unwary. The Bill makes no change in that respect.

Part IV of the Bill among other matters sets out the powers and duties of directors of public companies. Section 192 requires the disclosure in company accounts of loans made to directors of such companies. I do not think that section goes far enough in this respect. I think loans to directors of public companies, personal loans to directors in their personal capacity, should be prohibited under this Bill, as is the case in England. I do not accept the cautious view of the Committee on Company Law Reform in this matter. If a director of a company is a sound commercial risk, he can borrow his money from the appropriate moneylending organisations—banks, building societies and so forth. If he is not, it is an injustice to the shareholders of a public company that he should be permitted to borrow from that company.

I would, accordingly, urge the Minister to have another look at that section and seriously consider following the British precedent and, in respect of public companies, totally to prohibit such loans to directors. The argument of the Committee seems to be that there would be ways of circumventing the law, that if it were illegal for a public company to lend money to a director, ways and means could be devised whereby it could be lent to his wife or his family. To my mind, in so far as the climate of public opinion is measured against such lending, I suggest an embargo should be imposed.

In the same context, I do not think the provisions of the Bill in relation to the disclosure of nominee shareholders in public companies go far enough. The Bill provides for a separate register to be kept of directors' shareholdings and that this register may be inspected by members of the company. The Cohen Committee in Britain recommended full disclosure of all nominee shareholdings. I agree that the British Government in 1948 did not implement the Cohen recommendations in full but that was for technical reasons largely and very probably because of the strength and force of vested interests in Britain. Such considerations should not apply here.

I realise that registration in the name of nominees is legitimate commercial practice and is convenient in many places, but the fact remains it can be abused by the unscrupulous, and illegitimate use can be made of information by those who buy company shares in the name of nominees. It can enable, among other things, the take-over of a company by stealth, so to speak. We read in the papers some time ago of the case where the directors of Gallahers, the tobacco manufacturers, woke up one morning to find a considerable number of their shares were in the hands of another tobacco firm, having been bought in the name of nominees.

The technical considerations advanced by our Committee here in support of their view that nothing should be done about this matter are, admittedly, considerable, but, to my mind, a means can be devised of compelling disclosure of nominee holdings where they are operated on a large scale. To compel the holder of more than 10 per cent. of any class of share in a public company should be feasible and was, in fact, recommended by the Jenkins Committee in Great Britain in June of this year. It is, furthermore, a system which works well in the United States. That brings me again to the opinion I expressed earlier, that we should not lean over backwards to emulate the British all the time. There is much which we can learn from practice in other countries.

Again, on Part 5 of the Bill, very important provisions are contained in Section 184, which gives power to the courts in certain circumstances to restrain certain persons from acting as directors of companies. Another section prohibits undischarged bankrupts from acting in that capacity. It includes, I am happy to see, those undischarged bankrupts from Great Britain and Northern Ireland.

Section 184 is rather restrictive to that I think the provision should be my mind. I do not want to go into it in detail at this stage. Suffice it to say extended. Companies enjoy considerable privileges by incorporation and the work of the directors normally takes place behind closed doors. They should be persons of the utmost integrity. Therefore, persons convicted of any offences involving fraud and dishonesty should be debarred, whether in company proceedings or in other proceedings. As I see it, Section 184 is confined to persons who are guilty of fraud in connection with company proceedings.

Again, in regard to what I would term this subject of "chancey" directors, I want to ask the Minister if anything could be done to keep foreign chancers out of our commercial society, as well as British ones and ones from Northern Ireland. The name of a certain gentleman who engaged in operations in the stamp business immediately occurs to one's mind. There is nothing in this Bill which will keep the like of the notorious Dr. Singer from trading in this country, unfortunately. In these days, when national boundaries are rapidly ceasing to have the significance which they once had, it well behoves us to consider whether we can include within the scope of Section 184 and Section 183 persons who have been concerned in bankruptcy proceedings or fraudulent proceedings in countries other than Great Britain.

It is imperative to protect our commercial reputation. The Company Law Committee here adverted very strongly to that matter. The Committee expressed considerable concern and said that our reputation had suffered by reason of some company failures which had taken place in this country. We are a country with an undeveloped commercial tradition and it is very important that this question of integrity should be cherished by us and fostered by the law to the greatest possible extent.

I recognise, of course, that the vast majority of companies are efficiently and honestly managed. I recognise that the vast majority of company directors are most worthy individuals. I would be apprehensive that my earlier remarks might give the impression that I thought otherwise, but we in this Bill are catering for those who would be guilty of lapses from grace. We are trying to protect in particular the investors. That brings me to another section of Part 5 which contains the provisions referred to by Deputy Cosgrave in regard to the accounts of companies. They have to be submitted to their shareholders.

In this context, most of the remarks which I have to make relate to public companies. I recognise that the position of private companies is a very different matter. The Bill is going to require much greater disclosure of information to shareholders than has been customary in the past. I welcome that. I think it is true to say that the accountancy profession, chambers of commerce and the commercial interests as a whole welcome this. Sometimes appeals for a full disclosure are met by the remark that it is none of the inquirer's business. Part of the risk of loss is borne by persons other than the shareholders. It is borne by the customers and by the creditors.

There are, perhaps, still some few directors who hanker after the old days when it was not necessary to submit accounts to shareholders at all. Objection to full disclosure was on the ground that shareholders might not know what to do with the information when they got it. There was resistance to inquiry because there were not very many black sheep. Such an attitude is, to my mind, dangerous by reason of the fact that there is still in some quarters a lingering suspicion of directors and companies as a whole. Anything that can be done to allay that suspicion should be done. The essential feature of the accounting provisions in this Bill is the provision of fuller information to shareholders and, most particularly, the disclosure of reserves, directors' remuneration, the cost of company property and the depreciation provided in regard to assets.

The provisions of Part 5 in that respect are quite onerous. They are not as onerous as I should like to see them but I admit they are quite onerous. Certain companies are exempted from the operation of these provisions—banks and insurance companies. The view is that, by reason of their very special position, there is a very great need to maintain public confidence in the banks and that they should be permitted to carry on in the future as in the past.

There is a further provision in this respect which I do not like at all. The Minister is taking to himself in this Bill the right to exempt from this full disclosure any such class of companies as he may choose to grant this privilege to from time to time. I do not think it is right or proper that the Minister should be in the invidious position of picking on any class of companies and exempting them from this disclosure required of public companies as a whole. There are highly exceptional circumstances which apply to banks and insurance companies. I am at a complete loss to visualise what further classes of companies the Minister has in mind. Indeed, I go so far as to say that it might create an opportunity for exercising a particularly objectionable form of patronage.

This power to exempt further classes of companies from the disclosure provisions exists in Britain under the 1948 Act. It is a power which is exercised by the Minister by making an order. That power has been exercised by the Board of Trade in respect of only one class of company —shipping companies engaged in foreign trade. The Jenkins Committee last June recommended that the privilege should be withdrawn from shipping companies. So we are going to find ourselves in the position that this power will not be availed of at all in Britain and I am not aware of any need for it here or of any demand for it by those who are closely concerned in the operation of joint stock companies here.

I said that the provisions of this Bill are already regarded as being out of date in Britain and in regard to these disclosure provisions, Jenkins has made some very fundamental recommendations which I urge the Minister to incorporate in the Bill. If we want to boost the confidence of the Irish investing public in our companies, it is imperative that we should expect of our public companies the fullest standard of disclosure implemented elsewhere. There may be in this country, indeed, greater need for disclosure than is the case in Britain. For that reason, I urge the Minister to implement the recommendations contained in paragraph 397 of Jenkins which, among other matters, require public companies to disclose turnover or total sales.

I think the figure of total sales of any company is a very fundamental and basic figure, the trend of which, considered over a period of years, can be very informative and revealing to shareholders and investors. Jenkins has recommended provision of a five-year summary of turnover and of certain basic information on this question of results. Considered over a period of years, to assess the trend of results is something which is very significant to investors and the provision of such information which can be provided at no great inconvenience would be very well worth while.

I can see that there would be cases where disclosure of turnover might be detrimental to a company for unique reasons but, as a general rule, I think there should be provision in the Bill for disclosure of turnover and the provision of a five-year summary of results, which would include dividends and profits before and after taxation, to shareholders.

Again, in relation to accounts, in which naturally I am more interested than in other sections of the Bill, there is, as the Minister will be aware, a considerable problem in regard to the value of fixed assets. These are days of very rapid inflation and the problem of accounting for inflationary changes is a very controversial one. It is right and proper that in this respect we should adhere to orthodox practice but I seriously suggest to the Minister that in regard to the provisions in the Sixth Schedule, which sets out the accounting procedure in detail, some of those provisions, in paragraph 5 in particular, are so qualified as to lose much of their force, that is, in relation to the value of a company's fixed assets.

The cost of a property 50 years ago means very little nowadays. I am not saying that the accounts of public companies should be governed by a provision for compulsory revaluation of fixed assets but it would be very useful and helpful to all concerned if accounts were to have appended to them a note estimating the replacement cost of fixed assets. As to assessing the adequacy of provision for depreciation, which is a very important matter, I think it would be very useful if public companies were obliged to disclose to their shareholders the amount of wear and tear allowances allowed by the revenue authorities for tax purposes as a check upon depreciation provisions. I cannot see that it would operate to any company's disadvantage and I think it is an item of information which would be most useful to the investing public and to shareholders.

I suggest—and the Minister, as a lawyer himself, will be able to say whether I am right or wrong—that it is at present the case that the financial editors of our daily papers are circumscribed in the extent to which they can provide financial comment. Frank Press comment on the operation of public companies is an invaluable guide for shareholders who nowadays are mostly small investors who need professional guidance. In other countries, the Press can carry out a very salutary function in that regard. That function should be encouraged by giving the Press a form of qualified privilege and freeing it from undue fears of the law of libel in criticising boards and, if necessary, exposing unsound commercial practices.

Section 6 deals with the winding up of companies. I welcome the increased powers which the Bill is giving to creditors in voluntary windings-up. Like other speakers, I want to refer to Section 285 which deals with the preferential rights of the State in such windings-up. Despite the recommendations of the Company Law Reform Committee that the State, except in one small respect, should be put on a par with other unsecured creditors, the Minister has not gone the whole way with the Committee. As Deputy Cosgrave has already said, in those cases where the Bill departs from the recommendations of the Committee, we are entitled to ask the Minister why.

The Bill does remove the undesirable provisions of the Finance Act of 1924 which gave very sweeping rights to the State, but the Minister is retaining the right to the State to collect one year's income tax in preference to the claims of unsecured creditors. I believe that provision will continue to work harshly against unsecured creditors and in that respect we must remember that there is a consideration applying in this country which does not apply in Britain, that is, that unsecured creditors here can be very small traders, whereas in Britain, with all its wealthy companies, most commercial concerns are accustomed to writing off bad debts, but the collapse of a firm with which a small trader has been doing business can spell ruination.

Therefore I would urge the Minister to have another look at Section 285 and implement the Committee's recommendation in that respect in its entirety. I shall have more to say about Section 285 on Committee Stage; suffice it to say here that I am very happy to see that the Minister has included holiday remuneration as a preferential right for workers. I would ask the Minister to use his influence with other Departments of State to see that they will not endeavour to throw over the preferential payments set out in this Bill, particularly the Minister for Posts and Telegraphs.

I hope nobody will try to wind him up.

The Seventh Schedule sets out the matters to be expressly stated in the auditor's report. We are again in the position that Jenkins has recommended a simpler form of auditor's report in Britain than is provided for in this Schedule. Jenkins has done that at the behest of the English and Scottish Institutes of Chartered Accountants. My view is that the essential duty of the auditor is to report to the shareholders of a company whether or not, in his opinion, the accounts are true and fair. To arrive at an opinion, he applies his professional skill in examining the accounts. Having done that, he ought not to be required to do more than report his opinion, with such reservations as may be necessary. It ought not be necessary to specify those matters of detail on which the auditor has satisfied himself on reaching his opinion.

The Minister mentioned that he was imposing increased and very stiff fines and penalties for breaches of this Bill. I do not know whether one would regard £100 as a stiff penalty for a grave infringement. I have run through the Bill quickly and a £100 fine seems to be the standard penalty. On the assumption that we will not have another Companies Bill for many years I have been wondering if a section should not be incorporated which would give the Minister the right at any future date to stiffen the penalties by order, if he felt so disposed.

In regard to filing the annual return of private companies, the annual summary, it is a fact that the average procedure is that if one examines a file in the Castle, one finds that the annual return is two or three years out of date. I would urge the Minister, having given an extended time for the filing of the annual return, to see that the law is adhered to by the Registrar of Joint Stock Companies.

In conclusion, I want to point to what I regard as a rather important matter. In Britain, very important extra-statutory controls are imposed on public companies by the Council of the London Stock Exchange, imposed on those public companies whose shares are quoted on the London Stock Exchange, and that means most of the important British companies. If I might give an example of one such control and apply its relevancy to this country, I would cite the case of a certain Irish public company which a year ago announced an increased dividend and immediately its shares increased substantially in price on the stock exchange. It announced the dividend without making an announcement of what its profits were, a preliminary dividend announcement. When the accounts came out, it was seen that the profits for the year had not in fact increased and, properly speaking, the price of the shares should not have jumped as it did on the stock exchange. In Britain, the London Stock Exchange requires all public companies to make a preliminary statement of their profits and their dividend proposals. Both must be done at the same time, so that if a company announces that it is going to increase its dividends, the shareholders will be informed through the Press whether or not that increased dividend is matched by increased profits.

That is a very fundamental and basic control and one which serves a very useful purpose. As far as I know, it is obligatory for such announcements to be made on a certain fixed date, a date fixed by reference to the end of the company's year and the announcement must be made whether or not the audit has been completed. It can be made as a provisional announcement, subject to audit. It ensures that information as to the reason is, through the Press, in the hands of the shareholders and the investing public at the earliest possible date, before people in the know can make out of their information.

Before this Bill goes very much further, the Minister should get together with the Dublin Stock Exchange and ask them about these matters. He should ask them if they would consider imposing here those necessary controls which are imposed by the London Stock Exchange in Britain. If the Dublin Stock Exchange declines to do that, the Minister should for himself consider the necessity of incorporating such controls into the Bill. It is better that controls of that nature should be by the stock exchange. In that way, they would be more elastic. If they fail to conform to the best modern practice in other countries, the Minister should act accordingly.

I notice that the Bill does not provide any age limit for directors of public companies as in Britain. For my part, I think that is a good thing.

At the outset, I should like to endorse Deputy Cosgrave's commendation of the members of the Company Law Reform Committee, who did very useful service for the economy of the country in the examination they made of the subject and the report they prepared. I had intended to pay this tribute, at a later stage and perhaps it might be more appropriate at the end of our deliberations. Nevertheless, it is only right that I should now support Deputy Cosgrave's commendation.

In that connection also, I should mention the services given by Mr. Justice Kenny, who, at the suggestion of Deputy John Costello when Taoiseach, was invited by the then Attorney-General to act as honorary secretary of the Committee. When the Committee had finished its deliberations and taken all the evidence, unfortunately the chairman of the Committee died and Mr. Kenny, as he then was, undertook the preparation of the report. Subsequently, before his appointment to the Bench, he went to considerable pains in the drafting of this Bill. He had not completed it when he was appointed to the Bench, but found time to do so subsequently. I feel, therefore, I ought to associate with the commendation of the Committee commendation of Mr. Justice Kenny's services in that regard.

As the Deputies who spoke have observed, this is rather a technical Bill, one on which comment would perhaps be more appropriate during the course of the Committee Stage. I am glad the House is agreeable generally to my suggestion that the Committee Stage should be entrusted to a Special Committee of the House. I may, however, comment on some of the observations that were made during the course of the debate. Incidentally, I should like to say to the Deputies who have spoken I was gratified by the close study they made of the Bill. Obviously, they prepared themselves well for the Second Stage. I hope that, when the Committee Stage will have concluded, the Bill will be in a much better form and will be a much better instrument to serve the purpose it is desired to serve.

I do not propose to go into all the points raised, but I will just mention a few. Deputy Cosgrave suggested there were some restrictions about the issue of redeemable shares. Under the existing law, private as well as public companies may issue redeemable preference shares. The new provision is that public companies whose shares are quoted on the stock exchange may, in addition to issuing redeemable preference shares, redeem shares that were issued as irredeemable shares before the 1959 Act.

Deputy Cosgrave asked to what extent State companies were covered by the provisions of the Bill. State corporations, as, for example, the ESB, are outside the scope of the Bill. Other state companies, such as those referred to by Deputy Byrne— companies promoted by the State under the Companies Act—are subject to all the requirements and provisions of the Bill.

Deputy Cosgrave also asked why the recommendations of the Law Reform Committee on the issue of shares of no par value were not accepted. I dealt with this to some extent in my introductory remarks and the reasons are also fully set out in page 6 of the explanatory memorandum published with the Bill.

One of the points Deputy Cosgrave suggested, and one on which we can meet him, is his suggestion of setting out the numbers and identities of the sections of the 1908 Bill in relation to the current Bill. That will be done and will be available to the members of the Special Committee, when appointed.

Deputy Norton referred to the possibility of there being introduced here unit trusts which are in operation in Britain and, to some extent, in the Six Counties. There are no obstacles here to the establishment of such unit trusts. We have no legislation dealing with them; but if any abuses emerge in the future that would require to be covered by legislation, I do not think we will have any difficulty in introducing the necessary legislation. In the meantime, it is not easy to make provision against happenings in the future, the extent of which and the repercussions of which are not apparent to us at present.

Deputy Byrne made a number of suggestions. In the main, I think, he followed to some extent the recommendations in the report of the Jenkins Committee in Britain. He observed that by reason of these recommendations, some of the provisions of this Bill are already out of date. The evidence as adduced before that Committee was available to us during the course of the preparation of the Bill. It was easy for the officers of my Department and the other experts who were consulted to anticipate, as a result of that evidence, many of the recommendations of the Jenkins Committee. We were in a position to assess to what extent they would be suited to conditions here. Some of them were accepted as suited to our conditions and some we regarded as unsuited. For that reason, I do not think the fact that the Jenkins Committee report was published after many of the provisions of this Bill had been drafted is an indication that any part of this Bill is already out of date. In any event, to the extent that we find some of the recommendations of the Jenkins report are suitable for us and are not at variance with the provisions of this Bill, it will be an easy matter to introduce amendments on Committee Stage.

Deputy Byrne also suggested that we were incorporating in this Bill a power that the Jenkins Committee suggested should be excluded in the British law.

Excuse me; I did not.

I may be misinterpreting what the Deputy said. However, as I understood him, he said that the Jenkins Committee had reported on shipping companies, which were the only group of companies permitted not to disclose reserves, and that that permission was withdrawn from that group. That does not mean that the power of non-disclosure was withdrawn completely. The President of the Board of Trade still has that power vested in him.

A power he should shed as quickly as possible.

The Deputy suggested that I ought to take power to increase penalties. Whatever about taking powers to make regulations providing for the better operation of the Bill, for the better presentation of accounts under the Bill, I doubt if the Deputy's Party would be too happy if I had powers to increase penalties in legislation that is already there. Nonetheless, the £100 fines to which the Deputy referred are fines in cases that are brought under summary jurisdiction. In the more serious cases, which will be brought on indictment, there are much more severe penalties, not only by way of fine but also by way of imprisonment.

I do not think at this stage I need go into any other details except to thank the Deputies who commended the Bill and who obviously realise that an immense volume of work had to be put into its preparation. I think Deputies will agree with me that, having regard to the length of time— which was not very long, in the circumstances—since the Committee on Law Reform was set up, that it took to bring the Bill to the House, that I was quite right in not waiting until such time as the Jenkins recommendations were implemented in Britain. I felt that to delay further would be a serious matter for us. At the stage that the Jenkins Committee had reported, I had the bulk of this Bill in my possession and I was not going to release it again in case I might not see it for a long number of months afterwards. To the extent that there are recommendations that would suit our system in the Jenkins Commission report, we will naturally have an opportunity of dealing with them in Committee.

Question put and agreed to.