I move: "That the Bill be now read a Second Time'."
The purpose of the Bill is to give effect to the fourth EC company law directive which deals with the content and publication of the annual accounts of public and private limited companies. The main impact of this Bill will be to increase the level of detailed disclosure required in the accounts of public and private limited companies and in particular to remove the current exemption under section 128 of the 1963 Companies Act whereby private limited companies are not at present required to publish their accounts.
Before addressing the details of the Bill, I wish to refer, briefly, to developments taking place in the area of company law generally both at national level and within the EC.
On the domestic front, Deputies already know of my intention to bring forward legislation aimed at removing the abuses that can occur in the direction and management of some companies and at bringing about other desirable improvements in company law. The need for such measures has been all too painfully highlighted in recent years and my Department are proceeding with the preparation of this legislation as quickly as possible.
Drafting of the text of this domestic Bill is well advanced, and when published it will be a substantial measure covering many important aspects of company law affairs. The EC also has been particularly active in the company law area in recent years and a large number of directives covering a wide range of company law matters have either already been adopted or are currently being negotiated. We have already seen the implementation into national law of the first and second company law directives and work is proceeding on implementing the remaining measures.
The servicing of meetings on EC directives, and the implementation of directives, demands considerable resources. I think this fact is not generally appreciated by those who demand quick action and reform. The complexity of the company law area makes it important that in whatever changes we make we must examine and weigh carefully the implications.
While I am on this theme, Deputies will be aware of the decision by the EC Commission to take a case against Ireland in the European Court for failure to implement the fourth directive by the required date. A principal reason for this delay stems from the complexity of the directive, the many options contained in it, which allowed different variations and requirements to be imposed on companies, and the need to consider these options carefully. These were problems faced by all members states. No member state met the directive's timetable Three member states, like us, have still to implement the directive. Indeed, in recognition of the complexities of such directives, a much longer and realistic period of implementation was allowed in the 7th EEC Directive on the accounts of groups of companies.
Notwithstanding the many options, there is still a central core of basic provisions in the directive which we have to follow in legislating here today. I must emphasise, therefore, that in many respects the Bill now before the House is merely reflective of the mandatory requirements of the fourth directive and as such contains a substantial range of provisions which we in this House are not at liberty to vary. I would ask Deputies to have regard to this fact during the debate on the later stages of the Bill.
At the same time, however, the directive contains certain optional provisions which can be availed of by individual member states to apply the directive to fit their particular circumstances. Many of the options relate to technical accounting matters and were included in the directive to permit the continuation of accepted accounting practice in the individual member states. I propose to avail of these options for that purpose.
The directive also contains options which allow for the application of modified requirements in the case of what are described as "small" and "medium-sized" companies. These latter flexibilities are, of course, of particular importance, but before commenting further on these issues I think it would be helpful to place them in perspective by referring in detail to the state of our current requirements regarding disclosure of information in accounts and the impact of this Bill.
The Companies Act, 1963, and in particular the Sixth Schedule thereto, sets down the basic accounting disclosure requirements applicable to the annual accounts of public and private companies both limited and unlimited. These requirements reflect the basic principle that such accounts should provide a "true and fair view" of a company's position and, subject to this over-riding principle, stipulate the information to be contained in the balance sheet, profit and loss account, notes to the accounts, directors' report and auditors' report.
These requirements do not, however, lay down precise formats of presentation to be adopted in the accounts, but rather identify the main headings under which disclosure must take place. In the case of private companies, the disclosure requirements relate only to the accounts prepared for shareholders, since under section 128 of the Companies Act, 1963, private companies are not required to publish their accounts. In practice, however, the requirements set out, in particular in the Sixth Schedule to the 1963 Act, have been supplemented by companies' adherence to developments in accounting practice as reflected in the accounting standards issued by the accountancy bodies in Ireland and the United Kingdom.
I now wish to turn to the content of the Bill before us and its implications for change in the current requirements which I have just outlined. The Bill specifies the format which the balance sheet and profit and loss account should take and prescribes rules in relation to the treatment of individual accounts items; the valuation procedures which can be applied to assets and liabilities and the supporting information which must be provided by way of notes to the accounts.
The Bill introduces additional disclosure requirements to be met in the directors' report and in the report of the auditors on the company's accounts. Like the Companies Act, 1963, the Bill recognises the primacy of the "true and fair view" principle which is in accountancy practice in Britain and here and this over-rides all other requirements of the Companies Acts as regards the accounts. Furthermore, if adherence to the rules set out in this Bill in regard to the format or content of the accounts would not result in a true and fair view being given, those rules must be ignored, or additional information must be given in order to give a true and fair view.
Like the Companies Act, 1963, and the Sixth Schedule thereto, those general matters relating to the scope of the Bill and the principles governing the preparation and publication of accounts are dealt with in the body of the Bill, while the detailed requirements regarding the formats of presentation and treatment of individual accounts items are dealt with in the Schedule to the Bill.
Essentially, therefore, the Bill will have the effect of substituting the more detailed and precise accounts disclosure requirements contained in its Schedule for those currently contained in the Sixth Schedule to the 1963 Companies Act, in so far as the accounts of public and private limited companies are concerned.
In so far as the formats of accounts are concerned, companies are being given a choice in the Bill of one of two balance sheet formats and one of four profit and loss account formats. The differences in either sets of formats are basically presentational. I am allowing companies to choose so as not to upset whatever current format arrangements they may be using. Once a company have chosen a particular format they must, with very limited exceptions, stick to that format in subsequent years and not chop and change. In practice, the choice of formats is not of such diversity as would cause difficulty for people to understand the accounts.
Deputies will notice that the Bill proposes in section 2 that certain companies should be excluded from its scope. The companies in question are charitable and religious companies and companies not trading for profit and the proposed exclusion would recognise their non-commercial character.
I am also proposing in section 2 a particular application of the Bill's requirements in the case of banks and other financial institutions and also in the case of insurance companies. Effectively, the Bill's proposals will result in such bodies having to publish their accounts by filing with the companies registration office and to comply with certain detailed requirements in the Bill, for example, in relation to the directors' report and publication of information on subsidiary and associated companies. However, it is not proposed to require such bodies, financial institutions, to follow the specific technical, accounting and presentational measures contained in the Bill, since these are not designed for application to such bodies. Indeed, the need for special accounting treatment for such bodies was recognised in the 1963 Companies Act and more recently in the decision of the EC Commission to bring forward special directives for application to the accounts of such bodies.
For purposes of clarification I should point out that under insurance law, insurance companies are currently required to submit to the Minister their annual report and accounts laid before their AGM and these reports and accounts in turn are lodged by the insurance section of my Department, together with other returns made by insurers, with the Companies Office. The provisions of this Bill do not alter that position.
Before going into some detail on the exemptions for small and medium-sized companies it may be of benefit to Deputies if I were to refer briefly to the remaining sections of the Bill. I have covered sections 2, scope, and 3 and 4, true and fair view, formats. Section 5 sets out the basic accounting principles to be followed in preparing accounts. These are essentially the principles of using accountancy jargon "going concern", "consistency" and "prudence". Directors may depart from these principles in drawing up accounts in special circumstances, but full details of the departure and the reasons for it and effect on the balance sheet and profit and loss account must be given in a note to the accounts.
Section 7 procures the publication of accounts by requiring them to be annexed to the annual return filed with the Registrar of Companies under the 1963 Act. The provisions in section 7 mirror those in section 128 of the 1963 Act. Sections 8 and 9 set out the criteria — turnover, gross assets, numbers employed — for qualification as a small or medium sized company. The sections apply only to private companies. The threshold levels used are those which follow the new figures for turnover and gross assets inserted in the original directive by an amendment to the directive in November last year.
The rules for qualification as a small or medium sized company may appear somewhat tortuous. They are; but they are what is required by the directive. We can go into these rules in more detail on Committee Stage. Sections 10 to 12 contain the exemptions for small and medium sized companies. I will come to those presently.
Section 13 contains an important new development. Many Deputies who read companies' accounts will be aware that they are often prefaced by a long and informative chairman's statement. This chairman's statement is not a requirement of law. However, the report of the directors is. As a recent survey of several large Irish public companies has shown, many people turn first to the chairman's report. It seems incongruous that this voluntary report should contain more meat that the statutory directors' report. Section 13 will change this by requiring that a fair amount of what now appears in the chairman's report will in future be given in the directors' report as a statutory requirement, and furthermore under section 15 of the Bill the auditors will have to certify whether what is said in the directors' report concerning the state of the company's affairs is consistent with the annual accounts.
Section 14 is a requirement of the 4th directive and the 2nd directive for the directors' report to give details of acquisitions by a company of their own shares. The circumstances in which a company may acquire their own shares are at present limited so that section does not have very wide effect. However, I have been giving a lot of thought to the issue of allowing companies to buy their own shares. I know that there are prudential reasons for circumscribing the power of a company to buy back their own shares but there are good reasons, in terms of making it easier for companies to raise investment capital, to consider moves in this area. The reason is that people will not invest in venture capital companies unless they have a reasonable prospect of being able to sell those shares at a later date. Unfortunately the stock market and similar institutions here are not as widely developed as we would like them to be. Hence, in order to make a market for shares in certain types of companies it may be desirable to allow the companies to buy the shares at a subsequent date from an individual who may wish to realise them in order to buy a house, a car or something else. Essentially that is the reason we are considering this matter and it will be the subject of another companies Bill which I shall introduce probably sometime next year. I am hopeful that the researches being carried out at my request will provide a workable and prudent way of allowing companies more latitude in this matter.
Section 16 of the Bill provides for the disclosure by companies of information on subsidiary or associated companies. The information required is the name and registered office of the subsidiary or associated company, the nature of the business carried on, details of the shares held, the capital and reserves, and profit or loss of the subsidiary or associated company.
Disclosure of this sort is not new to us here. Section 158 of the 1963 Act already contains such provisions, although these are limited to the name, registered office and the nature of the business. "Associated company" is defined in the Bill generally speaking as one in which the investing company has a more than 20 per cent interest. Certain exemptions from the disclosure rule are provided for in the section.
Section 17 provides a facility whereby the Minister may exempt subsidiaries or a parent company in the EC from the requirement to file accounts once a number of strict conditions are fulfilled. The subsidiary must be a private company, every shareholder in it must agree to the exemption, the parent must guarantee the debts of the subsidiary, the accounts of the subsidiary must be consolidated in the parent's accounts and the group accounts must be drawn up and published in accordance with the fourth Directive. The use of the exemption must be notified to the Companies Office in the annual return of the subsidiary.
Sections 18 and 19 concern the publication of accounts. They are somewhat complex and we can go into detail on these on Committee Stage. The principal feature in section 18 is the special auditors' report to attest to the fact that a small or medium-sized company can avail of the exemptions in filing accounts in the Companies Office. This procedure is necessary, since the registrar could not, nor would it be sensible for him to assume the role of and become liable for checking the annual accounts of companies to see if they were qualified for exemption. The registry acts as a public filing office, not as a supervisor or invigilator of companies.
Sections 20 and 21 are relatively minor amendments to existing law required by the directive. The remaining sections of the Bill deal with the usual provisions on offences and penalties, power to modify the Act, and the citation and commencement clauses.
Deputies will notice that the penalties for offences are substantial and the fine on summary conviction is set at a maximum of £1,000. I feel these fines are adequate. There is no need for draconian penalties. For most companies the commercial consequences of preparing and publishing inadequate accounts will be a sufficient deterrent in itself.
Deputies will also see that the commencement date for the Bill is not specified and will be laid down by order. I want to give a reasonable period to companies to comply with the new requirements but, at the same time, the measures in the Bill are long overdue. I am prepared to listen to whatever submissions are made to me on what should be a reasonable commencement date. The date I have in mind would be not later than 1 July 1986.
I would like now to refer in some detail to the important question of the options contained in the directive under which individual member states are permitted to apply modified disclosure requirements to what are described as small and medium-sized companies. These options were included in the directive in recognition of the burden which adherence to the full disclosure requirements would place upon smaller companies. I propose to avail of these options in the case of private limited companies in order to limit the burden of detailed accounting requirements upon firms which, because of their limited size may lack the resources, or may find it overly costly to comply with the full requirements of the Bill.
I am also conscious of the fact that many such companies are operating in competition with other forms of trading entities such as sole traders and others who are not required to publish their accounts. I think it would be unreasonable to over-burden small private limited companies in these circumstances. I do not propose, however, to extend this facility to public limited companies since in my view the public status of such companies requires that their affairs be fully reported to the investing public.
The precise size thresholds for qualification as small or medium-sized are set out in the body of the Bill and as stated earlier are based on the level of a company's gross assets, turnover and number of employees. A company is required to satisfy any two of these three criteria for two years running in order to qualify for the reliefs provided and, of course, the extent of these reliefs is greater for small companies than for medium-sized companies.
The reliefs in question relate to both the preparation of accounts for shareholders and the publication of accounts through lodgment with the Companies Registration Office. In the case of preparation of accounts a small company is permitted to prepare a balance sheet in which certain individual accounts items may be combined under more general headings. In the case of publication of accounts, a small company is permitted to publish this modified balance sheet and is not required to publish its profit and loss account or its directors report.
A medium-sized company is permitted a more limited range of exemptions. It may prepare a profit and loss account in which certain information relating to costs of production may be combined under one heading. This facility will also extend to small companies. In the case of publication of accounts, a medium-sized company may publish its modified profit and loss account and also a balance sheet in which certain individual accounts items may be combined under one heading. The balance sheet in this case is, however, more extensive than that required of small companies.
With regard to the proposal to avail of the options for private limited companies of limited size, I think it is important to mention that in no case will the level of disclosure involved be less than that required under the Companies Act, 1963. Indeed, even for small private limited companies the requirement to publish a balance sheet, together with notes to the accounts, will result in the provision of important information on the affairs of such companies that has not been available hitherto.
It is my view that the approach adopted in this Bill for the treatment of small private commercial concerns represents a reasonable balance between the interests of users of accounts and the need to avoid an excessive burdening of small industry at a time when the importance of such industry to our future development is becoming more and more apparent.
I am confident that Deputies will be supportive of these proposals. I think it is also important to say at this stage that we must keep a balance in what is required to be given in companies' accounts. The material to be included in the accounts by virtue of this Bill will be substantial.
The provisions of this Bill are important and will reach out to all limited companies. Recent statements in the press give an impression that only a handful of companies are affected by the Bill. This is simply not so and a reading of the Bill, in particular the Schedule and the Explanatory Memorandum, will confirm that fact. I can go into the details of this on Committee Stage if that is necessary.
I would hope that Deputies will not see this Bill, and the Schedule, as a vehicle for loading and over-loading companies' accounts with information, however interesting, which is not relevant to assessing the state of affairs of the company, or which is information that, because of its sensitivity, would be better and more effectively transmitted through private communication between interested parties and the company.
Finally, there remains the Schedule to the Bill. While the Schedule is of particular importance dealing as it does with the more detailed technical aspects of my proposal, I must confine myself here to a general overview of it. In addition to the formats of accounts, the Schedule sets out the procedures to be followed in valuing assets and liabilities under the historic cost and current cost methods of valuation, both of which are permitted by the Bill, and itemises the matters to be covered by way of notes to the accounts. It also contains requirements aimed at identifying the nature and extent of inter-company dealings and provides certain reliefs considered necessary to cater for the specialised activities of certain types of investment companies.
The main disclosure elements in the Schedule are contained in Part IV. This part sets out the information to be given by way of notes to the balance sheet or profit and loss account. Under section 12 of the Bill small and medium sized companies are exempt from having to publish the information required by certain of the notes to the accounts set out in Part IV. These exemptions parallel those already described in respect of the balance sheet and profit and loss account. Thus, if one is exempt from giving certain data on the face of the accounts a similar exemption will apply to any notes to the accounts concerning such data.
Finally, the point has been made that companies should not be allowed to be remiss in fulfilling their statutory obligations. It must be said that failure to file accounts in companies offices is a problem which other EC registries also face. For our part, I can assure the House that determined efforts are being made to remedy this problem, and will continue to be made. I realise that the disclosure requirements of this Bill are, to a large extent, only as good as what is ultimately filed in the Companies Office. It is the Government's intention to make the Bill as effective as possible.
The Government have under way a large scale programme of computerisation of the Companies Office. The effect will be to have information made available speedily and to allow the registry, using computer records, more assiduously to follow up the position of companies who fail to file their accounts. This is a very practical application of information technology in a matter of considerable commercial importance. We should not underestimate, in our desire to limit the burdens placed on companies, the problems faced by creditors of those companies and to the extent that creditors of companies do not have access to relevant information about the financial status and performance of companies, as a result of legislation such as this and its enforcement. To date, such creditors have been operating under serious disadvantages in commerce and it is important to protect the interests of creditors of small companies just as it is to protect small companies themselves, because many of those creditors will be small companies struggling to survive. It is not a justification of any measure to say that an undue burden is being imposed if failure to impose that burden would impose an even greater burden on persons who extend credit for which they do not get paid.
From this review of the Bill, I am sure Deputies will appreciate that the subject matter is fairly complex. In formulating the Bill, I had regard to the views of industry, the trade union movement and the accountancy profession and I would like to avail of this opportunity to thank all those bodies for their submissions on this subject.
In conclusion I would like to refer again to the urgency which now attaches to the enactment of this measure. I have referred to the proceedings in the European Court. These will take place in the next few months, so I am sure that the House will share my wish to proceed with this matter as quickly as possible. I look forward to the co-operation of Deputies in this regard and I recommend this Bill for the approval of the House.