I welcome two relatively new elements in this legislation which has been in the process of drafting for many years. When I was Minister for Industry and Commerce I asked the Department to prepare provisions for what is known now as chapter 11-type arrangements where a company can be permitted with the protection of the court to trade itself out of its difficulties. I am glad that that has been subsequently incorporated in the legislation. Likewise I was very concerned as Minister for Industry and Commerce to promote the idea of wider shareholding to encourage more people to invest in small companies so that they would rely on private investment funds to develop rather than solely on borrowing money from the bank, which practice frequently led them into premature difficulties because the interest burden was too great for them. Had they got more equity in the first place they would have survived.
To that end I was responsible subsequently as Minister for Finance, for improvements to the business expansion scheme, the aim of which was to give tax relief to people to put money into companies to help them get going. One of the difficulties raised in regard to encouraging investment in companies in that way was how would one sell one's shares after four or five years if the company was still at that time a private company, as there would not be any market for shares. A solution proposed was that the company could buy back the share from the person who invested. That solution was impossible because the law forbade the purchase of shares by a company from its shareholders. The Minister has indicated that he intends to remedy that by Committee Stage amendments. That is something that I had asked my Department to do. The legislation, which I expect will require a substantial number of amendments, is now ready to be introduced. Given the complexity of drafting, that is the length of time that things take.
In relation to the problems faced by Departments such as the Department of Industry and Commerce in the matter of drafting legislation, the Department have to draft heads of the Bill, but the actual drafting of legislation is done by the parliamentary draftsman's office, an office which while it has considerable expertise in a lot of fields has no particular expertise in any particular field. This is not generally the case. The Revenue Commissioners are allowed draft finance legislation with the result that finance legislation is always drafted extremely quickly. From the day of the Budget to the day of the Finance Bill two months later, a complex, lengthy Bill is produced. Legislation of a similar complexity being produced by a Department like the Department of Industry and Commerce or the Department of Justice, will take not two months but somewhere in the region of ten years because the Department do not have in-house expertise to do the drafting, or if they do, they are not allowed to do the drafting as it has to be referred to the parlimentary draftsman's office where it joins a queue of lots of other legislation. Even if the Government are jumping up and down looking for legislation, because of the monoply suffered by the parlimentary draftsman's office, in regard to drafting legislation, the parliamentary draftsman's office becomes a road block.
We should consider whether or not the procedures which require all drafting other than Finance Bill drafting to be done by the parliamentary draftsman's office on the basis of heads supplied by some other Department, should be amended to allow the drafting be done by Departments. That would greatly reduce the bureaucracy involved in terms of meetings between departmental officials and officials of the parliamentary draftsman's office and waiting for weeks to even get to meet officials in the parliamentary draftsman's office and sending over heads of Bills which are misunderstood but which people will not say are misunderstood, so that the Department get the draft on paper and the Department realise that the draftsman's office have misunderstood the original intention. It would make a lot of sense if all that type of to-ing and fro-ing could be done in the one Department. The only way that that could be achieved would be to allow the facility that the Department of Finance have to the Department of Industry and Commerce and to the Department of Justice, Departments who have substantial law making functions anyway. The parliamentary draftsman's office could simply provide a drafting service for the Departments who are not involved in drafting legislation frequently so that they are unable to build up the necessary in-house expertise.
That would mean that a lot of problems would be solved more easily. The Minister might comment on that. It was certainly my experience that this had become a major road block and Ministers were constantly being beaten over the head for not producing legislation which they were doing their level best to produce. The people in the parliamentary draftsman's office work extremely hard but they are grossly overworked and they are supposed to be specialists in everything.
The Minister in his speech spoke about his gratitude for every suggestion that had been made to him when the Bill was being considered in the Seanad and said that he had carefully stored all the ideas and suggestions and that perhaps an opportunity would arise some other time to make use of some of them. That implies that while the Minister was very ready to listen to amendments while the Bill was going through the Seanad, he may not be so ready to listen to amendments now that the Bill has come to the Dáil. I hope that if any of the material that the Minister has stored from those submissions is brought up here in the course of the debates, the Minister will be prepared to accept the proposals and amendments either from this side of the House or from his own side of the House. It is certain that, a major Companies Bill having been produced, we will not see another one of its breadth for perhaps 15 or more years. Even if it means going back to the Seanad to recommit some sections which are amended here, it is important that we do it. I hope the Minister will be willing to listen to proposals for amendments.
I will now make some suggestions with regard to difficulties that exist and improvements that might be made in the Bill. The first general point is that detection is more important than the size of penalties. My worry about this Bill is that it will be like a lot of legislation that goes through this House in that it will look good on paper and be full of clear statements about what is not acceptable and full of penalties for people who do what is not acceptable, but then there will be no mechanism or an insufficient mechanism for detecting events which ought to be the subject of prosecution. I realise that responsibilities have been delegated for detection, to liquidators and people like that who will be obliged now to report certain matters to the Director of Public Prosecutions.
It will not depend entirely on the Department of Industry and Commerce or the Fraud Squad to identify people who have done things which are wrong, but there are sections of the Bill where that responsibility will largely rest on the Department of Industry and Commerce. I wonder whether the Department and the Companies Office have the necessary staff to initiate prosecutions themselves. Legislation which is not adequately enforced is legislation we would be better off without. I hope, as we go through the Bill, that we will not discover sections which are in the nature of aspirations with which we would all agree but in relation to which it would be so difficult to prove a breach or to obtain information that the legislation would be a dead letter. That is a theme which should be in our minds as we go through this Bill section by section. We must ensure that we are making as much legislation as is enforceable rather than legislation that would look good.
Early in the Bill there is provision for the appointment of investigators to look into the affairs of particular companies which are considered to be operating in a manner which is not acceptable to some people. It is provided that up to one-fifth of the shareholders of a company will be able to apply to the court to have a company in which they are shareholders investigated. Similar rights exist in regard to a creditor of the company. These investigations are extremely expensive. Only two or three investigations of companies have been undertaken by the Department of Industry and Commerce under existing law, which provides that investigations may be undertaken at the initiative of a Minister. This Bill provides that the court, rather than the Minister, will initiate the investigation. It will not thereby become less expensive. The investigation will possibly become more expensive under the present Bill due to the expenses of the initial court hearing securing agreement to the investigation.
Should there not be a cheaper way of having investigations of companies undertaken? A suggestion has been made to the Minister that there should be a socalled official investigator appointed who would be an assistant secretary in the Department of Industry and Commerce. It is not without precedent. One of the assistant secretaries in the Department already acts as Registrar of Friendly Societies, in addition to performing a variety of functions within the Department. Perhaps another assistant secretary might be given the job as investigator of companies and given the ability to make certain preliminary or relatively modest inquiries where a matter might be capable of being rectified fairly quickly and inexpensively. Obviously if he found himself getting into a scale of work which was quite beyond him in terms of resources, then the provisions in Part II of this Bill would have to be used. Because the investigations will be so costly and because anybody seeking an investigation may have to give security of up to £200,000 even to be heard, the provision may become a dead letter. A creditor who is owed £30,000 by a company which he feels is being conducted in a very unsatisfactory fashion and should be investigated faces the prospect of having to lodge up to £200,000 as security for the cost of the investigation, all to get back a maximum of £30,000. I know the reason for the £200,000 security is to prevent frivolous applications. If an investigation is undertaken which could cost up to £400,000 to complete, there should be some way of sorting out applications so that only those which are genuinely important are considered. I am not suggesting that the provision should be removed. I am saying that perhaps there should be a supplementary system for investigations of relatively minor cases. Should there not be a sort of small claims court in regard to company investigations which would not involve such high costs?
It is fair to ask why such investigations are so expensive. Where do all the fees go? Do the people who get the fees really earn them? Do they deserve them? If the fees are high because we are imposing all sorts of liabilities on people, is it not the case that it is our fault? People have to get bonding against all sorts of eventualities and therefore charge a fee which will enable them to pay these expenses. Perhaps we should consider having a form of investigation which is less onerous from the point of view of the person carrying it out and which has less serious consequences for those found to be deficient. It might deal with minor abuses rather than major cases. Perhaps the Department of Industry and Commerce with one of their assistant secretaries designated as the official investigator might be a means of dealing with this.
Section 10 contains provisions in regard to solicitors of companies who might be required to give information about the way in which a company is being run. In regard to the criminal law generally there is privilege in regard to communications between someone who is at risk of being the victim of a criminal prosecution and his legal adviser and such communications cannot be used in evidence against him. In this case a solicitor would be required to disclose information to the person concerned with the investigation, which could lead subsequently to criminal proceedings. That evidence would be capable of being used in the subsequent criminal case. It could be said that people would have privilege in their communications, with their solicitor with regard to the direct criminal proceedings against them, but if the solicitor has been forced to disclose everything in the earlier investigation that protection would be set at nought. It should be remembered that in this Bill we are creating a whole new set of crimes which frequently will have just as serious consequences as traditional crimes such as theft and burgulary. If we give certain protections to people who are accused of burgulary we must ensure that similar protections are afforded in regard to those who might be charged under this legislation. They are innocent until proven guilty. I question whether this is a breach of this principle.
There is a similar case to be made with regard to section 13, which is a very strange section in many ways. It says that the cost of the investigation may have to be met out of his personal assets by the person who is subsequently convicted of a crime that is detected in the course of the investigation. That is a very interesting new principle in criminal law. If I am accused of theft I may, for example, go to jail but I am not asked to pay for the cost of the trial as well. If a rich person commits a murder, if convicted he can go to jail but he is not asked to pay for the cost of the investigation of that crime by the Gárda. He is not asked to pay travelling expenses for all the official cars used to asemble the book of evidence, any more than he is asked to pay the costs of the prosecution in the court case. He is, of course, asked to pay the cost of his own defence.
Under section 13 somebody convicted of a crime which is much less serious than that of murder — and no matter what one may say about rogue directors they are not people who would be equivalent in terms of culpability to murderers — may be asked to pay for the entire cost of the investigation of the crime, from the beginning of the original official investigation. That does not apply in an analogous situation with regard to a crime of murder. There may be good reasons for this but I have not yet heard them. Given that this is criminal legislation, we should try to apply the same principles in regard to these cases as applied in regard to others. That is the essential principle I am trying to put across here.
I am speaking now in more or less general terms rather than about the sections, but that is what Second Stage debate is really about. If you take section by section, all 207 of them, a very good case could be made for each one that they are absolutely just. I am sure that is what the Minister will do. However, what we need to do is look at the total effect of the whole Bill as a cumulative change in the business environment. For instance, what effect will it have on the cost of setting up and running a business? What effect will it have on the choice of somebody currently working in EOLAS, who is in a safe, pensionable job with everything arranged out in front of him, being able to budget for the education of his children, who has a business idea, is thinking of getting out of EOLAS, discarding his pension and leaving his safe job behind him and setting up a business and in due course incorporating that business? He will be moving from the area of virtually no risks into one where there are massive risks.
There is the accumulation of all the costs involved here and all the potential penalties, for instance, that it could be argued that they ought reasonably to have known something in regard to the administration of the company which they subsequently set up but did not know it and they find that their home is confiscated, for example. Their fears may be irrational in some cases because one would be able to convince them that in practice, while they could be charged, a judge would not actually take the house from them in those circumstances, that the judge would be behaving reasonably. Let us remember the decision to leave the safety of a public sector job and go into the private sector is taken by people not solely rationally. It is a visceral decision, taken on the way people feel as well as on the way they work things out on paper.
I ask the Minister to ask himself if this Bill in its total effect makes it more comfortable for people to stay in safe jobs rather than go out and set up a company. There are elements in it that will make the situation of people running a company so potentially uncertain as to the safety of their existing assets that they may decide not to bother, or they may decide to liquidate the company quickly before giving the idea a full chance because if they do not do that while they still can pay off their creditors they might themselves no longer enjoy limited liability and be accused of recklessness. If they want to set up another company they may not be able to do it because they will have to lodge extra money and will be named as a special breed of people, as director of an insolvent company. Nobody will touch them with a barge pole. What will these people do?
That will be a general problem in regard to this Bill and something we will have to consider. We have combined concerns here of encouraging enterprise and also ensuring that entrepreneurs are not stung by the activities of people more reckless than themselves. The main victims of rogue directors are frequently small businessmen. I know it is not a simple question of the small businessman versus the administrator. It is the interests of the good small businessman against the less good one. Accepting all that, the Minister needs to look into this matter and when the Minister of State is replying I hope he will deal with that general concept.
There is another point I would put to the Minister about the consequences of this Bill. Will it not be possible that an increasing number of people, faced with the very heavy potential penalties, will decide to incorporate their companies somewhere else so that they not have similar legislation applied to them? The company law of the Isle of Man, for instance — which is the nearest alternative place in which one could set up a company — has been relaxed, shall we say, as a matter of deliberate policy. Company law there and that in the United Kingdom, which previously was very similar, has diverged radically. Company law in the UK has moved more or less in the direction in which we are moving, tightening up the rules very stringently on those who might be considered to be reckless traders while, at the same time, company law in the Isle of Man has been going in the opposite direction, becoming more permissive of what people may do.
Do we not have the possibility that somebody who wants to engage in reckless trading and undercutting in this country, to win market share without due regard to the interests of either his creditors or the public in general, will simply relocate his company in Douglas? Recently under their company law the Isle of Man reduced the minimum number of members of a public company to only two; the formality with regard to the formation of companies, particularly the requirement dealing with the direct duration of compliance by a duly authorised person, has been removed; companies will no longer be required to file their accounts in the public register or elsewhere. An Act which came into effect on 30 June 1988 abolished the need for a company to state their objects in their memorandum and articles of association, and a company is presumed to be resident in the Isle of Man unless it is registered as being non-resident.
If you set up a company in the Isle of Man it would appear that you could conduct your business elsewhere and the presumption under the Isle of Man law will be that you are an Isle of Man company. If you try to defend yourself from an action you can say you are an Isle of Man company and seek the protection of their courts and they will require the other party to prove you are not a resident company in the Isle of Man.
The Isle of Man is not part of the European Community and will not be subject to any of the directives that may emanate from Brussels with regard to wrongful trading, insolvent liquidations and so on. The Isle of Man is only half an hour's flight from here. I imagine what will happen is that while we are terrific guys imposing these massive requirements on business people, at substantial costs to those who comply, the people who do not want to comply, who are currently operating under existing company law, will pop over to the Isle of Man and run their business in Ireland as an Isle of Man company. Will that not mean that the rogues will be able to emigrate while still at home? That is a possibility the Minister might address.
I know there are regulations with regard to branches and that if a company registered in the Isle of Man establish a branch here, we can impose separate requirements on them in regard to the operation and accounts of the Irish branch, but these people will not bother setting up branches. In 1992 the whole concept of branches will probably go and they will not have to establish here to provide services for the Irish economy.
In my view there may be a danger — and this may apply not just between Ireland and the Isle of Man — within the EC, without frontiers in 1992, that companies will tend to gravitate to the state where the requirements are less onerous. If, for example, the Greeks decide they will not bother with legislation like this, and if there is free movement of goods and services between Ireland and Greece, will it not be possible for people who want to avoid this mound of stuff which might be thrown at them in the courts through personal liability, etc., to set up their companies in whichever EC country has the least onerous requirements? Just as we are trying to attract people to the Custom House Dock site by offering very attractive tax rates, other countries might encourage companies headquarters to come into their jurisdiction by offering the no company law as their equivalent of our attractive tax rates at the Custom House Dock site. If that happens, and we all know how long it takes for the EC to bring anyone to court over a thing like that, could we find that this legislation will be evaded by the unscrupulous but become a burden for the scrupulous thereby penalising the compliant and allowing the non-compliant to evade their responsibility?
The next point I want to advert to is the appointment of inspectors by the Minister under sections 14 and 15 to find out who owns shares in a company — this applies to private as well as public companies — in "the public interest". I can understand and accept that the Minister should be able to find out who owns shares for the effective administration of the law in regard to companies if there is a possible breach of the company law, and that he might also require to know who owns shares in a company for the effective discharge of his functions under another enactment, for instance, competition law, fair trade legislation and so on, and he might need to use section 14 of this Bill to get information about who owns shares in a company which is taking over another company — a topical matter at present — but we have a further provision which says the Minister can look for this information in the public interest. Who judges what is in the public interest? He does. He may say he thinks it is in the public interest that he should know who owns company X or Y. He might do that in a very partisan and unscrupulous fashion because Ministers are human beings and you can get bad Ministers as well as good Ministers. Sometimes a Minister might have a vendetta against somebody in business and might decide to throw the book at that company and get after them through section 14.
What matter that it is not relevant to company law or to other legislation. Maybe company A, a French company, is in competition with company B, a British company, and the IDA have decided that company B is a favoured company and has been absorbed into the company development programme and is the company everybody believes should succeed. Let us say the Minister wants to favour the French company rather than the British company and decides to slap a disclosure order on the British company to make them disclose A, B, C and D. When asked why he is doing this he replies that it is in the public interest. Who decides the public interest? He does. There are dangers there. We must legislate for the worst case scenario. We are not legislating to deal with best case scenarios. One possible worst case scenario is a malicious Minister. For the Minister to come here and say he would never do that, does not answer my case. That should be looked at in the further elucidation of this Bill.
Under section 17 the Minister has the power to get information in regard to companies that are not incorporated in this State. For example, he can inquire as to the beneficial ownership of shares in a company in Germany if that company is operating here. That sounds great but how will he enforce it? Is there any arrangement for the mutual enforcement of section 17-type provisions between EC members states? If there is not, the provision will not mean very much. It is something else the Minister might investigate.
The next aspect with which I should like to deal is the provision in regard to loans to directors. Here we have a provision which says loans to directors shall not exceed £2,500. It has been put to me that really that provision should be related to the turnover of a company, that the bigger the company and the larger its assets the larger the amount of loans it should be able to give its directors. It has been represented to me that in the case of a very small company £2,500 might constitute too high a limit. I have not much sympathy with that point of view, in fact I do not agree with it, but it is one represented by me by a reputable group, that the limit should be related to the size of a company rather than have an absolute figure. I think I would prefer an absolute figure.
However, I might pose this question to the Minister: why permit loans to directors at all? Does it not involve a complication? Will there not be quite an amount of difficulty experienced in proving that a loan amounts to only £2,500? Is there not a possibility that the loan might have been more than £2,500 at some point within a three year period, when a person might have had £3,000 on credit at a given time and broke the limit? One would need to have a flow chart showing the amount owing at any given time. If a person broke the £2,500 limit at any stage, he could find himself potentially guilty of an offence even though at the time one comes to initiate the investigation the loan outstanding might amount to £1,000 only? It appears to me that this makes for extremely complicated enforcement for a trivial sum of money anyway. A sum of £2,500 of a loan from a company will not get the type of people about whom we are speaking very far. Why not say just: there should be no loans, period, rather than have £2,500 as a limit? Certainly it would be easier. Everybody would then know where they stood: one does not get a loan from a company of which one is a director, end of story.
If I may turn from the particular to the general, one of the worries I have about the provisions of this Bill is that they will create a sort of general sense of guilt, uncertainty, a feeling of, perhaps I am in breach of the law among business people without their knowing exactly what is wrong and what is right at any given time. This is an area in which that uncertainty could be removed relatively simply.
I should like to turn now to the references in the Bill to insider dealing where, again, I feel there is some element of uncertainty. People may feel that they may or may not be committing a crime. I have absolutely no quarrel with the provisions of the first part of section 91 (1). It is absolutely right and says:
It shall not be lawful for a person who is, or at any time in the preceeding six months has been, connected with a company to deal in any securities of that company if by reason of his so being, or having been, connected with that company he is in possession of information that is not generally available, but, if it were, would be likely materially to affect the price of those securities.
If a fellow is an officer of the company and has information that would affect the price of those securities he cannot use that information. That is simple and straightforward and anybody in that position will know exactly what are and are not their obligations. I have no problem with that provision; it is fine and must be implemented.
Where I do have problems with regard to the provisions in relation to insider dealings is in regard to section 91 (3). Under the provisions of that subsection someone who is not an officer of a company who may have received information, directly or indirectly, from another person, who is aware or ought reasonably to have been aware of the facts and circumstances by virtue of which that person might have given him the information — it being information he had obtained in a privileged way that would be contrary to the provisions of section 91 (1) — is guilty of an offence. Suppose someone meets another person in a social setting and the person says something about a company to the effect that it is doing well, we are going to do something. Suppose the person who says it is a director of the company and therefore caught by the provisions of section 91 (1), and the person who hears it says: good idea; I must buy some of those company shares, there might be no intention on the part of the director who said that to encourage such investment, he might have no interest whatever in the other person buying the shares. But now we are in a position in which essentially someone hears a bit of information which encourages them to invest in a company in particular circumstances. If it could be shown that he had received that information, either directly or indirectly, although he could have heard it from a third party who had heard the director say it the first time, in other words, indirectly, and if he ought to have known that the person who said it the first time was a director of the company — even if he did not know he was a director of the company — if he subsequently invests in those shares, he is guilty of insider dealing. I know the Minister want to avoid circumstances in which people will get other people to buy shares for them which had they bought themselves would render them guilty of insider dealing. That is what the Minister wants to stop. I fully accept that as an objective but I fear that we may be creating circumstances in which anybody who gets any information about a company which might be useful with a view to buying shares will end up a potential criminal and subject to massive fines.
I do not know the answer to that problem. I am simply putting the problem forward. We appear to be really casting the net so wide that anybody who invests in shares is potentially an insider dealer if they do so on the strength of any information other than that gleaned simply from looking at the newspapers. We all know that most people who invest in shares do not rely solely on newspapers, creditworthy and all as newspapers are in business matters. We do know that investors rely on some sort of chat they have had with somebody, who in turn has a chat with somebody else to the effect, that something might be worth investigating as a possible investment.
Are we going to create this new grey area of offence, of practices that are crimes technically but are not really prosecuted in practice? If this means the type of law that creates a sort of shotgun approach, rendering everything criminal — but in practice implies that we will go after the really serious cases only because, after all, we are all reasonable men and we will not pursue a case like that — that is not good law. The law should be certain. People should know they are committing a crime if they do certain things, but we will have circumstances obtaining in which nobody really knows.
For example, our tax laws have become so complicated that people are told after the event that they have done something which was taxable even though they thought it was not taxable at the time. They are supposed to know the law, God help us; everybody is supposed to know the law. Ignorance of the law is no defence any longer. I wonder how many businessmen will know this law when it is passed by this House? I wager a guess it will be very few but, as far as the court is concerned, ignorance of the law is no defence. Therefore, we will have circumstances obtaining in which many people will be in two minds as to whether they are in the clear. Indeed, they may not know for years whether they were in the clear because it might not be for years afterwards that anyone would investigate the matter. At its very least that is not good for the mental health of the business community. Perhaps it is something we should investigate to render the law more certain. We have got to stamp out abuses but we must go about it in a way that ensures that the law is clear; black and white, not grey.
I know also that the provisions of this section on insider dealing are based on the rules in regard to this matter which are set down by the Stock Exchange. If I might put it this way, the Stock Exchange is not a national institution. It is an institution which is transnational. It is an institution that exists in Britain and in Ireland, as one person in two jurisdictions. The Stock Exchange is almost like the deity, it exists in a whole lot of different places; it is one person but it is not really one person.
I am told that the regulations on insider dealing are cogged directly from the Stock Exchange's own rules or, shall I say, based heavily on them. What happens if the Stock Exchange decide to change their rules next year? Will we have to catch up on them? Will we be faced with having to follow them or should we perhaps deal with the matter in some other way? Reliance on the Stock Exchange as the main means of enforcing the provisions of Part V of the Bill will pose certain problems if their code differs or diverges subsequently from that contained in Part V of the Bill. If the Stock Exchange change their rules next year they will then be enforcing, simultaneously, our rules contained in Part V of the Bill and their own rules, which may be different. Is that a problem and, if so, how will it be overcome?
Section 83 of the Bill provides for the disclosure of the ownership of shares in private companies. I can understand in regard to a publicly quoted company that it is legitimate to find out who owns shares because you want to know if someone is building up a shareholding, the purpose of which might be to take over the company. The people at present controlling the company want to know if an ambush has been set for them. That does not really apply to private companies because, according to existing company law, it is based on mutual information being given. Anyway, the affairs of a private company in regard to individuals buying shares do not seem to be a matter in which the State has any particular interest. If people in a private company have a row it does not affect anybody except the people concerned. Why is the State in this section making powers available for the disclosure of interest in shares in private companies? What public purpose is served, given that this is a private company? Are these matters that the private company should deal with in their ordinary memorandum of association, whereby members entering a private company should disclose the beneficial onus to the other members of the company? Why should the State be involved? Surely if people enter into the setting up of a private company and fail to get an arrangement with their fellow shareholders about information in regard to the selling of shares, there is no need for the State's involvement? Possibly there is a good reason but it is no harm to ask the Minister to explain.
Section 92 says — essentially — that if Deputy Cullen and I have an insider deal and I sell shares to him somebody can look for compensation. How will that compensation be measured? Will it be the difference between the price at which the shares were sold and what they would have been sold at if one of the parties did not have insider information? How will we determine it? Will the person who may sue be somebody else in the company, another shareholder? How will compensation be measured in the case of insider dealing? Who is the injured party? I know there are procedures for determining amounts but what will the criteria be?
Section 107 provides that there shall be a declaration of solvency given in respect of a company by the directors of the company before they put it into voluntary liquidation. In other words, if the directors of a company decide that they will wind up a company voluntarily, they must make a declaration, and they will be personally liable for the truth of such declaration, that the company have enough funds to pay their creditors. That is very reasonable protection because it prevents voluntary liquidations being used as a means of liquidating companies that do not have enough money to pay their creditors and getting away from their obligations in that fashion. However, section 107 should be extended. There is also what is known as a creditors' voluntary liquidation where the creditors decide that they agree with the directors that the company should be liquidated because they feel, that by such a move, they will get their money and the directors are prepared to go along with this. There is a possibility that the creditors might be misinformed in agreeing to a voluntary liquidation in the first place. The creditors might decide on voluntary liquidation thinking that the company had certain assets but, in practice, the company may not have these assets and the creditors may only get 50p in the £. Should there not be a requirement for a director to give a declaration of solvency in regard to all voluntary liquidations, those initiated by the members themselves and initiated by the directors of the company?
The key section is section 116 which provides for civil liability for people who carry on business in a reckless manner. I acknowledge that the concept of recklessness is fairly well established in law. It means that you know that there is a possibility that what you are doing could cause certain bad consequences and you carry on regardless. It is not that you just make a mistake. You do not intend the consequences but you know there is a strong possibility of the consequences and you still go ahead. Assuming that my definition of "recklessness" is correct it is a reasonably well established legal concept and people should know that they are being reckless. That certainly applies to section 297A (1) (a) of the section but there is also a problem in relation to (b) which says: "If it appears that any person was knowingly a party to the carrying on of any business of a company with intent to defraud creditors of the company, or creditors of any other person or for any fraudulent purpose..."
Does that mean that he was knowingly a party to carrying on the business of the company or knowingly a party to the fraud? If it means that he was knowingly a party to the business of the company without knowing about the fraud it should not be an offence. It is clear that an employee of a company who did not know about the fraud — or if he did could do nothing about it — should not be caught in that situation. Perhaps the Minister will clarify this.
It is important to recognise that for an action to succeed under section 116 against something whereby they would have to give up their assets to assist the creditors in getting their money back, all that would be needed would be that it would be proven on the balance of probabilities that the person was acting recklessly, not beyond reasonable doubt as occurs in a criminal case. Talking totally in theory, it seems to me that where there is even a smell of a possibility that recklessness could be proved, creditors of an insolvent company will sue under section 116 in every case more or less automatically. You sue the directors of a company that is insolvent. You do not just throw the normal liquidation law at them, you go for personal liability as well as a matter of course, because no accountant or legal adviser would want it to be said afterwards that he did not advise his client to use all possible remedies open to him. To take this example: if a company has £150,000 worth of debts of which £100,000 is owed to the Revenue Commissioners, and the company has £100,000 worth of assets, the Revenue Commissioners get all the assets. There is £50,000 left which is not there, so to speak. In that circumstance the only course the other, non-Revenue, creditors will have will be to go after the personal assets of the directors. The tendency will be to take an action under section 116 in all cases of insolvency, almost, to use the legal term, as a sort of "fishing expedition". This is the term used. People put in claims, and if you have lost your money you try every angle.
If the company is insolvent it may well be that directors who were not reckless will be tempted to buy off creditors with their personal assets simply to avoid the possibility of having to defend a case under section 116 in court. Even people whose companies became insolvent but acted perfectly properly throughout — and that is possible still under this legislation — will be forced to give some of their personal assets simply because of the need to avoid the nuisance of defending a case such as this. We all know that in practice insurance companies constantly settle cases where they do not believe there really is any claim on the basis of the person claiming. In order to avoid the problem of having to defend a case in court they settle. Is it not going to be the case here that everybody will use this? If so, what effect is it going to have on people becoming non-executive directors of companies? If somebody has a bit of money and a bit of expertise and a company is getting into difficulties and that person is brought on board by the company — maybe on the advice of Fóir Teoranta — to help the company sort out its mess and get itself back on the road, and by that person's coming to the company it staggers on for another while but eventually closes down, is it not likely that any creditor of that company will go out of his way, if the company has not enough to pay him in full, to try to prove that the director who came in late in the day was reckless in prolonging the life of the company even for a few days and by virtue of that he should be forced to put in some of his personal assets? If that possibility is even there — it does not have to be a probability — will it not be very difficult to get non-executive directors to come on boards because of the possibility of "fishing expeditions" by creditors under section 116? The court may not take the view that the person concerned was reckless, but the sheer nuisance value of having to defend such a case where one's reputation would be impugned in court in public might encourage people to pay out even though they were not reckless.
One point that might be looked at is in regard to a defence against recklessness. Section 116 (2) provides that a person shall be deemed to have knowingly carried on a business in a reckless manner if "(b) he was a party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts (taking into account the contingent and prospective liabilities)..."
Does that mean every director of a company must be qualified in accountancy in practice? If it is reasonable grounds, or reasonable grounds as would be seen by an accountant, where is that going to leave the director of a company who, like many directors of companies, left school at 14 years of age, and subsequently acquired skill, whose only assets initially were a tool box and who has not got qualifications in accountancy and might not be able to read the signs in regard to a company going off the rails as well as an equivalent individual who had a qualification in accountancy and was sitting on the same board? Yet section 116 (2) (b) makes no distinction between the knowledge of the director in the one case and in the other. If a director of a company is an accountant it seems to me he should bear a higher obligation in regard to ensuring that debts are not contracted by the company that cannot be met than somebody who has no formal training in that area. Should section 116 (2) (b) also include the qualifications contained in paragraph (a) of this same section where regard is had to the general knowledge, skill and experience that reasonably may be expected of a person in that position, in other words, a person who is a director of a company who is there as an accountant and has accountancy qualifications, vis-a-vis someone who has not?
I put that forward. I do not know whether it is possible to do this, but it seems it is not going to be enough to prove that you honestly did not know you could not pay the debt. You would have to be able to prove that you honestly did not know it on reasonable grounds. Would that be "reasonable grounds" in your own eyes or in the eyes of the court? It could be either, and remember it is going to be a civil case, so all that will need to be proved is that on the balance of probabilities, on reasonable grounds, you should have known. It could be problematic. Maybe the Minister will expand on it when he comes to reply eventually to this debate.
I would like to revert to section 128 of the Bill, under which a director of a company who have gone bust and who were insolvent must ensure, before becoming a director of another company who have public liability, that the company have share capital subscribed of £50,000 or, if a private company, have share capital subscribed of £10,000. So there will be two categories of directors in the future, one of which will be those who in the past were directors of a company who became insolvent even if there was no suggestion of criminal liability in that insolvency. Companies do become insolvent where there is nobody guilty, even under this Bill, or criminal activity of any kind; people simply make mistakes, and if we are going to make mistakes a crime we can forget about enterprise altogether. There will be situations in which mistakes will be made and companies will be insolvent and there will be no suggestion of moral culpability of any kind, criminal or ethical. That will not matter under this section. If the company become insolvent any director of that company, however blameless, will not be able to become a director of another company unless that company have a subscribed share capital of £10,000.
This raises a number of difficulties. First, it will create a new class of potential directors of companies, people who have black marks beside their names. In fairness to anybody who is setting up a company, there should be a register of ex-directors so that one does not invite somebody onto one's board only to discover subsequently that they were at one time a director of a company who was insolvent, and that therefore one's company should have had a share capital of £10,000. If one is going to set up a black list of former directors of insolvent companies there should be an actual list as otherwise people will not know when recruiting directors whether their accession to the board would require this change in the share capital of the company.
It will make it very difficult also for individuals, particularly non-executive directors who are brought into companies, directors who may be directors of seven or eight companies put in there at the behest of Fóir Teoranta to help to keep the company going. If any one of those companies goes down that director goes onto the black list and cannot be on the board of any other company unless that company comply with the requirements of section 128. This will discourage people from going on boards as non-executive directors.
Let me suggest a possible remedy for this. Why not have a general requirement that all public liability companies must have a share capital of a certain amount subscribed and that all private companies must have a share capital of, say, a minimum of £5,000, and let that apply regardless of the directors on the board? It is absolutely right that limited liability should not be purchased cheaply. There should be money there to meet initial debts anyway. Conditions should be more stringent. Companies should have more subscribed share capital than the present £2, that is all that is required. This would be better than creating two classes of directors and avoid people who may innocently have been directors of an insolvent company, having gone in for no reward but simply to help out, finding themselves on a black list in this way. Requirements similar to those in section 128 (5) should apply to all companies to ensure that they are properly capitalised in general. We could deal with all cases in that way without creating a black list. It would have the same effect; the protection given to creditors would be much greater because the requirements would apply to novice directors as well as to those who have been over the hoops in the past and may have had one case which went wrong out of many which went right.
Section 137 of the Bill relates to the obligation that is placed on a director who resigns from a company to lodge in the Companies Office a letter saying why he resigned. I would ask the Minister to contemplate whether this requirement could be used maliciously. Let us suppose an individual director gets into a row with one of his fellow directors, maybe about something that has nothing whatever to do with the company, and they just cannot live with one another any more and one of them resigns; the row is so severe that the director who resigns decides to get his own back by putting in a letter saying that he had doubts about the management of the company and doubts about its solvency. That letter would then be public information. It may be a misleading letter although not actually untrue because it cannot be proved to be untrue, but as a result nobody is prepared to lend that company money. I know what the Minister is trying to achieve and I support it, but should there not be some provision to prevent malicious statements being included in reports of this kind, to ensure that statements should be strictly factual and related to matter that is being concretely alleged, not simply speculative material put in that might be badly motivated in the fashion that I have described?
Under section 149 if a statement of affairs of the company is not lodged by the directors, the receiver who goes in subsequently is required to lodge such statement of affairs. What does that mean? A statement of affairs, as I understand it, means that he has to put a value on all the assets of the company. As a result of that the receiver will be in a rather anomalous situation. He will be asked, under section 149, to put a value on the shares in the company and he then has to go on and try to sell these for the best price possible. He might have valued a particular asset, say, a building at £50,000, and he cannot value it at more than he believes it to be worth. He has the obligation then to try to sell that for £100,000 if he can. He will be dealing with one hand behind his back because in lodging the statement of affairs he has had to show his hand to the person to whom he is selling the asset. The other person, knowing that, will use it in the negotiations. The receiver will be in an anomalous situation by having to put in this statement of affairs, because he is the one who will be subsequently dealing in the assets. That is almost asking that person to be schizophrenic, I would argue.
Part IX of the Bill, which was referred to by the Minister, is something I had initiated at the early stages of the preparation of the Bill. My worry about that provision is that it will cost a lot. The experience of Chapter XI in the United States is that it is fine as a type of infirmary for big companies because they are so big that they can afford the medical fees in that infirmary. However, I wonder if Part IX, as it will be known, will be relevant to small companies. Will they be able to afford the medical fees in the infirmary, in Dr. Brennan's new surgery for ailing companies? In my view they will not. I accept that the Minister has made efforts to simplify the procedure and reduce the potential cost but in spite of that this will cost so much that the only people who will use it will be the bigger companies. The smaller companies will not be able to use it and, therefore, we will be creating a new form of discrimination between large and smaller companies. The large companies will be able to trade their way out using Part IX while the smaller companies will have to go. The Minister should address that problem in the course of his discussions. Should we not have a mini-Part X for small companies with a lighter or more inexpensive cutprice infirmary for them? I do not know if that is possible but I ask the Minister to consider that thought.
I should now like to move to section 199 and the House will note, with relief, that as I am nearing the end of the Bill I am almost at the end of my contribution. Essentially, that section states that if accounts are not kept, not only are the officers of the company liable to a criminal offence but are liable to have their houses taken from them. I cannot quarrel with that because there is no way one will know whether an offence was committed unless people are required to keep the evidence. By failing to keep accounts one ensures that there is no evidence for any subsequent prosecution. Therefore, if we did not have a provision like section 199 people would avoid the other provisions in the Bill simply by not keeping accounts because nobody would know whether they were reckless, fraudulent or whatever. I accept that very stringent penalties are necessary for failure to keep accounts. Otherwise the other provisions in the Bill will fall flat.
I should like to know if this section really means that every company from now on will have to have an accountant on its board. The section seems to state that the other directors can get rid of that responsibility by stating that one of the directors shall be responsible for the keeping of the accounts and the others shall not. I imagine that those who are not accountants on the board will say, "you are the accountant and, therefore, you are the person who is responsible under section 199 (2) (b) and, therefore, you are the person whose house is at risk if the accounts are not kept." For example, those in the building business are not likely to be accountants and in practice this will mean that every small firm that is incorporated, whether it is a building firm or a firm that is involved in clearing drains or engaged in other mundane activities, will have to have their company accountant on the board as a director. That person will then be personally liable if the accounts are not kept. What will that mean? In my view it will mean higher accountants' fees for two reasons. Firstly, the accountant will charge extra because he or she will have to be a member of the board. No other member of the board who is not an accountant will be able honestly to put his hand on his heart and say that the books were being kept in accordance with section 198. Secondly, it will mean that the accountant will add an additional risk premium into the fee to cover against the possibility that he may make a mistake and be liable to prosecution under the section. His house, and his assets, as an accountant will be at risk. In my view the fees of accountants will increase substantially.
I know that the weight of the advice the Minister will receive from the accountancy profession will be on the following lines, "good man Minister; you need to insert such provisions," but I wonder how many ordinary builders have read the Bill. I wonder if it is the case that Ministers — in that statement I include myself as a former Minister — tend when looking for advice on a companies Bill to go to people who know about company law. They tend to be people who have an interest in making their money out of company law and who do not mind extra requirements being inserted because they will mean more fees for them.
Is it not possible that the knowledgeable community so far as company law is concerned consists of people who have a vested interest in more and higher levels of regulations? Is it not true that the only time the average building company director will become acquainted with the provisions of the Bill will be when he is before the court? I wonder how much advice we, speaking of present and previous Ministers, have been able to take in regard to this from the people who will have to pay the extra accountancy fees that will arise under section 200? In my view it was relatively little because there is nobody who knows enough about the subject to whom we could talk. It will only be when there are a few exemplary prosecutions under the legislation when people have the book thrown at them and express the view that they do not think it is just, that we will have people telling us that the provisions are too onerous.
I should like to ask the Minister to have another look at these provisions and ask himself the question, "what effect will they have on the cost of running a business, apart from the criminal and civil risks of running a business if it is incorporated; what effect will they have on the ordinary running costs in terms of the extra fees that will have to be paid to help people comply with all requirements." It is only fair to say that in respect of section 200 anybody who is a creditor of a company that is declared insolvent and who is receiving 80p in the £ may use section 200 to go after the directors for personal liability. If they can find anything wrong with the records of the company — we should remember that section 198 requires that they must correctly record and explain each transaction — they will go after the assets of anybody who could have had anything to do with the company, be it the working director or the professional director. People will use section 200 which gives them the possibility of getting that extra 20p in the £ they will not be getting from the company. Word processors will be spewing out personal liability actions in order that creditors will get what they can.
We must remember that those creditors will be in competition with one another and if one creditor goes after the directors and gets something from them the other creditors will feel very sore that they did not go after them. There will be a race to get the assets, or anything that can be got, when a company are declared insolvent. To ensure that nobody gets in in front professional advisers will advise people to automatically make a claim under section 200 and a further claim under the earlier section which relates to reckless trading. That is a possibility.
The Minister may tell me that this has not happened under similar legislation in Britain. That could be for either of two reasons: first, that it cannot happen because the legislation is so well drafted that it will not happen, or second, it may be simply that the British company law practitioners have not copped on to the possibility of this yet and might use it in this way. The Minister should give this point serious thought.
I would like to draw the Minister's attention to some more points. The provisions in regard to reckless trading apply where a company is being wound up, but they do not apply beforehand, I think. This is going to mean that perhaps people will do everything to avoid winding up the company because they know the consequences once they wind it up will be so heinous that they could not even contemplate them. They will actually keep on going, getting deeper into the mire, because the trigger for all the consequences is the winding up of the company. Some people have argued that by making the penalty so severe when the company is wound up and found to be insolvent that, far from encouraging people to wind up the company once they get into difficulty — and they know they are in difficulty — they will keep going rather than stop half-way. The company will finally be brought to ground at either two points, first, when it is still solvent and people decide to get out and that is all right and, second, once they get into difficulty they will go the whole way because they know they are doomed anyway. They might as well keep going until it is too late to salvage anything and everything is gone as they are going to be got anyway. Frankly, I do not know what the answer to these points should be. This point has been put to me as a possible danger and I ask the Minister to deal with it.
I now wish to refer back to Part IX of the Bill. Under Part IX of the Bill the Revenue Commissioners will be able for the first time to forego their Revenue preference and enter into an arrangement with a company which is in the infirmary to keep them alive by writing off some of their debts or by entering into an arrangement about the collection of those debts in the long term which may involve the Revenue not collecting their money on time. That is fine if a company is under court protection but if a company becomes insolvent and is not under court protection the Revenue Commissioners still retain their full preference and have first preference over everybody else. I think that because the Revenue Commissioners know that if they refuse to enter arrangements under Part IX that they will still have their full preference, they will not go in under Part IX. They will simply say they will not agree to Part IX because they do not care about the rest of the creditors or that the rest of the creditors may be better off if the company was kept going. If the company had £100,000 of disposable assets and they owed the Revenue £100,000, the Revenue would get that money and they do not care about the rest. The Revenue have preference and they will take what they are owed. Their attitude might be: "Although Part IX is great, we are not interested, we have first preference".
It seems to me that the only way in practice that the Revenue Commissioners will be prepared to co-operate with operations under Part IX would be if they were on the same basis as the other creditors and did not have preference. Then they would know they would be just as much liable to gain from the company continuing and paying all its debts ultimately than by pulling the chain on the company straightaway. A very strong argument for the operability of Part IX is to get rid of Revenue preference.
It is fair to say that the Revenue Commissioners have taken on a whole range of new powers in recent legislation with regard to ensuring that they get their money. They have had a very successful amnesty and have powers of attachment and self-assessment. They have the services of the sheriffs. A great many powers are now available to assist the Revenue Commissioners in collecting debts which were not there when the Revenue Commissioners were originally given first preference as a creditor of a company. Therefore there is not the same need now as there was before this legislation to give the Revenue preference. Giving the Revenue preference will mean that Part IX will be aborted because they will not go along with it.
I know the Minister will say that the Revenue Commissioners are reasonable people — as they are from my knowledge of them as individuals — and that they will recognise that it is Government policy to use Part IX. I do not think that will work because the Chairman of the Revenue Commissioners is an Accounting Officer. He has to appear before the Committee of Public Accounts and he has to be able to show that he did everything he could to collect every pound owed and if he does not, Deputy Gay Mitchell or whoever is chairman of that committee would have something to say to him. He will be exposed for not going after his pound of flesh from a particular company. So long as the Revenue Commissioners have the preference and fail to use it, the chairman runs the risk, metaphorically, of being put through the wringer by Deputy Gay Mitchell, or whoever happens to be the Chairman of the Committee of Public Accounts.
Unless we take away the preference and put the Revenue Commissioners on the same basis as other creditors where they have got to do a deal, and it is simply a question of whether it was a good or bad deal, I do not think the Revenue Commissioners will be prepared to go along with reconstructions under Part IX. For that reason there is a very strong case for getting rid of the Revenue Commissioners' preference. The Revenue's preference in the past has meant that the Revenue Commissioners do not take action early enough to get money from a company. They relax and sit back in the knowledge that they have preference ultimately if the company goes. They fail to use information they have to initiate a reconstruction or winding up of the company in good time for everybody including themselves, because they know they can relax as they have preference.
If the Revenue Commissioners did not have preference, I think they would take action earlier which would not only mean that they would be better protected but that the other creditors would be better protected. The Revenue would be more vigilant in taking action in a timely way than is the case at present when they can sit back and enjoy the benefits of preference. This area needs to be looked at.
This legislation was prepared by the Government of which I was a member; I was directly involved in preparing large chunks of it so I am hardly going to speak out against it. It is necessary to deal with rogue directors, insider dealing and to have better provisions in regard to requiring people to keep accounts. It is necessary to improve the position with regard to investigation of companies and the other things that are set out to be done in this Bill.
We need to look at the Bill very carefully as it goes through Committee Stage to ensure that people know exactly where they stand and that it does not create undue costs, as far as legitimate businesses are concerned, which are greater than the proportionate benefit that would come from the new provisions and, therefore, that this legislation contributes to enterprise rather than takes from it. That would be the purpose of my contribution and I am sure the contributions of all other Members on Committee and subsequent Stages of this Bill. I hope the Minister will be prepared to take on board amendments in this House and if necessary to go back to the Seanad with them, that he will not consider that all the work he did in that House is all he is going to do.
