I welcome the Bill which was initiated by Deputy John Bruton and the Coalition Government. It represents the most major and comprehensive legislation in this area since the Companies Act, 1963, and contains 11 parts and 207 sections. The Bill appears to strike a fair balance between the need to firmly tackle abuse and malpractice and to discourage and prevent dishonest and reckless people becoming involved in limited liability companies. The Bill will encourage and promote honest and genuine enterprises. When the Irish economy moved into a recession which it is still in, the problem presented by the growing number of insolvencies received a lot of attention. The Coalition Government introduced this Bill to protect companies and to prevent abuses. Those abuses ranged from bad and dishonest directors to the misuse of the concept of limited liability. Therefore, I welcome the general principle which motivated the Bill and I should like to acknowledge the work and commitment involved in recent years in bringing the Bill before the House.
However, while I genuinely welcome the Bill, I would like to emphasise that it is imperative that, although abuse must be dealt with, the Bill does not restrict the normal day-to-day enterprise system that exists in the country. Companies must not be deterred from taking risks which at a later date may become illegal or may be considered as reckless or dishonest trading under the provisions of this Bill. It is vital that the Bill strikes the proper balance between curbing abuse and restricting normal business practice. Good legislation must never be oppressive. In this case, oppression would lead to the closures of small business, a loss of confidence in the economic sector of the community, a rise in unemployment and ultimately rising levels of emigration. We must protect against this happening.
I take this opportunity to look at the proposals contained in the Bill and to make some observations and suggestions, which I believe would ensure that a balance is maintained in this vital legislation. First, I will look at the proposals with regard to company directors. The purpose of Part VII, Chapter I, is to prevent directors of companies, which are insolvent and winding up, from being appointed as directors or becoming involved in the promotion or formation of companies, unless such companies meet certain minimum conditions, including greater capitalisation as protection to the creditors of the new company. Section 117 provides that where a company is insolvent and winding up, any person who is a director of the company at the commencement of the winding up or within the previous 12 months will not qualify to be appointed as a director or be concerned with the promotion or formation of any company unless that company has a share capital of £50,000 in the case of a limited public company or a share capital of £10,000 in the case of a private company and the share capital must be fully paid up in cash in each case. Obviously, the aim is to prevent fraud and to ensure that company directors who have a bad record do not continue to be involved in the destruction of another company. However, it must be noted that fraudulent, and dishonest directors are in the minority.
The underlying aim of the Bill as expressed in the explanatory memorandum is to create a climate of confidence for business activity in which genuine commercial development will take place. If this climate is to be created, the Bill must distinguish between fraudulent and genuine business risk. It is important to note that in contrast to the 1963 Act, the present Bill provides for the disqualification of company directors in a much wider range of circumstances. Under the 1963 Act, the court could disqualify a person from being a director where such a person was convicted on indictment of any offence in connection with the management of the company or of any offence involving fraud or dishonesty, whether in connection with the company or not. Under section 128 of this Bill, such a person would be automatically disqualified for a minimum of five years following such conviction. In addition, the court at its discretion may disqualify a person for such a period as it sees fit, where it is satisfied that the person is guilty of fraud, or breach of duty in relation to the company, which makes him unfit to be concerned with the management of a company. I am concerned that a director involved in a company which goes into liquidation for perfectly legitimate reasons would be victimised under these penalty clauses. Because of the additional financial guarantees required, they will be put at a severe disadvantage and may find it impossible to launch their development plans. This section makes no allowance for the honest businessman who is caught up in a liquidation but wishes to form a new enterprise. We will have to look seriously at this question.
This section deals also with people who have acted dishonestly within companies. It is important to emphasise that these positions are not designed in principle to prevent directors of insolvent companies from starting off in business again but merely provide the minimum set of safeguards in the interests of future creditors. The Bill therefore aims to eliminate the Phoenix Syndrome while at the same time attempting to punish the corporate cowboys. Indeed, I think the Minister for Finance, the Department of Finance and the Revenue Commissioners could lend considerably more support and give valuable assistance in making it much more difficult for these individuals and companies to run up debts in the first place.
How are dishonest directors to be brought to book? Under the present legislation if the receiver in a company being liquidated, identifies a fraudulent dealing, he is obliged to take action against such a director. This is difficult for a number of reasons. First, the finances necessary to do this within the company may not be available. Second, it is very difficult to identify legally exactly what is meant by fraudulent and make the case stick. Therefore how can the problem be solved? Mr. Peter Usher in his excellent work, Company Law in Ireland, has suggested that a fund be created to enable liquidators to pursue dishonest directors. I believe this idea has a lot of validity, yet it is not catered for in the proposed legislation. The cost of creating this fund could be spread over the business community as a whole, for instance, by the imposition of a levy on all companies registered at the Companies Registration Office. Mr. Usher proposes an alternative approach which involves shifting some of the burden of dealing with the consequences of company failure from the ordinary creditor to the secured creditor. The secured creditors, banks and financial institutions, have charges over the assets of the company and could be required to devote a proportion of their secured claims to the liquidator's fund to enable him to pursue directors guilty of fraud. If the balance, which I suggested at the outset, is to be maintained then it is vital that structures be set up within the Bill to allow this to happen.
The problem of company fraud would be tackled much better by providing the liquidators with adequate resources to pursue directors who have deliberately cheated their creditors rather than providing for directors to be made liable for the debts of the company in cases where there may have been no conscious dishonesty. I accept that it is difficult in certain situations to distinguish between (a) fraudulent, deliberate dishonesty; (b) necessary business risk and (c) what we would call reckless trading.
Sections 106 and 107 attempt to deal with this problem and section 107 is particularly pertinent. There have been many cases where directors have operated a company in such a way, that without fraudulent intent they have completely disregarded the interests of the creditors and shareholders. In devising the reckless trading provision, the Minister and the Department have endeavoured to ensure that it will not have adverse effects on business by providing safeguards to protect the honest director.
Under the provisions of section 104, if the court considers the person has acted honestly or responsibly it may relieve him wholly or partly from personal liability on whatever terms it thinks fit. However, it must be pointed out that phrases such as "honesty" and "responsibility" are equitable phrases and the instruction of such phrases may involve much litigation before the exact meaning of these terms is clarified. Therefore, at this stage, it is important that these ambiguities within the Bill be carefully examined and if possible taken out.
Great care must be taken in framing the legislation so that appropriate recognition is given to the reality that risk is an inherently acceptable aspect of business and, accordingly, directors of trading companies should not be unjustly penalised because of this reality.
The Bill introduces the concept of reckless trading. It would be totally unacceptable in any circumstances that directors compelled to take acceptable risks in somewhat uncertain trading conditions should be held liable for reckless trading. I recommend therefore that the concept of wrongful trading should be substituted for reckless trading in the Bill. Again, this would help to clarify some of the ambiguous terms which exist in the Bill as it now stands.
I fully support any move to impose appropriate penalties on those who seek to trade in a fraudulent manner. It is essential, however, that any steps which are legitimately taken to protect the public from the actions of those who seek to trade fraudulently should not be such as to virtually undermine limited liability status, which is the cornerstone of commercial enterprise and has been so for more than a century. In a small country with a very high level of unemployment — approximately 18 per cent — and with a national output per head of population of only 70 per cent of that of the EC average, the main focus of our efforts should be to ensure the creation of a climate which will attract more people to establish enterprises. We should ensure that an appropriate balance is always maintained between the need to encourage enterprise and the need to protect the interest of those affected by the enterprise.
As I have stressed in my general acceptance of the Bill in principle, I hope these suggestions may be useful in tying down the ambiguities which appear to be an inherent part of the Bill as now proposed. If it is important on the one hand to weed out dishonesty and fraudulence it is also important to provide some kind of structure within which companies going through hard times may find or receive the opportunity to restructure or redevelop their business. With this in mind I would like to look at Part IX of the Bill.
Part IX proposes the introduction of a new legal mechanism for the rescue and reconstruction of ailing but potentially viable companies. It has been rightly said that the primary objective of insolvency law must be to support the legitimate efforts of directors and shareholders who wish to save an ailing business while, at the same time, protecting the rights of creditors in the event of the business collapsing. Joseph Chamberlain, the former president of the British Board of Trade, once said that Parliament has to endeavour, as far as possible, to protect, to salvage and also to diminish the number of insolvencies. In this respect, therefore, we have much to learn from other countries who have tackled the problem of the rehabilitation of companies in trouble.
Under our present system it is necessary for the directors to have substantially developed their plan for reorganisation before they can approach the court, whereas in the United States, for example, the protection of the court is available during the hiatus period while the plan is being developed. In the United Kingdom the Insolvency Act, 1985, took note of these developments in the United States. The proposed legislation proposes a rehabilitation period of three months to allow companies in difficulty to get some type of reorganisation or regeneration into action. I would welcome this new legal mechanism for the rescue or reconstruction of ailing but potentially viable companies. The central feature of the proposal is the appointment by the court of an examiner and the policing of the company concerned under the protection of the court for a period of three months.
However, there are some suggestions and modifications which I would like to point out here. First, the powers of the examiner need to be strengthened and clarified. It is vital that the brief which is to be given to the examiner be clearly identified. Otherwise, we may have a situation where companies which are not really potentially viable find themselves benefiting from the rehabilitation period. This would be a time-wasting exercise and would create a terrible lack of confidence in the new structure. Secondly, the examiner should be required to report in a timely fashion and in full but not to the degree that would prejudice the company's competitive position.
There is also a very important supplementary point to be made here in relation to preferential collection of debts. This point deals with the area of creditors. In the event of a company being in difficulty, the Revenue Commissioners and local authorities have a public duty to collect unpaid taxes and other charges and they should carry out this duty without reliance on preferential status in the event of a winding-up, if that occurs. A bad debt owed to the State is likely to be insignificant in terms of total Government receipts but the loss of a similar sum to a supplier in an insolvent company could result in serious hardship and bring further insolvencies into train.
In this rehabilitation period I suggest that individual creditors be given preference where possible and that the State, if it is deemed necessary, take a secondary role in the collection of debts. This would also have the advantage of creating further confidence in the Government and in their structures. This would be advantageous to a company in difficulty as they may be able to offset debts during the period of rehabilitation and so allow the company to restructure itself and become economically viable once again.
Thus, there seems to be obvious merit in providing a system in this country whereby a company in temporary financial difficulties can be given a breathing space in which to reorganise and reconstruct and to face their difficulties at a much earlier stage and to take action to salvage the company instead of letting it slide into liquidation and, perhaps, leave a trail of unpaid creditors behind. The Bill has made provision to provide for this but the suggestions I have made will help to create the balance which I have consistently stated from the outset of this statement.
Part V of the Bill deals with the unscrupulous and reprehensible practice of insider dealing. This is a malpractice which is contrary to the principle of maintaining an efficient fair shares market involving equal access to information and so on and also because it impedes the aim of promoting a wider share ownership among the general public. Part V of the Bill proposes to make it a civil offence to deal in securities on the basis of insider information, to pass on information by way of a tip or to deal on the basis of a tip. I welcome this development.
In recent years as business transactions have become more complex, more computerised and more technical, it is very important that legislation be there to deal with this kind of fraudulence. The consequences are twofold. First, ordinary individuals and small investors may lose out as a result of this kind of activity. Secondly, this kind of dealing leads to eventual monopolisation of markets and a predominance of multinational companies.
I also welcome the provision of civil remedies for parties incurring losses as a result of insider dealing. Provision is made for exemption for directors' qualification shareholdings, for pension funds and other schemes solely or primarily for the benefit of employees, for obligations under an underwriting agreement and other limited circumstances. However, the provisions of Part V of the Bill, particularly sections 91 and 92, will give rise to many practical difficulties.
Having regard to the small size of the Irish investment community and the difficulty in determining the loss incurred and identifying each and every shareholder who may have been victims of insider trading, it is difficult to see how the Bill can protect against this problem. However, as in the case of the rehabilitation period and the examiner in the court, I think that the brief should be very clearly identified and that all ambiguities in relation to legal developments must be clearly identified and clarified. This may help to bring about more productive legislative action. The Bill overall is geared to be more beneficial to creditors while, at the same time, tackling the problem of dishonesty and fraudulence within company activities.
With the introduction of this Bill I foresee a greater climate of economic confidence for Irish business. The Bill is aimed at prevention of insolvency, liquidation and fraudulence rather than curing the problem after it has begun. This is a very valid Bill and is very good legislation. I hope my suggestions will be accepted in the spirit in which they are offered. They are aimed at creating a greater balance within the structure of the legislation so as to make the Bill more positive and functional in practice. For far too long it has been possible for people to trade without respect for liabilities due to others. Furthermore, unscrupulous people have been able to re-establish businesses which have previously failed without having to meet liabilities previously incurred and flagrantly disregarded. This has encouraged a situation where a man's word is no longer his bond as successive businesses are pulled down due to the knock-on effect of the failure of one business and has led to a general reduction of business confidence at a time when it is most needed.
People who have confidence are needed to set up business. That requires a stable and satisfactory business climate. I believe this Bill will assist in that objective. However, as I have stated it is vital that we avoid the pitfall of over-legislation within our business community. If we look at the US we can see the huge array of legislation covering all areas of business life. We are a far smaller economy and in our economy too much legislation can stifle enterprise and initiative. Therefore, while I welcome the Bill I believe the demands for further legislation should be accommodated only when it can be shown that further legislation would assist in generating economic benefit to the country. In other words, keep it simple and do not fix it unless it is broken.
The Minister should be open to suggestions and recommendations in relation to this Bill. This openness must stretch into the future and we must monitor and analyse how this legislation affects the business community. Then, and only then, can we see for sure if further legislation would be needed. There is no need to produce too much legislation so as to suffocate any future developments. Legislation must open doors, not close them.
This new legislation in the long term will create situations where information will be readily available. Survival plans can be quickly designed. Directors and creditors can make valid contributions in all areas of the development of the business and the legal structure will be there to provide and safeguard against dishonesty. This Bill opens the way for this to take place and, therefore, it is a valid exercise. I also believe this Bill could be accompanied by a greater drive to encourage investment and industrial development in this country. The Bill allows for security. It allows for openness and potential in the future. This must be counter-balanced by active initiation of industry and financial availability. The IDA and various organisations within the State are geared for this. We must give them more leeway. We must encourage greater investment and we must encourage greater confidence. This is the active side from a business point of view in relation to this Bill.
It is not enough to ensure that directors who are dishonest or reckless are dealt with. Accountability must permeate the company. Can we be sure that the agents concerned in the company — perhaps under the section dealing with auditors and the people who advise those companies — have an obligation to make responsible information available to the company and will be held responsible in addition to the directors for the protection of the common good? If these agents are knowingly involved and aware of the problems of the company and fail to act in the interests of the common good the auditors and accountants in question will have to be brought into the area of civil and legal liability. It is not good enough just to touch the tip of the iceberg. This legislation must guarantee greater confidence throughout the structure of a company and that liability must go further than simply the boardroom. In the area of liability it must be recognised that the penalties imposed upon directors or other members of a company involved in fraudulence must be in keeping and in line with the crime committed. The Bill must pursue a just line of punishment at all times. This is vital so as to encourage bona fide directors within companies to maintain their standards and to feel sure that justice will be seen to be done in relation to business activities.
As I stated clearly at the beginning, the Bill must strike a balance between reducing malpractices in business and encouraging a healthy economic climate; between the penalties imposed and justice observed and between common sense and illegal practices. As a piece of legislation it must not take on too much; otherwise it will become inefficient and create a general lack of confidence. It must strive towards finding a fine line between dealing with dishonesty and not getting bogged down in bureaucracy. I encourage the Minister to look at this carefully and to look at all the resources available within Government Departments to ensure that this Bill works and is as efficient as possible with the least amount of padding and excess. In the words of Benjamin Franklin, the price of freedom is eternal vigilance. We, as a political entity, have a responsibility to ensure that we maintain vigilance on the business community. Ireland's vigilance must not be prohibitive but it must strongly, quietly and assuredly do its work in maintaining an honest, productive and legally acceptable business community.