When concluding on Tuesday I stressed that the fiduciary duties of directors are extensive and that they also extend to shareholders but that in so far as they do they are extremely limited. One of the greatest defects in company law over the years has been that the duty of directors was owed to the company in general terms but not to the shareholders. This has given rise in a number of instances to tremendous abuse and in no area of company law has the abuse been greater than in the use of insider trading — the use of inside information by a director to benefit himself. A classic case of this occurred in the US when the directors of a mining company, the shares of which were quoted on the Stock Exchange, learned from geologists employed by the company that an extremely lucrative discovery of copper and zinc was about to be made. Before this was made known to the general public the directors purchased a large number of shares and when the find was made known and the share price rose they disposed of their purchases at a handsome profit.
The remarkable thing is that insider trading has not been an offence in Ireland. When this Bill was originally drafted it was anticipated that it would merely provide for civil proceedings in that a shareholder could bring a civil action against a director. I am delighted that in the Seanad insider dealing was made a criminal offence. It has been a criminal offence in England since 1980. For many people here, the provision making insider dealing a criminal offence comes too late. Many people have lost their life savings as a result of insider trading and the use of subsidiaries to carry out extremely doubtful practices. The entire concept of insider dealing is morally wrong and now for the first time in our law it is legally wrong.
This Bill greatly extends the duties of directors to shareholders and that is only fair. In the past some directors violated their fiduciary duties in insider trading and where directors purchased shares in their own companies in the certain knowledge that the price was going to go up, people were badly wronged. On the other side of the coin, directors use their knowledge of company affairs to dispose of shares when they knew full well that the people buying them would be at a great loss in a very short time.
Insider dealings has tremendous connotations for company law and this change is revolutionary. It has always been felt that the use of information by directors to get something for nothing smacked of criminality and now it has been made criminal. The company may not now be used by the directors for their own fraudulent gain. Mr. Justice O'Hanlon in the Kelly Carpetdrome case summed it up best when he said that the privilege of limitation of liability which is afforded by the Companies Acts cannot be afforded to those who use a limited company as a cloak or shield beneath which they seek to operate a fraudulent system of carrying on business for their own personal enrichment and advantage.
I welcome the provision relating to investigation. Until now the Minister was empowered to send in an investigator to examine the affairs of a company where a court ordered it. Under this Bill the Minister has transferred his powers to the court to a large extent while retaining power in certain instances. The Minister is empowered to appoint an investigator where a company has been abused and where business is being carried out in a fraudulent manner or for an unlawful purpose. The problem is that the words "fraudulent" and "unlawful purpose" have yet to be clearly defined in case law. It would have been of tremendous assistance if the Bill for the purpose of company law had defined these words in the context of company law. It is important that that has not been done and it should be looked at.
For many years the concept of personal transactions between the company and the directors has concerned many people. Apart from prohibiting companies from financing the purchase of their own shares and requiring that the aggregate amount of loans to directors be disclosed in the annual accounts, the Companies Acts up to now have said nothing about loans to directors by the company or about a company securing directors' borrowings. Of course, the concept of loans between the company and directors is a convenient method of remunerating directors. It is, to say the least, a rather suspicious way of doing so and has more often been utilised in order to defraud and rob the shareholders of a company and the fellow directors.
We have in this country seen examples of the abuse of this provision whereby loans were made to directors by a limited company which was a legal person and when the company went into liquidation it was found that the loan moneys were gone and the directors who obtained the loan was in no position to repay it. To say the very least of it, this practice was dubious and means that the company's assets were shoring up the financial affairs of a given director to the detriment of the shareholders. It comes back in the end to the fiduciary duty which the director did not owe to the shareholders but did owe to the company. He still owes it to the company and he now has a very great duty to the shareholders. The abuse of the legal person which is the company is again attacked by the provision which sets out the prevention measures which have been so necessary to prevent this kind of abuse and, in some instances, fraud. The provision is very welcome.
Another provision which assists shareholders and trade and commerce in general is that dealing with disclosure. The register of shareholders which already exists provides that the shareholders' names must be listed but this provision makes the disclosure of directors' interests, nominee accounts, subsidiaries et cetera far more clear and extensive. Professor Gower, one of the leading authorities on company law in recent years, said that on the basis that forewarned is forearmed the fundamental principle underlying the Companies Acts has been that of disclosure.
If the public and the members were enabled to find out all relevant information about the company this, through the founding fathers of our company law, would be a sure shield. This shield may not have proved to be quite so strong as they had expected and in more recent times it has been supported by other measures. Disclosure still remains the principal safeguard on which the Companies Acts pin their faith and every succeeding Act since 1862 has added to the extent of the publicity required although, not unreasonably, it has varied it according to the type of company concerned. Members of the public, which for practical purposes means creditors and others who may subsequently have dealings with the company and become its members or creditors, are supposed to be able to obtain the information which they need to make an intelligent appraisal of their risks and to decide intelligently when and how to exercise the rights and remedies which the law affords them. Non-disclosure, which to an extent has existed up to now in our companies legislation, facilitates fraud and insider dealing, both of which have been assaulted by case law over the years but not in many instances by a tough enough kind of legislation. The sections dealing with disclosure assist creditors to make sound judgments.
The State itself, which on occasion has funded through grant-aid certain companies, has a greater protection for its investment. The better to protect State aid to companies, the IDA, Údarás na Gaeltachta and any other grant-aiding agency should insist on taking an equity in the company which is assisted. Taxpayers have as much right to profit from a venture in which they have invested as do the directors, members and shareholders of the company. There is no logical reason why semi-State companies or organisations acting on behalf of the Government should not take an equity holding in certain companies. This week I was pleased to see that the Minister for Agriculture and Food, in grant-aiding the Kerry Group which has been so tremendously successful over the years, said the State intended to take an equity in the project in which the company were engaging. This is a welcome development. All too often when the State has grant-aided companies which make a success of their business affairs, the State and the taxpayers do not benefit; but when the State invests in companies which fail, the State and the taxpayers lose everything. The taking of equity in companies which are grant-aided will be of great assistance to the State and certainly to the taxpayers. The taxpayer is entitled to recover his profit.
I am pleased that the concept of voluntary winding up of a company is being improved. It often happened that companies were liquidated by shareholders and directors at a time when those companies might have carried on business to the benefit of the creditors. It is not right that a company which sees some difficulties coming up can decide to wind up in order not to lose anything themselves while, at the same time, there are creditors who might be paid if the company were not wound up. The concept of voluntary winding up has been too loose and it is about time it was tightened up.
I welcome the new concept of reckless trading. Reckless trading is not outright fraud. Fradulent trading has long been unlawful. To sum it up, fraudulent trading qualifies the separate legal personality. Reckless trading goes further and is crucially important for the creditors of insolvent companies. Reckless trading qualifies the separate legal personality in a far broader way than fraudulent trading and lifts the corporate veil to the advantage of creditors of insolvent companies. For far too long directors who traded recklessly though not fraudulently lost little or nothing and carried on their businesses in a manner which they knew to be reckless, like a gambler gone daft, knowing that the piper — in this case the creditor — could not call the tune. That was clearly wrong. I believe creditors of insolvent companies will now be able to go behind the corporate veil, or the legal person which is the company, sue the directors who traded recklessly and make them personally liable for the debts they approved. This Bill does not affect the director who trades honestly and responsibly but it does and should make an attack on those who, in the past, have traded recklessly. Directors who trade recklessly, fraudulently, may now be disqualified as directors.
While this legislation for the most part does not say that a person may never be a director again, the Bill will require a director who is taking a second bite of the cherry to have greater capitalisation. I think the sum mentioned is £50,000. For many public companies that figure is too low because a person who has been disqualified from acting as a director for a certain period should not be entitled to form a public company and trade again without greater capitalisation than £50,000.
Receivers have never been over popular in Irish business affairs, but they perform a very important function. In our company law, receivers are required to obtain the best price reasonably possible for the company's assets. Anybody connected with the company can make an application to the court to ascertain if the receiver is getting the best price reasonably possible. It is crucial that creditors and shareholders be protected because a receiver who does not make a sufficient effort to obtain the best price reasonably possible on the open market, who is in a rush to dispose of the company's assets and get on to the next liquidation, cannot be tolerated. It is time those with a direct interest in a company's affairs got the opportunity to ascertian if the receiver is getting the best price reasonably possible.
If I have a reservation about the amendments in relation to receivers in general, it would have to be that receivers under our legislation since the foundation of company law, even under the Companies Act, 1963, have little or no social obligations to the workers in a winding up other than the statutory rights of remuneration in order of priority. It is time receivers looked on the social position of the workers and the economic and future viability of the company to ensure that workers are treated fairly. A receiver going into a company with a view to selling the assets with no regard for workers could create great difficulties for those people who might otherwise have been able to continue in employment. The companies legislation should be amended to ensure that receivers have due regard to the workers and this should be done as a matter of urgency.
The concept of the introduction of an examiner to go into the company is a better option than a receiver in many instances. If legislation provided that an examiner could continue the operation of a business, many companies which have been wound up to the detriment of the creditors, shareholders and workers, might have continued trading. The best example of this is the PMPA insurance company. It is a pity that the concept of the examiner in its present broad sense was not brought in earlier.
However, the concept of having an examiner must raise the question of whether it is reckless trading for directors to continue trading when it becomes apparent that they should have called in an examiner or of whether it is reckless trading for a company to continue trading in the knowledge that the company would become insolvent anyway and the directors did not appoint an examiner. That question will give rise to a considerable amount of case law in the coming years.
For a long time it has been a founding principle of company law that companies could not acquire their own shares. It was first forbidden in the case of Trevor v. Whitworth, and that has become known as the rule. The main objections were that it endangered the creditors' security and is a disguised way of returning capital to shareholders. Another argument made by many was that company controllers could manipulate share prices by acquiring the company's shares and the third argument was that it made it easier for controllers to entrench their positions of power.
Since this Bill attacks abuse and malpractice, the concept of the company acquiring their own shares is no longer of value. In the present industrial and business climate, it is important that a company be allowed acquire their own shares because the shares may be undervalued as against the assets of the company. In that instance, it is only right that the company should acquire their own shares to protect themselves. It encourages directors of companies in trouble to sort out their problems. It protects State investment where grant aid has been paid, it helps creditors and assists industry generally. We must never again have a situation in which people invest their money, as in the case of the PMPS, and find their life savings gone because of defects in company law. This Bill will correct all those wrongs.