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Dáil Éireann debate -
Wednesday, 23 Nov 1988

Vol. 384 No. 6

Companies (No. 2) Bill, 1987 [ Seanad ]; Second Stage (Resumed).

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

On a point of order, is it appropriate that the House should continue to sit in this thick smog?

It has been commented upon.

I would have thought that Deputy Mitchell would be only too glad to export it from Ballyfermot to here.

(Interruptions.)

Perhaps the Minister for the Environment would declare the House a smokeless free zone.

Order, please.

I wish to continue with my reply to the Second Stage debate. On Part VI of the Bill Deputy Bruton suggested that to avoid situations where creditors might be misinformed and agree to a voluntary liquidation, all voluntary liquidations should be subject to a declaration of solvency requirement. I should explain here that there are two kinds of voluntary winding ups, a members' voluntary winding up and a creditors' voluntary winding up. The essential difference between the two is that a members' voluntary winding up is only available if the company is in fact solvent. Therefore, since most creditors' voluntary winding ups occur where companies are insolvent in any event a requirement to have a declaration of solvency in such cases would be inappropriate.

Also on Part VI Deputy Bruton along with a number of other Deputies raised a number of detailed points on section 116 which introduces the new civil concept of reckless trading. I recognise that this is a particularly tricky area and one that needs a lot of teasing out. For that reason there was a substantial debate on that section in the Seanad and I am sure that will be repeated in this House. I should also tell the House that the section concerned was amended by the Seanad in an effort to clarify more exactly what the Bill is driving at with this new concept. As a result of that amendment section 116 is now much clearer. However, the various matters arising can of course be further teased out on Committee Stage. I would say at this stage that I do not share the Deputies' concerns as to the likely effects of the section concerned on the creditors of a company or on its ability to attract directors to its board.

Many Deputies raised the question of the preferential status of the Revenue. They raised the familiar question of the preferential position of the Revenue Commissioners in the winding up of a company and asked that this be abolished or substantially reduced. This issue was also debated at some length in the Seanad and a commitment was given in that House to give the matter the fullest consideration. That consideration is still going on and I would say that I hope to conclude the examination concerned at a very early stage.

Also on Part VI, Deputy Lowry said that certain difficulties can arise in bringing dishonest directors to court. The most obvious cases would be where there were insufficient finances available within the company to do so. To help overcome this problem he suggested that a fund should be created to enable liquidators to pursue dishonest directors. Deputy McDowell made the related point that there should be a statutory division of the assets of a company in liquidation in somewhat the same way as applies to inheritance under the Succession Act.

Taking Deputy Lowry's point first I should say that section 299 of the Principal Act already obliges liquidators in the course of winding up companies to report any suspected wrongdoing by directors or shareholders of the company concerned to the DPP. Section 153 of the present Bill proposes a similar duty for receivers. Secondly, the imposition of a charge spread over the whole business community to create a fund for use in circumstances where the receiver or liquidator did not have sufficient resources in the company to pursue the directors would not be something to be lightly taken on board. It would not only involve a direct additional cost on industry but its administration would also involve making resources available at a further consequent cost. Finally, with the overall tightening up of the provisions in the Bill relating to the operation of companies the necessity for a fund as suggested by Deputy Lowry should not be as great in the future.

Turning to Deputy McDowell's point, this would have dramatic effects on the existing relationships which exist between companies and those who provide finance to the companies, either members, shareholders or lending institutions as well as creditors. The circumstances of each company liquidation which occurs vary so much that such a rigid arrangement would result in a major reassessment of trading relationships. This is something I would not be inclined to consider at this stage.

On Part VII of the Bill a number of Deputies suggested that a black list of restricted or disqualified directors should be available to ensure that people establishing companies did not invite disqualified people on to the board. The suggestion was also made that all companies, both public and private, should have minimum capitalisation requirements. I should clarify that under the 1983 Companies Act the minimum authorised capital of a public limited company is already £30,000. However, if we went on to require a certain minimum capital from private companies also I wonder if this would have the effect of discouraging the very enterprise we all agree is so badly needed in this country. Our approach to this, on the other hand, was rather more limited. All section 128 does is say that if one is a director of a company which goes into liquidation and cannot pay its debts then before one can start up again the new company will have to meet the minimum capital requirements set out in section 128.

As regards the register of restricted or disqualified directors, I should point out that the Registrar of Companies will, under sections 128 and 135, be notified of the names of every person to whom these sections apply and he will be in a position to monitor the directorships of new companies or any change in the directors of an existing company. Obviously, the registrar would have discretion about the manner of making available to the public any information he gets under this subsection.

Deputies Cullen, Mac Giolla and Dempsey, among others, gave examples of directors who so organise their affairs that new companies are formed before the old ones which have run up massive debts are liquidated. These Deputies will be interested to learn that, following publication of the Bill, company directors were encouraged by certain parties, even before the Bill came into operation, to protect themselves from the proposals contained in section 128 by setting up shelf companies now which could be used at a later stage if the company with which the director was already involved went into liquidation. We became aware of this proposal and section 128 closes that particular loophole.

I was glad to note that most Deputies welcomed the provisions dealing with what I might call "outright disqualification" of directors, although Deputy Lowry expressed concern that a director of a company which goes into liquidation for perfectly legitimate reasons might be victimised under the provisions of this Part of the Bill which provide for the automatic disqualification of a director following conviction. I should point out that these automatic disqualification provisions will in general only operate where a director has been convicted and found guilty of a serious offence involving fraud or dishonesty and obviously this is something we will stand over.

On Part VIII of the Bill, Deputy Bruton thought that section 149 could actually militate against a receiver obtaining the best price for company property in that his valuation of the assets would be known to the potential purchaser. While the section does place a duty on the receiver to prepare a statement of affairs, the fact remains that in the valuation of assets, which was the case instanced by Deputy Bruton, the receiver would more than likely avail of the services of a professional valuer. Subsequently, when disposing of assets, he would be obliged to exercise all reasonable care to obtain the best price reasonably obtainable. After all, a valuation is simply one person's estimate of what an asset is likely to realise. In practice, the market dictates what will be realised on the sale of such an asset and reflects such matters as interest, scarcity, location and so on.

Deputy John O'Donoghue thought that receivers should in general take more account of the interests of employees. I should tell the Deputy that this has been addressed by section 146 of the Bill, which was amended in the Seanad to allow employees to apply to the court for directions as to the manner in which the receiver is carrying out, or indeed is not carrying out, his functions.

Most Deputies welcomed the general aims and ideas behind Part IX of the Bill although some expressed reservations about the cost aspects of the new rescue system we are proposing here. Some others — for example, Deputy Swift — expressed concern about the shortness of the period during which the debts of a company would be frozen following the appointment of an examiner.

Taking Deputy Swift's point first, the period during which a company can be under the protection of the court will in most cases be three months but in exceptional cases may be extended to four months. However, rather than being a disadvantage I think this is one of the major attractions of the rescue proposals in Part IX of the Bill since it will tend to concentrate people's minds on what needs to be done. Thus, it will not have the disadvantage attributed to the American "Chapter XI" system which we understand can often run on indefinitely. There is a definite time period in Part IX of the Bill and I think it would be wise to stick to it. I also want to make the general point that much consideration went into designing the proposals in Part IX. They have been so structured as to involve the least possible resort to the courts and the speediest possible operation of each appointment.

This is an innovative measure so far as company law in this country is concerned and it deserves every opportunity to see if it will operate successfully. At the same time, if there are ways and means in which it can be improved still further I will be only too willing to listen to them. Indeed, this was certainly the case in the Seanad where Part IX was radically overhauled and improved following many suggestions to that effect which we openly received.

Having said that, it is obvious that a scheme along these lines is not only desirable but necessary. It will give companies in financial difficulties but which have a long term future the necessary breathing space to sort out their problems. I have no doubt that Deputies in this House as well as myself and others know of companies which could have been kept in business and jobs saved if such a provision existed in company law.

On Part X of the Bill, most Deputies welcomed the efforts to raise the general standard of account-keeping within companies, although Deputy Bruton wondered whether this would involve every company having to have an accountant on its board, leading to increased company costs. I think we would have to accept that compliance with the new requirements may involve some additional expense for companies. On the other hand, there is ample evidence in recent times that many companies have become particularly lax in keeping proper accounts — indeed all one has to do is to ask company liquidators what their general experience is in this regard, to confirm this. What we are saying is this: there is no substitute for proper accounts and management information systems and many a good company would still be around today if they had paid proper attention to this aspect of their affairs.

Taking this one step further, if the poor records kept by a company contributes to its ultimate demise, I see nothing wrong in allowing a creditor who suffers loss as a result to seek compensation from directors who have contributed to that loss by failing to keep proper accounts. Section 200 does no more than that and indeed includes a number of tests that a court would have to be satisfied about before it could make a declaration under that section. All in all, if the provisions of Part X of this Bill achieve the desired improvement in the standard of account-keeping generally then this House can be well satisfied.

Deputy Mac Giolla suggested that the restrictions on access to the privilege of limited liability should not be confined to directors of companies which go into liquidation in that directors could evade these restrictions by not formally winding-up the company. Section 207 of the Bill is aimed at dealing with the type of abuse mentioned by the Deputy. It provides that certain provisions of this Bill and the Principal Act can be applied to companies even though they are not being formally wound up.

Deputy O'Malley said that present take-over panel arrangements in relation to mergers involving Irish companies were unacceptable and would need to be addressed by way of amendment of the present Bill or the Mergers, Take-overs and Monopolies (Control) Act, 1978. While I appreciate that the matter mentioned by the Deputy is very topical at present, I am sure he will share my view that it is more appropriate for consideration separate from the present Companies Bill. Indeed, in this regard I wish to say that preliminary discussions have already taken place with interested parties in regard to the future role of the panel in Ireland. I will certainly bear the Deputy's comments in mind in relation to the matter. I believe all of us and the public at large feel totally dissatisfied at recent events in this regard. I can assure the House that the discussions which have started are for real. We have involved the Central Bank, the Stock Exchange and many other interests in the discussions and these will continue in the hope that they will produce an appropriate solution to the situation.

Deputy O'Malley also said, in welcoming the indication that proposals to provide for purchase of own shares by a company will be brought forward by way of Committee Stage amendment, that he would like to see copies of the scheme at an early stage. As the Deputy remarked, this is a particularly involved proposal and the details of the scheme are being finalised. I wish to assure the Deputy that I will bring the scheme before the House at the earliest opportunity. It is a innovation in company law and there are concerns about it but I am also concerned that, at least, Irish companies can operate under the same ground rules and be afforded the same opportunities and as we look towards 1992 that they are given the opportunity to purchase their own shares, not just to be able to purchase them as such, but to ensure that the proper safeguards are fully in place before this goes through.

Coming back to the general thrust of the Bill, many Deputies said that companies must not be deterred from taking risks, and that it was vital that the Bill should strike a proper balance between curbing abuses on the one hand, and not restricting normal business practice on the other. This is precisely the point that we have been at pains to emphasise throughout the whole debate on the present Bill. It is absolutely essential that the right balance be struck here, and in this regard all suggestions that will help to ensure that this is achieved have been, and will continue to be, fully, fairly and carefully considered.

I would like, finally, to thank Deputies on all sides of the House for their excellent contributions to the debate. I hope the House will understand that I could not hope to cover all the points that were made. Indeed, I know that my reply has been on the long side, but so many points were made by Deputies that I felt I had to reply to as many of them as possible.

I am now putting the question: "That the Bill be now read a Second Time".

May I ask a question, a Cheann Comhairle?

A question from Deputy Fitzpatrick.

Am I correct in thinking that there is a provision in the Bill which provides that a person who has been a director of another company which was wound up leaving a list of unpaid debts behind it cannot be a director of a new company unless the paid-up capital of the new company is at least £10,000? If that is right, does the Minister think that that will be a discouragement to anybody who has failed and wants to set up a sham company to trade again without any chance of succeeding a second time?

Before the Minister replies, I should advise the House, as indeed the Members well know, that Committee Stage of this Bill has yet to be taken. Members will have an ample opportunity of ventilating their views still further in depth and in detail at that time. Does the Minister wish to comment on what Deputy Fitzpatrick has said?

The reply to his question is, only if such person is disqualified, to my knowledge. However, it is a matter that can be teased out on Committee Stage.

It applies automatically, does it not, across the board?

Arising directly out of what the Minister has said about the possibility of amending the Mergers and Monopolies Act, 1978, given the new context that now exists, I think that he expressed the view that it would be better to do this by way of a separate amending Bill rather than as part of this Bill. Does he propose to bring in such a Bill shortly? Secondly, if he does, is it proposed to deal with the takeover panel problem in that Bill, or to deal with it by some administrative arrangement or agreement separately from legislation?

It must be accepted by the House that the Minister has replied to the Second Reading of the Bill. The Chair is glad to entertain a question but there can be no discussion at this stage. Would the Minister wish to comment briefly?

Separate discussions are going on until the position crystallises and clarifies itself. We have not made up our minds fully as to which way to deal with it.

Would the Minister agree to ask his officials to investigate the possible danger under the two areas where directors may be personally liable for the debts of a company, that is, failure to keep proper books and accounts and reckless trading, that it may become the practice for creditors who are unable to get the full amount that they are owed from the company, almost as a matter of course to pursue personal liability against directors? This practice, if it become embedded on the part of advisers to creditors, could have a very serious effect in discouraging people from becoming directors of companies at all, particularly directors who come in as non-executive directors to help to rescue companies—

I regret to say that this is tending to become a debate.

Would the Minister undertake particularly——

These matters can be dealt with later.

These matters will be fully considered and we will come back in connection with them on Committee Stage.

I must put the question again: "That the Bill be now read a Second Time.

Question put and agred to.

When is it intended to take Committee Stage of the Bill?

Next Tuesday, subject to agreement between the Whips.

Could I ask the Minister in that regard, as I did on the last night——

On Committee Stage of the Bill, Deputy.

——if a special committee might be established rather than a committee of the whole House? What is the Minister's thinking on that?

It is still being considered.

The Minister would want to make up his mind before next Tuesday.

We are not saying yet what the Whips will agree to next Tuesday.

Is it likely or not?

I do not know how far the discussions have gone and what the position is at this stage, but I made it clear that we were open to discussion.

It is the first that I have heard of it.

Committee Stage ordered for Tuesday, 29 November 1988, subject to agreement between the Whips.
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