I understand Deputy Charles McCreevy reported progress and is in possession.
Companies (No. 2) Bill, 1987 [ Seanad ]: Committee Stage (Resumed).
I was welcoming the new amendment 10a put down by the Minister to effectively scrap section 13 as in the Bill at present. I recognise the Minister is attempting to put in a complete new section to get over a problem which was raised on the last day when we were discussing the expenses of the investigation. The section as it stands gives rise to the following problems. I think the best way to explain this is to give an example of what I envisage will happen when the investigation takes place and the inspector is appointed. We will say the shareholders of XYZ company apply to the court under section 7 for the appointment of an inspector and the court grants that. When the court is granting the appointment of an inspector to carry out the functions, the applicant will have to put forward some security of money, bonds or whatever, as provided for under section 7, of a sum not exceeding £200,000. Take it that the court decides that a bond must be put forward by the applicant for the appointment of the inspector of, say, £200,000. When the inspector has drafted his report and it is sent back to the court, criminal prosecution may result from this report and some people involved in the company may be brought to trial charged with various misdeeds or wrongdoings and may be convicted of offences. Under the section as it stands the expenses of the whole investigation are to be borne in the first instance by the Minister for Justice. When the whole report is completed and prosecutions are initiated against various people and the costs of the investigation come to, say, £500,000, under the present section if those people are convicted of offences the court can decide that they should contribute a certain proportion of the costs. If it happens that they cannot pay up or are not in a position to meet those costs, even though the court decided that the applicant who had put up the security then had to pay only £50,000 and the other people could pay nothing, The Minister for Justice could still have the bond estreated up to the sum of £200,000.
We can almost take it for granted that most of the applications for this will be from people who suffered loss before the whole proceedings commenced in the first place. That seemed an innocuous section. The Minister here is trying to meet the problems put forward when we were discussing that last week, and I suppose this goes some way towards it.
Subsection (3) of the amendment provides that:
The report of an inspector may, if the thinks, and shall, if the court so directs, include a recommendation as to the directions (if any) which he thinks appropriate, in the light of his investigation, to be given under subsection (1).
We can take it then that the inspector in a practical case would probably say in his report who he thought should be liable for the cost of this investigation. Presumably then the court will, under subsection (1), direct the various bodies to pay certain proportions.
However, the difficulty I see with subsection (1) is that only two kinds of bodies are mentioned there after the Minister for Justice has been liable for the costs in the first place, namely, the company themselves or the applicant. The applicant may have brought these matters to the light of the inspector, the inspector was appointed and he completed his report. Arising from his report a number of other creditors, members of the company, or X, Y or Z could benefit as a result. The only people who are going to bear the costs of all this are the people who brought the application in the first place, but everyone else could benefit at the same time. Would it not be possible to provide that the inspector may include a recommendation under subsection (3) as to who else might benefit from an investigation?
Subsection (2) (c) deals with that.
Yes. If, under subsection (2) (c), a person got damages or property, arising from this investigation in the court, such persons would have to pay the costs as well. The amount cannot be greater than one-tenth of the compensation they got.
Two points occur to me. The word "repay" where it appears at the beginning of the last paragraph of subsection (1) seems inappropriate. The wording "to repay the Minister for Justice" all or part of the money seems to be wrong drafting.
Secondly, and I ask the Minister to take this on board seriously, if you get an award of damages of, say, £100,000 and that made you liable in theory to contribute 10 per cent of it, which would be £10,000, you can be ordered to pay the £10,000 by virtue of having the damages awarded to you. However, it is one thing to have the damages awared to you; it is a different thing to have them paid and to collect them. The court is only entitled to make the order at the time it awards the damages, but if the court says that I, for instance, have to pay 10 per cent of an award by way of indemnification to the Minister, I may be ordered to pay that money to the Minister but I may have no chance at all of doing so due to some problem about recovering the remaining 90 per cent. Is that fair?
Before we interrupted business, Deputy McDowell raised the question of the constitutionality of the provision requiring a convicted person to contribute to the expenses——
In the District Court.
——of an investigation in the context of summary proceedings. We have given some consideration to that matter in drafting our amendment. It may have been the wording in section 57 of the Road Traffic Act, 1961 which caused the problems which led to Mr. Justice Hamilton rendering the section unconstitutional in the case of Cullem v. AG in The Irish Reports, 1979. The section was very clear in its infliction of a punishment on a person convicted. The requirement to pay compensation was stated in the section to be “in addition to any other punishment”. Therefore, while we have yet to confirm our view on that finally, I am fairly satisfied that the wording in the section is in no way intended as an intentional, as it were, penal deprivation of property, to quote from the case of Conroy v. AG, The Irish Reports, 1965. I would like to confirm that position by Report Stage but I am fairly happy at this stage that we are clear of this difficulty. However, I appreciate the Deputy's raising it.
Deputy Bruton raised some points about the number of courts and so on. We may have covered that by providing that the Minister for Justice or the applicant or a body corporate can be refunded, but the Deputy may have a point about the manner in which the subsequent proceedings are to be dealt with. I will have to give that some more thought also. The Deputies have suggested trying to get more of this done in one court rather than have a number of proceedings, but it will not be that simple because some are in the civil area and some in the criminal area and there would perhaps be different levels of court. I will have to give more thought to tidying that up. What we are trying to do here is put some order on the procedures. If that leads to a second or third court case, offhand I have no neat way of preventing that. I will have a close look at it between now and the next Stage of the Bill.
Deputy McDowell asked about the word "repay" and I accept his views in regard to it. We will tidy up the wording in the subsection between now and Report Stage. I take his point about "awards" not being the same as "collection". However, the intention is clear, that the times will coincide. I will have to look at that matter between now and Report Stage.
If the Minister inserted "awarded" and "receives"?
I would prefer not to do that now. I will have a look at the matter between now and Report Stage. The points raised by the Deputies, which are mainly of a legal nature, were helpful and I will have a look at them.
The "any other punishment" that appears in that section of the Road Traffic Act also appeared in relation to disqualifications. It was held by the Supreme Court not to mean that it was penal in nature. I am referring to one losing a licence. The relevant section states that one can lose a licence in addition to any other punishment, and the Supreme Court, rather surprisingly, arrived at the view that that did not apply, that it was a punishment to lose a licence. It may be that the Cullen case is not as straight-forward as it appears.
The Minister did not comment on the unusual fact that this is one case where criminal sanctions are also accompanied by the possibility that people being convicted might also have to contribute to the costs of the investigation which led to their conviction. He did not comment on the fact that this has for some years been a unique feature of company law.
I will give the Deputy the reference later. There is such a provision in the 1963 Act and, to that extent, it is not unusual. I do not think it is any less valid.
The provision in the 1963 Act has never been used because there has not been any investigation under that Act.
It is provided for in the principal Act.
Is there a constitutional difficulty in providing that a person, in addition to being convicted by a court, sent to jail and fined, should also have to pay the investigative costs?
The advice given to me is that there are no constitutional difficulties. As we go through the Bill and points of a legal nature are raised I want to be careful to get advice from the Attorney General's office. The advice to me on the constitutional issue is clear but I will make doubly sure before Report Stage.
These investigations may cost a lot of money and may drag on for one or two years. In the meantime the inspector may have to make payments to third parties, experts and so on. Will superior court rulings be drawn up indicating how those people will be reimbursed as the investigations progress? If an investigation lasts for one year the sum for expenses and fees will be very big. In the case of liquidations and receiverships experts are paid out of the assets and funds of the company but it does not appear that that will happen in the case of investigations. An inspector when appointed will not control the company. Will professional witnesses have to wait until the end of the investigation, which may take 12 months or 18 months, for payment? If that is the case very few experts, or firms, will be in a position to take on such work.
Section 13 is reasonably clear in regard to that. It states that the expenses will be defrayed in the first instance by the Minister for Justice. Therefore, in the first instance such people will be covered by the Minister. There is also a procedure for a refund, if necessary, to the Minister for Justice.
I am referring to payments on account to the inspector. When the investigation has been completed and the amount of fees has been agreed, the Minister for Justice will make the payments but are we expecting people to wait until the end of the investigation to obtain payment? I do not think we can expect people to wait for two years to receive payment. Such a person would incur expenses and may have to make payments to a third party. Will it be necessary for an inspector to make an application to the courts to get the Minister for Justice to pay as the inquiry progresses?
The section is clear in regard to this. It states that the expenses of the investigation will be defrayed in the first instance by the Minister for Justice. Is the Deputy referring to the cash flow position of the inspector?
I do not know if we should cover such a detailed point in legislation. The section states that the expenses will be paid. Obviously, it permits payment on account to be made to the inspector by the Minister for Justice. The details of the procedure involved in transferring money from the Minister for Justice to the monthly account of the investigating inspector is not necessary in legislation. It is a minor detail that is not necessary.
It may be a minor detail to the Minister but it would not be for the inspector.
I do not think we will have many investigations to worry about.
The section should allow for the making of payments on account as the investigation proceeds. This is a different type of procedure to liquidations and receiverships. A liquidator or receiver has control over the assets and funds of a company and they may apply to the court for payment on account. Under this legislation an inspector will be asked to investigate many of the activities of companies but without having control over the assets. I accept that the costs will be defrayed by the Minister for Justice at the end of the investigation but if it takes two years to complete we should make provision to pay the experts on account. An inspector would not be able to fund himself as he proceeds with the investigation. I should like to appeal to the Minister to consider this matter between now and Report Stage. If payments are not made on account to the inspector and third parties employed by the inspector to carry out work on his behalf there will be few experts anxious to participate in lengthy investigations.
The Deputy has indicated that he does not regard this as a matter or urgency and has asked the Minister to look into it between now and Report Stage. On that basis may I put the question in regard to the amendment?
May I suggest that the Minister consider inserting some kind of a rule giving power to the Minister for Justice to govern practical matters of various kinds which might smooth out some of the difficulties about the multiplicity of courts, the running expenses of the inspection and so on, that this could be dealt with by regulation. I do not know whether that is practicable——
I will take a look at it.
Deputy Bruton will appreciate that amendments Nos. 11, 11a and 11b cannot be moved.
I move amendment No. 12:
In page 17, subsection (2) (c), line 3 after "public interest" to insert "in the light of activities or possible future activities of the company which the Minister shall specify".
This section deals with the investigation of the ownership of a company. This is not a power related to the formal investigation that we have been talking about in the last few sections. It is simply a free standing power on the part of the Minister to inquire who owns particular shares in a company. There are three grounds under which he can inquire as to who owns the shares in a company, one is for the effective administration of the law in respect of companies. There is absolutely no doubt but that the Minister should be well able to use the power in that circumstance. Another is for the effective discharge by the Minister of his functions under my enactment. While that is a much wider power it is reasonable. For example, the Minister might want this information for the exercise of his powers under the mergers legislation——
——or insurance, as Deputy McDowell has rightly reminded me. Again, that is not unreasonable, it is broad commercial law. The power is also being taken that the Minister in the public interest can obtain this information. Perhaps the Minister can cite various authorities and so on regarding the public interest but the public interest seems to me to be essentially what the Minister as a politician decides is a good enough reason. If it is good enough politically for the Minister he can inquire into the ownership of the shares of a particular company. It could be done potentially for partisan political purposes. For one reason or another a Minister might not like a particular company. He might suspect that one of his political opponents owned shares in that company and that his political opponent was not disclosing the fact that he owned those shares and he might decide that it was in the public interest — which is so broad that it has the most elastic meaning — that he should find this out. It is a kind of a fishing expedition for information. That is some thing that is not particularly desirable and that is the reason I suggest in my amendment that the Minister should be required to specify exactly what he thinks the company might be liable to be doing wrong, as stated in the amendment:
"in the light of activities or possible future activities of the company which the Minister shall specify".
In other words the Minister could not go to court off the top of his head looking for the names of owners of a particular company; either he would have to do it because he needed the information to enforce company law, because he needed it for some other enactment or because he was worried about something the company were going to do which he should specify. He should not be able to do this just in the public interest which could mean anything and which would be an entirely subjective judgment of the Minister.
In a sense I know one will naturally be suspicious about who owns shares in companies if people deliberately choose to cover up the true ownership of a company. One would be inclined to suspect that there was something amiss. That might tend to be more frequently the case in the matter of public liability companies. In private companies people might have perfectly ordinary reasons for not wishing to disclose the ownership of the shares. I think it is right in certain circumstances that they should be forced to do so but I wonder if the Minister should be free to do it on such broad grounds as are contained in the section.
I am aware that the Deputy has raised this point on Second Stage and I appreciate his concern. I see his point that the Minister of the day might be influenced other than by the most desirable motives to appoint an inspector but I am sure the Deputy will appreciate that there could be a number of circumstances in which the Minister might use this power although, in fairness, I cannot see them arising very often. Having said that the type of cases where I think it would arise would be if, perhaps, the Minister suspected that the company concerned were being used as a front for illegal operations of one kind or another, for example, trafficking in drugs or the use of companies by illegal organisations. Cases might arise where the IDA, say, had substantially grant aided a company, but following a takeover or some other similar circumstance, the Minister wished to know who controlled the company. They are some examples of what we would have in mind in this section dealing with the question of, "in the public interest."
I take on board the Deputy's general concern. I am very sympathetic to the aim of his amendment but I am not entirely happy with the wording he proposes. For example, I do not see what benefit would be served by the Minister specifying the activities of the company which led him to appoint an inspector in these cases. Indeed, in some of the cases I have mentioned already by way of the three examples I have given, the very specification by the Minister of the activities which led him to appoint an inspector in the first place, could turn out to be counter-productive. Arguably, it could forewarn some operators as to what the Minister had in mind. Requiring the Minister to specify the activities concerned would not itself seem to serve any public cause since I assume there would not normally be any publicity attached to the appointment of an inspector under this section. I would not envisage it being a matter of publicity.
The Deputy has legitimate concerns regarding this section. If he wishes me to pin down what I mean by "in the public interest" then I would like to do so on Report Stage by bringing forward a Government amendment on the subject. Incidentally, another reason I should do it that way is that in section 15 (1) (c), the words "in the public interest" also appear and we would have to deal with it at that point also. I would say yes in principle to the amendment but reject the actual wording. I will bring forward a Government amendment which will meet the Deputy's concern.
I accept what the Minister says. The three cases he mentioned are all reasonable but they are all circumstances which arise under an Act of the Oireachtas, not necessarily an Act for which the Minister for Industry and Commerce is responsible. Perhaps we could get rid of the public interest element altogether by extending paragraph (b) to include for the effective discharge by the Minister of his functions under any enactment or at the request of another Member of the Government for the effective discharge of functions attributable to him under an Act of the Oireachtas for which he is responsible. Perhaps that would be a way round it. There is something to be said for tying it to an actual responsibility which a Minister has and not to allow for a purely subjective judgment.
I take Deputy Bruton's point. May I ask the Minister if the ministerial power is absolute? If somebody disagrees that an investigation ordered by the Minister is in the public interest have they any right of recourse to the courts?
Before the Minister replies it strikes me that the phrase "that the Minister is satisfied" is one which is an objective test and that if the Minister decided entirely subjectively and arbitrarily that something was in the public interest it would be subject to judicial review and could be quashed and an order made by the Minister. That phrase has been held in a number of cases to actually require the Minister to arrive at an objectively justifiable judgment which can be set aside if there are not reasonable grounds for his being satisfied. Those two points are covered.
Deputy McDowell has given a sufficient answer to that question. There is a provision contained in the Bill which would allow a judicial review to take place in cases where the Minister has to be satisfied in regard to a certain aspect.
If the section stated "the Minister is of the opinion that" it might be very different but because the Act requires him to be satisfied an objective test is created.
The fact that an aggrieved party can go to court to vindicate himself in respect of something which has been done by the Minister is not sufficient justification for enacting sloppy legislation. We should try to specify when exactly we envisage the Minister using this power rather than waiting for the court to decide on this matter on a case by case basis. In any event, it is desirable in a matter of this kind that the Oireachtas should give some guidance to the court as to when it is envisaged and the circumstances in which the Minister would use this power. While I have been reassured by what Deputy McDowell said, a few points remain to be looked at and I take it that notwithstanding what Deputy McDowell has said the Minister will look at this issue to see if the legislation can be tightened up and made more precise.
Is the Deputy happy enough at this stage not to press his amendment?
I am as happy as I could possibly be in the circumstances.
That satisfies the Chair and gives him the right to ask——
It is stated in the Bill that if an officer or an agent refuses to co-operate or refuses to produce documents he shall be guilty of an offence. Can the Minister of State tell us if it is stated in a later section what the punishment would be?
Section 202 (1) deals with that matter.
A fine not exceeding £1,000.
Let me indicate before we formally agree to the section that the reference in line 34 of page 17 to the "Registrar of Companies" is misplaced and that it should be noted that the Bill will have to be amended on Report Stage.
Can the Minister of State tell me if the purpose of section 15 is more or less similar to that of section 14?
Their purposes are very similar. Section 15 provides a much shorter route.
One does not need to appoint an inspector under section 15 whereas one does under section 14.
That is correct. That only applies in cases where the Minister requires information.
Why would one need to appoint an inspector in one case and not in the other? Is that of any significance?
There may be circumstances where the shorter route would be the more appropriate route to take, for example, in a case which relates to a small company where not much fact finding is involved.
I move amendment No. 13:
In page 20, subsection 18, between lines 22 and 23, to insert the following:
"(b) to be filed with the Registrar of Companies".
At present when the Minister imposes restrictions on shares or debentures under this section he is required to have a notice of this direction sent to the company so that it would know what it may or may not do and to have a notice of this direction published in Iris Oifigiúil and in at least two daily newspapers. This amendment seeks to place a requirement on the Minister to have a notice of this direction filed with the office of the Registrar of Companies which has been substantially automated and which will be used to an increasing extent by those in business who wish to obtain information. Clearly, potential purchasers would need to know that restrictions have been imposed on shares or debentures and if they are to rely on the company to supply them with that information or on the fact that they are regular and assiduous readers of Iris Oifigiúil, or of all the statutory notices in the daily newspapers, there is a danger that that information may not be made available to them. It is possible that people may want that information long after the time when the notice appears in the newspapers. It would be much better if the information was available at some central location where people could easily locate it. That is why I suggest that the office of the Registrar of Companies should be added to the list of places where the Minister would have to submit this information.
I can agree with the thrust of this amendment but, again, I would be much happier from a drafting point of view if the House could agree to inserting the words "delivered to" rather than the words "to be filed with". That is a small point but by inserting those two words the matter would be made much clearer. There is one other point I would like to make and that is that the words "Registrar of Companies" should be written using lower case letters. Again, this is a technicality and I ask the House to agree to this change as that is the way in which it generally appears in the Companies Act.
Perhaps the insertion of the words "delivered to" would be more appropriate as the chances of anyone ever finding the information there are remote.
Things have improved.
Some effort should be made to improve the workings of that office as it is like the last outpost in the Congo and I say that with no disrespect to those working in that office.
Is the Deputy convinced that his contribution is appropriate and helpful to the discussion on the amendment? So that the House would be quite sure as to what it is being asked to agree on, may I ask whether it is being proposed that we delete the words "to be filed with" and substitute the words "to be delivered to"? Is that agreed? Agreed.
The Minister of State has suggested an additional correction.
I indicated that the term "Registrar of Companies" should be written using lower case letters as that is the way in which it generally appears in the Companies Act. Let me quickly say that I do not want to be associated with the view that the Companies Office is in some disarray, in fact, quite the contrary is the case in that it is working very well.
They are doing their best with limited resources.
I think we all take it that Deputy McCreevy's contribution was by way of Christmas cheer. Is section 16, as amended, agreed to?
Could the Minister of State give us any indication as to the circumstances in which the provisions contained in this section would be used?
I would like to put one or two questions to the Minister of State. In subsection (1) the Minister would be given power to impose restrictions on the transfer of shares. Let me quote subsection (1):
Where in connection with an investigation or inquiry under section 14 or 15 it appears to the Minister that there is difficulty in finding out the relevant facts about any shares (whether issued or to be issued), the Minister may by notice in writing direct that the shares shall until further notice be subject to the restrictions imposed by this section.
There are different types of shares in most companies and if difficulty arises in finding out information about a particular type of share it appears that the restriction will be confined only to that type of share. That seems to be the plain interpretation of this section. I should like the Minister to look at this section because it is easy to envisage circumstances where difficulties could arise and where the restriction would not be imposed on the transfer of other types of shares in the company.
Section 16 (2) (a) states that any transfer of those shares — that is the shares on which the restriction is based — shall be void. Will the Minister confirm that the word "void" means totally inoperative, in other words that even bona fide purchasers for value without notice will not in effect acquire the legal or beneficial ownership of those shares in the case of a transfer?
Section 16 (6) states: "Subject to subsections (7) and (13), an order of the court or a direction of the Minister that shares shall cease to be subject to the restrictions imposed by this section may be made only if...". In other words, an order of the court lifting a restriction placed on the transfer of shares may only be made in two circumstances — if the court or Minister is satisfied that the relevant facts about the shares have been disclosed to the company and no unfair advantage has accrued to any person. The person who is affected by the restriction on the transfer of shares may not be the person who has gained the unfair advantage. Having regard to that point the Minister should have another look at the subsection and perhaps we can talk further about it when he has commented on what I have said.
Section 16 (17) applies this section to debentures as it applies in relation to shares. Does this mean that a freezing order made by the Minister catches debentures as well as shares? I wrote to the previous Minister for Industry and Commerce, Deputy Reynolds, about one point in relation to this — some securities of companies, including promissory notes of banks, are defined as debentures. They are a security but there is a problem with their tradability, and prospectuses apply in relation to them. Suppose one of the big banks issued floating rate notes which are classified as debentures, as the law presently stands, could this have the effect of making bearer bonds frozen in the hands of various people? I would be worried about that possibility. I wrote to the Minister about this possibility and I thought I was getting a reasonably sympathetic reading of my letter. Does the Minister propose to make bearer bonds of banks exempt from the provisions of the Companies Act in relation to prospectuses and the like? I know this issue does not immediately arise under this section but it could have a bearing on this section. If the Minister does not propose to introduce an amendment on Report Stage would he indicate what his attitude would be to an amendment to that effect tabled by me or any other Member of the House?
Deputy Bruton asked me for an example of when we might need this section. All I can say to the Deputy is that the section is included in the Bill because the Minister may have difficulty in finding out the facts about shares — whether they have been issued or have to be issued — and he may require to know who owns the shares. If somebody anticipates that the Minister may move, they may start to unload shares, transfer shares or attach voting rights to shares which might frustrate the inquiry. They may issue further shares which may dilute the holding of an existing shareholder or they might start to make payment of sums out in anticipation of a move by the Minister. If there is any suspicion on the Minister's part that somebody may be engaging in such transactions in order to head off what the Minister may wish to do, the Minister may move in and impose these restrictions on the shares. It is in that kind of context we would use the section.
With regard to Deputy O'Dea's point, we would envisage these restrictions being used selectively. The Minister may put restrictions on one of these aspects but he may not necessarily put restrictions across the board. He may put the restrictions on debentures or further shares being issued and the restrictions would apply selectively and would depend on what classes of shares were in existence. They may be voting shares, non-voting shares, preference shares——
Can the Minister put restrictions only on the classes of shares about which he cannot get facts?
This section deals with instances where he has difficulty getting facts about shares so he would use it only where he has difficulty in getting facts. Therefore, if he knew all the classes of shares except one he would need it only in that one case and use it in that one case. I am satisfied that the Minister will use section 16 only in cases where he cannot get information.
I do not think that is desirable. One can envisage cases where a lack of knowledge about one particular class of shares in a company can give rise to difficulties if another class of shares in the same company are transferred. In effect, the Minister's powers under this section should be extended.
I will look at that point but I am happy at this stage that section 16 will be used only where there is difficulty in finding out the relevant facts about any shares. The restriction will be placed in cases where there are difficulties in finding out the facts and nowhere else. Section 16 (1) states that where there is difficulty in finding out the relevant facts about any shares the Minister may by notice in writing direct that the shares shall until further notice be subject to certain restrictions. This section is targeted only at those shares about which the Minister has difficulty in obtaining facts and he would not go beyond that.
I believe the discretion should be extended.
I will give that some thought but I believe the section should be confined to the area where the Minister has difficulty. It should not be extended across the board because that would throw it open much too wide.
Deputy O'Dea referred to section 16 (2) (a). I will have another look at this subsection. On the surface the Deputy was right in his remarks about that section but I will have to think further about it. I want to confirm that the word "void" in subsection (2) (a) means totally void.
Deputy McDowell referred to section 16 (17) which states that this section shall apply in relation to debentures as it applies in relation to shares. What we have in mind here is that the section will apply either to a debenture or to shares depending on the area of difficulty. That leads me to the Deputy's other point which was very complicated and one which gets increasingly confusing as the financial industry hots up. I understand the Deputy to be talking about debenture-type paper and financial instruments which are continually being created. Some of this is equity-like and some is interest bearing and not risk related. We had originally intended putting something in at the end of the Bill about this whole area. Since the Deputy has raised the matter, I should like to look at it very carefully. It is not a simple question. The usual areas of ownership and involvement are covered but they are continually devising a plethora of new financial instruments. We will have to figure out how to lock those in.
It is my intention to put down as an amendment to the general Part at the end of the Act an amendment to the definition of "debenture" so as to exclude securities intended to be traded in as money, as interest bearing notes in international exchanges. Some of the big financial institutions here are facing the difficulty that if they issue a letter offering these floating rate notes, either nationally or internationally, it amounts to a prospectus and on a strict interpretation of the law they could be committing an offence. We should get the law in order so as to permit them to compete with other banks. The law in Britain has been changed to allow the issue of that kind of debenture without prospectus laws applying. Our institutions should not be at a disadvantage.
We are on the one road and I will see if I can do something towards the end of the Bill.
This section gives very wide powers to the Minister and I understand completely the purpose of these powers. As the Minister pointed out in reply to Deputy O'Dea, the section is pursuant to actions under sections 14 and 15 which enable the Minister to inquire as to the ownership of shares. It is a very wide section which covers all kinds of possibilities. If the Minister cannot get satisfactory answers under sections 14 and 15, it is only then that section 16 follows on. Section 16 (1) relates back to sections 14 and 15. If the Minister is not satisfied under these two sections and then makes an order under section 16 declaring all transactions in those shares to be null and void, it will not be of any great benefit. I am in favour of the powers given to the Minister from subsection (2) to the end of section 16, but we must remember that the section is pursuant to sections 14 and 15 relating to the ownership of shares. Is it necessary to include subsection (1)? Let us suppose that information came overnight to the Minister that something terribly dangerous was going on to do with one company. The Stock Exchange would probably suspend trading in the shares if the problem came to light but that would not prevent private transactions. The Minister and his advisers might consider using section 16, but in my opinion he would be unable to do so if he had not already made initial inquiries under sections 14 and 15 regarding ownership. I understand that section 16 comes into play only as a result of unsatisfactory inquiries under sections 14 and 15 and the Minister's not being able to find out about the shares. All the powers given under section 16 are very necessary but they would not be used. The horse would have bolted before they could come into effect. Is it necessary to include subsection (1)?
I am trying to have a fairly targeted Bill. Sections 14 and 15 deal with the powers to investigate the ownership of shares and debentures. In the context of seeking information about ownership, a person might seek to prevent the satisfactory conclusion of an inquiry by transferring shares or interfering with voting rights and the payment of money. In order to prevent that the Minister may wish to direct that these matters be frozen. I take Deputy McCreevy's point that this is a good power which should be extended across the board.
The whole question of whether the Minister of the day should have the power to interfere with day-to-day commercial transactions and prevent the transfer of shares is a much bigger issue. He would need grounds for doing so. We could not provide for it in this part of the Bill. It is already pinned to the grounds of ownership.
I agree with the Minister on the broad issue of the level of interference which should be tolerated. I find it difficult to see when section 16 will come into play. If it can be used only when activities are being carried out under sections 14 and 15, it will not be of any use. The general purpose of the section is very good. I accept that the power of a Minister to suspend trading in shares is a totally different matter. Section 16 is subordinate to sections 14 and 15.
To get over the bolting horse syndrome, perhaps it might be possible to alter the wording in the second line of section 16 by deleting "is" and substituting "may be". The Minister could then act where it appears to him that there may be difficulty in finding out the relevant facts about any shares. This would enable the Minister to act under sections 14 and 15 and simultaneously to put a restriction under section 16.
Is it not a little bit dodgy to use the wording "it appears to the Minister that there may be difficulty"? On what grounds would the Minister decide that there may be difficulties? That is giving the Minister power to look into the crystal ball and say there may be difficulties next week.
There are always difficulties in that.
That is making a forecaster of the Minister. The first line of section 16 (1) contains the phrase "in connection with". It does not mean that the Minister has to wait until the end of an investigation or inquiry into ownership of shares. Where in connection with an investigation or inquiry it appears to the Minister that there is difficulty in finding out the relevant facts about any shares, at that point——
While the investigation is going on under section 14 and 15, the Minister can take action to stop it.
Does a problem arise where people buy these shares in good faith? Will everybody know about this who should or will people buy the shares in good faith and find that they paid money for nothing?
The Deputy is talking about a case where the Minister would issue a restriction. I presume that, at the time he gives notice in writing directing that the shares shall not be dealt with and so on, the people who are involved in the shares will know. They do not need to know before that time.
That is true but does the Minister not think that a problem will arise in that area?
I do not think so because it is at that point the Minister comes to the conclusion that there is a difficulty. He is the first to know and he then informs the other people involved.
It should also be pointed out that under subsection (5) an aggrieved party or company can apply to the courts.
I was just about to point that out.
It is a very detailed section and it is important to point out that where the Minister can so direct, an aggrieved party can apply to the courts to have the order restricted. At the end of the day it will be up to the courts to make a decision and if the Minister's action is found to be unreasonable the court will not agree to it. Under section 11 the person who sells the shares will have to pay for the cost of the court case. Maybe the section will be used quite frequently but there are adequate safeguards for a person applying to a court if he feels aggrieved or under duress. I do not think the Minister can make an unreasonable request because if he did so the court would just throw it out.
That is so.
I move amendment No. 14:
In page 20, line 26, to delete "The provisions of this Part" and substitute "Sections 8 to 11, 13, 18 and 22".
On reflection, the coverage of section 17 is too wide at present. For example, it is not appropriate or practical to apply sections 14 to 16, which deal with investigations of share ownership, to overseas companies. In re-examining the question of scope I thought it might be preferable to look at the question the other way round, in other words what provisions of Part II do we want to apply to such companies. The answer I came up with is that we certainly need the sections mentioned in the amendment, as well as sections 19 to 21. It is not necessary to include sections 19 to 21 in the amendment because these automatically apply to foreign companies by virtue of section 19 (1) (e) of the Bill. The sections in Part II which would not, following the insertion of this amendment, apply to the companies involved are sections 7, 12, 14 to 16 and 23. That is the intention of this provision.
I know what the Minister is trying to do. Section 17 is a very good section but I would ask how is it going to be enforced. Is the Minister trying to target it more precisely? If the Minister's amendment is passed am I right in saying that the section will read: Sections 8 to 11, 13, 18 and 22 shall apply to all bodies corporate... That is not what the Minister said but I think that is his intention. Will that be the reading of the section or has the Minister something else in mind? I think what he said is in contradiction of what is stated in his amendment but maybe I am wrong.
What I am trying to do is to limit the original intention of this section. The original intention was to apply a large number of sections across the board but I am now trying to pin it down to a handful of sections that can be implemented. For example, we have not applied the ownership sections to the foreign company area. There are other sections such as sections 8 to 11, with which the Deputy is familiar, which deal with a number of issues such as investigations of companies and so on.
The Minister is really confining it to the inspectors' investigation powers. The other ancillary powers that the Minister is taking will not be affected.
I do not know how the Minister would find out the ownership of shares which are held outside the State. How would the inspector or the Department find out about the myriads of companies in the Isle of Man, the Cayman Islands and such places? That is probably the purpose of the Minister's amendment. There is no point in having a provision that we would not be able to enforce.
I move amendment No. 15:
In page 20, line 30, after "modifications." to insert "The Minister shall place a report each year before both Houses of the Oireachtas outlining the steps he has taken in bilateral contacts with other States to ensure the effective implementation of this section.".
This section deals with bodies operating in the State which are incorporated outside the State. During the course of my contribution on Second Stage of this Bill I made quite an issue of the fact that there is a danger that much of this legislation would be simply side-stepped by companies who would incorporate themselves in countries where company law legislation is more lax than it is here. I referred in particular to the position in the Isle of Man where, as a result of recent changes in the legislation there, a number of regulations covering private companies which previously existed there have been abolished, particularly that which restricts the transferability of shares and limits the maximum number of members of a private company to 50.
These latter provisions make it possible for the formation of what are known as bearer share companies, private companies with freely transferable shares in bearer form. Private companies, either with bearer or registered shares, do not have to file accounts any more in the public registry or elsewhere in the Isle of Man. If those freedoms exist in regard to the way in which companies can operate in the Isle of Man, it will be extremely attractive for people who want nothing to do with this legislation to incorporate themselves in that country. This route also may be sought by people who have avoided their tax liabilities. They will find ways of incorporating themselves in the Isle of Man and will become employees here of a company which they own but which company is located somewhere else. They will have a very comfortable existence in the sense that they will be able to move from one jurisdiction to another.
There is evidence that this is happening on a fairly large scale. It frustrates not just the administration of company law but also the administration of taxation. People can dissolve companies that are Irish owned, leaving debts to many people including the Revenue. They then incorporate themselves in the Isle of Man and continue to work here as employees of an Isle of Man company. The Isle of Man is not part of the European Community even though it is very close and accessible to us. It is not subject to any of the decisions that are taken by the European Community in regard to the harmonisation of company law. I am sure there are considerable attractions for people to pursue that route.
This section rather optimistically says that a limited number of sections now will apply to bodies incorporated outside the State but doing business here. I must confess that I do not know exactly how the Minister can avoid this type of thing happening. I am not pretending that the amendment I am putting forward here provides an answer. What my amendment does is to ask the Minister to report each year — in the companys' report which he is obliged to provide to the House — on the steps he is taking in bilateral contacts with other States, to ensure the effective implementation of the provisions of this section. In other words, I want the Minister to come back here each year and say how he is getting on in getting information from other countries about companies located there but which are operating substantially here. If the Minister is obliged to report periodically to the House on that it will throw into the public arena for debate the type of difficulties the Minister may be encountering. Indeed it will act as an encouragement to the Minister and the House to find solutions to any practical difficulties he may be experiencing in ensuring that our company law or other legislation is not evaded by people simply incorporating in other jurisdictions.
This is a matter that is causing quite an amount of concern in regard to the harmonisation of legislation and the free internal market in 1992. A lot of people are worried that — on account of the freedom to provide services from one country to another — what we will have is competitive laxity of regulation. In other words, countries will seek to attract business to their part of the EC — leaving Isle of Man companies out of it — by being relatively more lax in regard to company law and other requirements than competitor nations within the EC. That is something we need to monitor on a continuous basis. That is why I have suggested in this amendment that the Minister should deal with this in the annual report he will present to the House.
I have a general amendment tabled, No. 109, which I do not think we will reach this evening, which deals with companies annual reports in more general terms, requiring the Minister to report on certain matters in that report. Certainly this issue of enforcement — where companies are operating in one country and are domiciled in another — and the general question of competitive laxity of regulation are issues on which the Minister should be asked to report each year in the now rather delayed report on companies.
I appreciate what Deputy Bruton is trying to get at in his amendment. The purpose of the whole section is that there be an extension of the Minister's powers of investigation to certain bodies incorporated outside the State. In the amendment we have just passed the Minister has already amended this section, recognising the lack of authority he could have in investigating the ownership of shares of bodies incorporated outside the State. As the Minister said earlier: how would we investigate the ownership of companies incorporated outside the State? In the past couple of years there have been innumerable EC directives published, the whole idea of which is to harmonise various company law. The last Companies' Bill passed in this House was during the term of office of Deputy John Bruton as Minister for Industry and Commerce. That had to do with the implementation of the EC directive which required all limited liability companies to file their accounts in the Companies' Registration Office. I think we were in danger of being prosecuted by the EC for not having implemented that directive.
I have always contended that various laws and directives proposed by the EC to apply to every member state may not be appropriate to a small community such as ours at any given time. I made that point rather forcibly on that Bill about the filing of company accounts. I do not agree with uniform company law throughout the EC. I know that may appear to be flying in the face of the objective of the internal market and so on. I do not think — and I am on record as having said so consistently — that all EC laws and directives are necessarily appropriate or proper for us.
I do not think the provisions of Deputy Bruton's amendment will enhance the powers of this section except that each year the Minister will have to report to the Houses of the Oireachtas as to how these provisions are being implemented.
I presume that, in years to come, we will be introducing another Companies' Bill on account of further EC directives to, say, limit Irish law or in order to have everything known about all companies incorporated within the EC. I am not a great believer in that either. As Deputy Bruton has pointed out, the reality is that we are very close to the Isle of Man. Far be it for me to contend that people would avoid or evade their taxes by forming companies outside the State but, because of the nature of my work, I readily recognise that possibility and the fact that that practice may well continue.
Apart from places like the Isle of Man, which is adjacent to us, particularly in the case of multi-national companies it is often very difficult to ascertain the true ownership of a company or the manner in which shares are held. Often many individuals form companies primarily for the purpose of tax avoidance, that is companies incorporated outside the State in, say, the Isle of Man, the Cayman Islands or wherever where it may be legitimate practice to do so.
Deputy Bruton's amendment proposes that the Minister should report each year to the Houses of the Oireachtas. I see nothing wrong with that. I do not know what it will achieve except perhaps to highlight the inadequacies of the provisions of this Bill. Since the Minister's amendment was passed it means we are focusing on the sections over which we have some control, recognising the inadequacy of the powers available to us.
In regard to companies incorporated outside the State I should say that the Eleventh EC Directive will require all foreign companies with branches within the country to lodge their accounts. I gather that directive is well advanced now. As Deputies probably know, under the provisions of the 1963 Act, we require foreign public companies to file their accounts in the Companies Registration Office. But the Directive applies to all companies. I understand that the philosophy behind that Directive is to prevent companies from moving out and then moving back into the State through a branch, as it were, specifically for the purposes of avoiding disclosure.
That applies only to the Community though.
That is the philosophy behind the Directive. The Eleventh Directive and the 1963 legislation apply to all foreign companies which have branches in this country.
With regard to the Deputy's amendment, the section as it stands would simply apply the provisions of Part II of the Bill to foreign companies carrying on business here as if they were Irish companies. By virtue of the amendment which we have just discussed, we have reduced the scope of the section somewhat, to apply to foreign companies only those sections which it is practicable to apply. The type of case in which this section is likely to arise is where a foreign company are carrying on business here by means of a branch. In such cases an inspector could be appointed to investigate the affairs of the branch.
On the face of it, this section goes further and would enable the investigation to extend to the actual overseas registered company itself. However, we would have to accept that it is simply not practical from the legal point of view that an inspector appointed by the Irish courts could expect to be able to investigate on the territory of a foreign sovereign state the activities of a company which is registered there. We could not go down that road. This procedure is more likely to come about in due course in general terms by means of agreed multilateral treaties, conventions and so on, whether under the aegis of the EC, the Council of Europe or some other international body. I have already mentioned the forthcoming Eleventh Directive.
If it were to become apparent that there was a growing number of investigations into the affairs of companies registered in a particular foreign country, it would be correct at that stage to develop bilateral contacts with the country involved to see whether some aid procedure could be worked out. I could not see this as being a significant problem. I could not agree to the requirement that the Minister report annually to the Oireachtas on contacts because these contacts may or may not arise. It would not be sensible to lay that requirement on a Minister when it is probably unlikely to arise.
I accept that. My amendment was put down before the Minister's so I did not have sight of the more restricted application of section 17 that he now has.
I am not satisfied that I understand the Minister's reaction to the more general point made about Isle of Man companies in particular. We have a real problem with the Isle of Man, in that it is not part of the EC and we have no diplomatic representation there. Increasingly, its legislation is diverging from the legislation in Britain and we have no means of pursuing any bilateral arrangements with the Isle of Man that I am aware of, other than through Westminster. It seems that this will be an increasing problem in the Community in general. There is the Isle of Man, Jersey, Guernsey and Sark which are not part of the EC and yet are attached to one part of the EC. There is another place which has a similar characteristic and that is Greenland, which is not part of the EC although it comes under the Danish Crown. However, that is not a problem because Greenland is so far away that it is unlikely that people would be incorporating companies there. I could see much of this going on elsewhere.
This may not be the section under which to bring up this matter. Probably the better course for me to adopt would be to put this more general requirement about reporting on bilateral enforcement of company law into the requirements placed on the Minister in regard to the annual report which he must present each year. Would the Minister in general terms be agreeable to the idea that the Minister should be required to report annually on problems arising in respect of bilateral and multilateral enforcement of company law? Would he accept that sort of approach here which would mean dealing with this matter much later in the Bill rather than under this section where it is probably a little tangential?
The question does not apply only to the Isle of Man. There are Gibraltar, Liechtenstein and a whole host of tax haven type regimes. That the Isle of Man is the closest to us is what causes the Deputy to bring it up. It is a larger question than that. There is no ready or immediate answer on what we can do there. Public companies with branches there are all accountable under the Acts.
Private companies though.
It is the public companies that have the requirements under the Acts, not the private ones.
Private companies are where the problems will arise. There will be individual Irish people changing their domicile by going to live abroad for some time of the year, who will incorporate their companies somewhere else but will spend large parts of the year and derive large parts of their business from activities here. There will be a tremendous capacity for people effectively to be earning their money here but being governed by legislation from the Isle of Man, or Guernsey, or Gibraltar, or wherever. This will be an increasing problem that the Minister and public administration generally will have to address. I accept that the Minister says there is no ready answer to it. I know that only too well. The purpose of my amendment is that the Minister at least should be obliged to report on this subject to the Oireachtas on a reasonably regular basis so that there will be more information and ultimately out of that debate we will discover methods of dealing more effectively with the problem.
I shall certainly look at that idea when it comes to the section dealing with the annual report, as to whether we can insert something. I do not want to lay on any Minister the necessity of having to go into a long litany about progress on multilateral contacts. I do not want to overdo that. I shall look later at whether we can put in some minimum reference or requirement to comment on that area. I would not like to lay anything very heavy on the Minister.
Nor would I.
Indeed. I understand that the present position is that public companies here which may have their head offices in the Isle of Man must report their accounts of the branch here. Private companies registered in the Isle of Man do not have the accounting requirement here, but have to report other basic information under the 1963 Act such as directors, shareholders and so on. They do not have to report their accounts. I understand, however, that the Eleventh Directive when applied here will take in not just the EC but foreign companies operating here through branches. I trust that that Directive will substantially allay the worries expressed.
The amendments in the name of Deputy Bruton have been withdrawn and we spoke about this earlier today. This section deals with questions under section 10 in relation to the answers given being used in evidence against the person. Why was this confined to section 10——
With respect, Deputy, I trust you do not intend to discuss section 10 again as it has been disposed of.
This section is about the admissibility of evidence. Why is section 10 involved?
Section 10 deals with asking the questions and section 18 deals with the answers being admissible in evidence.
I move amendment No. 18:
In page 22, subsection (5), lines 21 and 22, to delete "and liable to a fine not exceeding £1,000".
This is a straightforward amendment which simply involves raising the penalty for non-compliance with the direction of the Minister under this section to produce documents and so on. A maximum fine of £1,000 is paltry in view of the level of penalties under the Bill generally and the specific nature of the offence under this section. Deleting the words mentioned in the amendment will, of course, have the effect of applying the standard penalties in section 202 of the Bill to offences under this section which are somewhat higher. I am raising the penalty, as it were, for not producing documents under this section.
Subsection (2) outlines the circumstances in which the Minister may give directions seeking information of various kinds about companies. It is essentially confined to company law type offences, fraudulent and unlawful activities of companies relating to the creditors and members of the company.
There is concern to ensure that our competition law works effectively and that there is no collusion by companies contrary to the public interest in so far as keeping prices high is concerned. Would there be any advantage in adding something like "if, in the opinion of the Minister, a company is conducting its affairs in collusion with other companies in order to maintain prices charged by them to members of the public at a higher level than would apply if the company was competing freely rather than acting in collusion with another company"? It may be that such powers already exist under the fair trade legislation although I do not think so. If the fair trade legislation is to work, there has to be a formal investigation which takes some time.
The 1987 Restrictive Practices Act already covers that matter.
The purpose of this section seems to be to give the Minister power to require the production of documents if he suspects certain acts. The Minister will want this information to form an opinion as to whether to appoint an inspector.
I hope the Minister can institute proceedings in some cases.
We discussed that this morning and had a row about it. This is a very elaborate and far-reaching section. In earlier sections we were giving powers to the courts and so on and asking the Minister to inquire about the ownership of shares of a company. This is about the production of documents. Presumably the Minister will form an opinion and then appoint an inspector. Many of the sections involve legal expenses in regard to applicants coming to the court and asking it to appoint an inspector but this section empowers the Minister to do this. It will be used quite often because, when a company is run down, the employees will probably know what is going on, be concerned about their jobs and write to the Minister's office. After that, the Minister might require the company to produce documents, books, etc., and his Department would make a general appraisal of the information and, if necessary, appoint an inspector under section 7. Will there be a separate section within the Minister's Department to do this type of work?
Deputy McCreevy is correct. The Minister may wish to know if there are circumstances which might require him to apply to the court to start an investigation. The other reasons for requiring the books are listed on page 21.
As the Minister is aware, there has been great difficulty under the 1963 Act in trying to prove fraudulent purpose, intent to defraud and so on. I suppose the Minister can form an opinion in this regard. Has he only to prove some of these circumstances in order to start the investigation?
The Minister said the phrase "if he is satisfied", which we discussed earlier, means that if a person does not want to give the information it would appear it can go to court. In which case does the Minister have to prove his case without the evidence? Would it be better to have the words "...by the Minister if he is of opinion that there are circumstances suggesting" so that he can get this information without necessarily having to satisfy the court that one or other of these circumstances exists?
With regard to Deputy McCreevy's point, the Minister does not have to prove anything. He has to be satisfied that there are circumstances suggesting these things like fraud and so on. If there are circumstances suggesting any of these he may use those for the purpose of launching an investigation or whatever. The question of proving fraud does not arise at that point in the Bill.
He only has to suspect.
He has to be satisfied that there are circumstances. With regard to Deputy Bruton's point, the phrase "if he is satisfied" is more precise than "he is of opinion". If the Deputy thinks it important I will check it out.
A point that enlightened me earlier was that where the phrase "the Minister is satisfied" is used that means somebody who does not want to give the information can refuse to give the information and can go to court and the information will be provided only if the court is then satisfied that the Minister was right to be satisfied. The Minister just cannot go and look for the information in the same way as somebody can look for information under a search warrant in an ordinary criminal proceeding. This occurred to me when listening to Deputy McCreevy. I do not want to make a big deal of it, but if that is the case are we taking the teeth out of section 19 by making it more difficult for the Minister than it should be to get this sort of information?
I recall to the House that I have been urging all along that section 19 is one we should be using for getting this sort of information rather than using the procedure we were discussing which involves very formalised and expensive investigations. Anything therefore, that strengthens section 19 is a good thing. Is the Minister satisfied that he is not going to have undue difficulty in getting the sort of information he is looking for in view of the difficulty of proving fraud, which is well established in the legal field and in the problems arising from the use of the word "satisfied"?
If you substitute the phrase "is of opinion" for the phrase "is satisfied" you take the Minister's discretion out of the ambit of judicial review. The Minister's power is absolute at that stage. It is a perfectly subjective decision.
This section is being used, I understand, simply to gather information——
——for the Minister, not information for the public and it is to enable the Minister to decide whether there is a case to answer and whether he should go for a formal investigation, winding up the company or prosecuting, but there is no sort of prejudice per se arising from this section.
I appreciate the point and I am only going to suggest a remedy to meet the point you are making.
If you think it would be a good idea to put it in——
If Members would address the Chair and speak through the Chair we might make more progress. I am putting this section as amended.
Please, a Cheann Comhairle, we are trying to find out something here and this is a very big section with two pages of print. While we may have spent a great deal of time on earlier sections we have not exactly overdone it on section 19. Could the Minister respond?
We have a choice of two approaches here, "if he is satisfied" or "if he is of opinion". In both cases there is a judicial review procedure either way, whether we have "opinion" or "satisfied". We are basically agreed that there can be a judicial review of either phraseology.
However, in "if he is satisfied" which I am proposing here in the broadest sense, there is greater scrutiny in the court of the Minister being satisfied, as it were, whereas if he is in court on the basis of having an opinion, then he has the opinion and the opinion does not change. "Satisfaction" requires greater probing and greater "proof".
It is going to be harder to get the information.
Yes, but it makes the Minister more accountable.
Would the Minister look at this to see whether it is strong enough? I hope the Minister will use this section fairly fully and the threat of this section being used could be a sufficient deterrent in itself so that the Minister would not have to resort to investigations and applying to courts for investigations and all that heavy scene. To make section 19 more workable is desirable. Maybe the Minister will ask the parliamentary draftsman to look at this.
I will take a look at it.
Will the proceedings under section 20 be in public before a district justice, in which case will there be notice of the proceedings? If there is notice of the proceedings will people who have material in premises proposed to be searched be able to get the stuff off the scene?
In order to prevent an inspection under section 19 being frustrated by a failure to produce the books, or their removal to another premises we have this section which provides for the right under warrant to enter and search premises and seize any books found therein. The warrant remains in force for a month. Books so seized may be retained for either three months or until the conclusion of any criminal proceedings mentioned in section 21 which we are coming to, that is essentially prosecutions under the Companies Acts. A penalty is provided against any person who obstructs the entry. While it is envisaged that this power of entry will be used infrequently, it is of importance that legal provision exists to ensure rapid and effective entry to gain possession of books and documents which might be denied to the Minister or perhaps even destroyed.
It should be observed that this is not an unduly draconian power. It can be exercised only with a warrant given by a district justice and only in cases where the Minister has required the production of documents under section 19 but where these have not been produced. As regards the Deputy's question, a district justice could give a warrant anywhere, for example in his house, in the court, or anywhere else. I will run through the various subsections if the Deputy wants me to do so.
Where documents are produced under section 19 the Minister may take copies of them or extracts from them. If under section 20 the books of a company who are still in business are going to be seized and retained for three months it could make the legitimate operation of that company rather difficult, to say the least, if their own documentation, which they needed for normal purposes, and was not available, it had all been seized and taken away. There should be something in this section which would require the Minister who has seized documents under this section to make available or provide copies on request of the material he has seized to the company so the company can continue to have access to the information.
I see the point, but it is hard to be sympathetic where the people involved have refused to give the books. We are dealing here with circumstances where people have refused to hand over documentation under the legislation. In that context the period might not be that long.
I accept that but in Irish society there are thick people. I have heard it said one hundred times, "I will go to jail rather than comply." Certain characters will dig their heels in and while they may be behaving in an entirely irrational and wrong way, the seizing of the documents may so paralyse the company that it will no longer be able to function. I imagine that if an inspector invokes this section he will sieze everything from the filing cabinets. In other words, the company would be wound up by the inspector exercising the powers of section 20 by virtue of the documents not being available to it for normal use. I do not have any sympathy for thickness, or endorse it in any way or sympathise with those who may be found guilty of an offence. I am recalling that what we are dealing with here is obtaining information which may or may not subsequently lead to a prosecution and where it does not the people who would be innocent would find themselves without their books and documents essential for the operation of the company for up to three months. I am not saying that the Minister should not have the documents but if he takes them he should be required to produce copies or allow inspection on a regular and continuing basis by the officers of the company at a reasonably convenient location close to the company. If the company is operating in Cahirciveen it will not be of much use to it if the Minister says the documents can be inspected at the offices in Kildare Street in Dublin from 9 a.m. to 5 p.m. The material will have to be made available to the company at a reasonably convenient location.
I accept that there is a need for the clause but what will happen to companies that voluntarily give their books to the Department or are forced to do so by an order of the court? A company may endeavour to continue trading while the books are with the Department. Will that company have access to the Minister's office in order to keep the business going? If all the books are seized, or given voluntarily under section 19, what provision is there to enable a company to continue trading? I am sure it is the intention of the Minister to allow reasonable access to the books but there is no such provision in the Bill. Those books may be retained by the Department for between six months or 12 months. They can be held for at least three months unless it is decided to institute criminal proceedings. The Minister will have to allow reasonable access to the books of a company that is endeavouring to continue to trade.
Members should take a harder line in regard to this. We are referring to companies who refused to co-operate. I take Deputy Bruton's point about thickness but in this case we are talking about the Minister applying to a district justice for a warrant to permit gardaí to enter a premises and take away documents. If the Minister has to apply to the court for a warrant the case has reached a serious stage. Are the Deputies suggesting that having gone through that procedure the Minister should say, "your books are in my office if you wish to have a look at them any day and you need not worry about the court procedure"? We are giving people an opportunity to voluntarily produce their books and if they do not do so we have to adopt a tough line. Otherwise we are telling companies that they need not worry because they can always have a look at the books in the Minister's office.
Those people are not guilty of any crime; a person is innocent until proved guilty under our law.
It is reasonable for the Minister to adopt this approach if he has to apply to the courts for a warrant in order to get people to produce their books. However, I am referring to the person who voluntarily gives up his books. How will such a person be able to conduct his business if his books are in Kildare Street? It may be said that I should have raised this issue on section 19 but at the time we were debating that section the Ceann Comhairle was getting a little upset at the length of time it was taking us to deal with sections. In my view the Minister will have to insert a provision that will allow reasonable access to such documents, otherwise companies will be closed overnight.
I accept Deputy Bruton's point that people are innocent until proven guilty but I am referring to people who have refused to comply with the direction issued under section 19 to make available certain documentation. Section 20 refers to people who have refused to comply with the direction of the Minister to hand over documents and books. I am being asked to provide in section 20 that having seized the books we will give the person permission to inspect them while they are in the possession of the Minister. It is important that there should be a clear distinction between complying with the ministerial direction and the Minister having to obtain a warrant to force people to comply with it.
Presumably, if people are reasonable and comply with the Minister's direction under section 19 the Minister will in turn be reasonable and tell them that they can inspect the documents at his office. If the company comply with the ministerial directive and co-operate by giving the books and documents there would be reasonable access to them as well.
I would remind the Deputy that section 19 talks about copies or extracts as opposed to the actual books.
No, that is not correct. There is a reference to copies in subsection (4) which says that the other powers shall include the power to take copies. The substantive measure is contained in subsection (1) where the Minister may require a company to produce the actual books and documents. I presume that producing them means that the documents would go into the possession of the Minister.
I understand that producing them means displaying them, showing them and making them available for photocopying or for examination. It does not automatically mean they would be taken away.
Could I make a suggestion here to deal with this problem? Would the Minister be agreeable to add a subsection (5) to section 20 to the effect that where documents are retained by the Minister under subsection (3), a person or company who require access to those documents for the continued operation of the company should have the power to apply to a district justice for an order governing such reasonable access by the company to their books, which these books are detained by the Minister, or, to obtain copies of all relevant information from the books which he needs for the continued operation of the company.
I will undertake to have a look at that suggestion. I want to be careful not to so soften up section 20 as to make it virtually a repeat of section 19 except that the Garda are involved. I want to make sure that this section is tough, otherwise it would be a repeat of section 19. I take on board the point that if the books are missing the company may not be able to continue and I will try to find a way to resolve it. I do not think that necessarily applying to the court would be the way to do it, but there may be another way. I would not start out by having lots of sympathy for people who refuse the ministerial direction and then put the State to the trouble, through the Minister and a district justice, of having a search warrant prepared and so on.
If he wants to wind up a company the Minister has the power. Before anything has been proved in court it would not be reasonable to retain the documents that belong to the company to such an extent that the company are paralysed simply by the exercise of this section. That is not natural justice. I would imagine that if one were to attempt to retain these documents in such a fashion as to paralyse the company under section 20, the Supreme Court ultimately would vindicate the constitutional rights of the company. Rather than put them to that trouble it might be no harm to clarify that in the section.
I am sure there must be some provision in our law, even though it may not be in this Bill, for the company to apply to the court and say: "I need my books in order to carry on my business". I am sure there is a law, under the common law of the land, to require that something like that be done. It does not say it in this section but perhaps another subsection is needed. It would be only right and proper that the company would have a right to go to the court and say: "it is unreasonable to expect me to carry on my business without my books and records. They have been taken away, they are in Kildare Street and I cannot get at them. If I do not get them back in the next day or so I will be out of business". If there is not a subsection here it would seem to be a reasonable and proper course that there should be some provision in the courts where that could be done; otherwise the law would not be a just law. As Deputy Bruton has pointed out perhaps this kind of subsection should be added to section 20.
I agree with the Minister that if a company receive a reasonable request under section 19 and do nothing about it, thus forcing the Minister to act under section 20 in order to obtain a warrant, we should be as hard as possible on them. One must recognise that there are many people in this country — not all in County Meath or County Kildare — who, as Deputy Bruton said, have an element of thickness about them and would say: "Over my dead body you will get those books". It might be necessary to use these powers. If it is not provided for in ordinary laws at least there should be some provision which would allow the company to have reasonable access to their books in order to be able to carry on their business. If they are going out of business they will not need the books and if they are involved in criminal activities they will not want to see them anymore but will hope they will be burned or lost in the meantime. It is not unknown for books to be missing or burned.
I am happy to look at everything until the day when it goes through. Genuinely, I do not want to remove the incentive to co-operate under section 19. The most important thing here is that people have an incentive to co-operate under section 19 which after all is a legal direction.
I agree with that.
I do not want to remove that incentive. The more I soften section 20 the less incentive there is to co-operate under section 19. Having said that I see the concerns of Deputies and I will certainly take a look at it. The period involved is three months. The books must be turned back before three months but it can be longer if criminal proceedings are envisaged. Otherwise they must be returned within three months. I do not see what is to stop the company having full copies of all their documentation before gardaí turn up at the door.
They will not be expecting the raid.
If they have ignored the ministerial directive they will not have had the commonsense to at least keep copies of their vital documentation.
Copies and all would be seized. Gardaí would come in and everything would be taken out. They would have to store the copies somewhere else.
The Deputy is being a little naive. If a company expect gardaí to turn up seeking the books of record but wish to keep vital copies of interesting documentation I assume they will be able to do that. The Deputy is portraying many company people as being extremely naive which they most certainly are not.
This section is about the security of information. The main thrust of the section is in subsection (1) which states:
No information, book or document, relating to a body which has been obtained under section 19 or 20 shall, without the previous consent in writing of that body, be published or disclosed, except to a competent authority, unless the publication or disclosure is required—
by (a), (b), (c) and (d). I would like to deal with the competent authority. Apart from the items under (a), (b), (c) or (d) which are more or less about the institution of criminal proceedings arising out of the Companies Acts. In subsection (2) it is stated that the books can be disclosed to a competent authority. The competent authorities listed under subsection (3) are:
(a) the Minister,
(b) an office authorised by the Minister,
(c) an inspector appointed under this Act,
(d) the Minister for Finance,
(e) an officer authorised by the Minister for Finance.
I presume the purpose behind authorising the Minister for Finance or an officer authorised by the Minister for Finance to be competent authorities is to allow the Revenue Commissioners to carry out a full investigation into the tax affairs of a company. In many of the Bills passed by this House there appears to be a cross-fertilisation of Departments in that Departments are given the right to get involved in the activities of another. I presume that is the reason behind authorising the Minister for Finance or an officer authorised by the Minister for Finance to be competent authorities.
Can the Minister of State tell me why the Central Bank has been included on the list?
As Deputies can see section 21 provides for the security of information obtained under sections 19 and 20. It is made quite clear in this section that no information or documents may be published or disclosed without the prior consent of the company in writing unless it is to one of the competent authorities listed in subsection (3) or unless it is required for one of five specified reasons which generally have to do with the commencement of legal proceedings of one kind or another. Therefore this provision can only be breached on those two grounds.
Deputy McCreevy referred to paragraphs (d) and (e) of subsection (3). In the case of paragraph (e), an officer authorised by the Minister for Finance, this will generally be a civil servant. Paragraph (f), "any court of competent jurisdiction", is self-explanatory and paragraph (g) relates to the Department of Industry and Commerce.
Can the Minister of State tell us whether he envisages any circumstances in which the registrar of friendly societies would seek information in relation to industrial provident societies or building societies in cases where there would be a need for him to have this kind of information for enforcement purposes or is this already catered for?
Such powers are already available to that Minister under the legislation in respect of industrial provident societies and building societies.
Increasingly co-operatives are establishing subsidiary companies. I cannot go into the details here but I could give some very prominent examples in the south of Ireland. Some co-operatives have gone public. It might be useful in obtaining information on the adequacy of the financial controls in co-operatives who have established subsidiary companies to also obtain information on the subsidiary company. If the competent authority wants information about the subsidiary company or an associated company of the co-operative they should be able to get that information. A case could be made for extending the list.
The question which Deputy McCreevy asked is whether following the appointment of the Minister for Finance or an officer authorised by the Minister for Finance as competent authorities it is envisaged that they will try to counteract tax evasion on the part of a company. Following on from that question, can the Minister of State tell me why the Central Bank has been included on the list?
Section 19 imposes limits on the circumstances in which the Minister may move in this area. The Central Bank has been included on the list because a bank may be investigated and the Central Bank may require information on this. Deputy Bruton is right when he says that the establishing of subsidiary companies by co-operatives is causing difficulties and I can assure him that I will take a look at this matter.
Has the purpose behind the inclusion of the Minister for Finance or an officer authorised by the Minister for Finance got anything to do with counteracting tax evasion or exchange controls or a combination of both? The Revenue Commissioners already have sufficient powers in this respect.
What we had in mind is that an officer authorised by the Minister for Finance would be a civil servant dealing with banking. We had not envisaged that he would be a civil servant dealing with taxation or exchange controls.
Therefore it has got nothing to do with counteracting tax evasion or exchange controls?
What is the purpose behind the inclusion of subsection (1) (e)? The grounds on which information may be made available are laid out in subsection (1) (a), (b), (c), (d) and (e) which reads: "for the purposes of proceedings under section 20". Under section 20 a warrant may be issued to obtain the books.
Under section 20 (4).
The books may be used in evidence in prosecuting a person under section 20 (4).
There are a few points I would like to make on this section. I am not clear as to what the purpose behind this section is. It seems to be designed to permit, on the face of it, a copy of the inspector's report to be introduced as evidence of the opinion of the inspector in relation to any matter contained in the report and I presume that "inspectors" should read "inspector". Is the opinion of the inspector admissible in evidence in a court? At present as I understand the law, evidence of opinion is receivable from an expert but the fact that one is appointed an inspector does not necessarily mean that one is an expert. Is this replicating the existing provisions of the 1963 Act?
It seems to be slightly vague in that an inspector's report may or may not contain expressions of opinion. Those opinions may or may not be admissible in evidence. It could be widened to make it more useful as the court should be entitled, unless contradicted, to draw findings of fact from a report of this kind. If an inspector says in his report that he found certain facts and that this or that event had occurred it would seem, unless contradicted, we should allow the court to accept them as findings of fact, but this section is restricted to opinion evidence. Opinion evidence, as I understand the law, can only be accepted by a court where it is proven that it comes from an expert. Who is an expert inspector? Is it an expert accountant or an expert solicitor and does the opinion have any weight?
I would also suggest that on Report Stage the section should be amended to read "a document purporting to be a copy of a report" because one of the things one would have to prove if one wanted to produce the report in court is that it is a true copy. One of the difficulties with the bankers' books evidence Act is that one has to prove that a report is a true copy before one can produce it in court and one has to bring a witness to prove that it is a true copy, whereas it would be better if it was stated that a document purporting to be a copy of the report would be admissible in evidence. I am making two points: first, that that should be done and, secondly, that such a copy should be admissible as evidence of the facts set out therein unless contradicted. It would be a useful way of avoiding duplication of a subsequent civil proceeding if there were facts that were not an issue and which the inspector had found as facts for the purposes of his report. The court could rely on his finding of fact rather than on his finding of opinion or statement of opinion. That would eliminate unnecessary duplication in court evidence and would improve the Bill if it was extended in that way.
I take very seriously any suggestions in the legal area from Deputy McDowell. Because of the points he has made I will take some extra legal advice in regard to the drafting of this section.
Is it in the 1963 Act?
It is practically identical to section 172 of the 1963 Act but it is being re-enacted in this Bill so that the complete picture about investigations is contained in one place. Section 172 of the Principal Act states:
A copy of any report of any inspectors appointed under the foregoing provisions of this Act, shall be admissible in any legal proceedings as evidence of the opinion of the inspectors in relation to any matter contained in the report.
The Deputy has made other suggestions as to how we might improve the section and I will take legal advice on those suggestions.
I move amendment No. 18a:
In page 23, subsection (1), line 48, to delete "sections 14 to 16 or 19 to 21" and substitute "this Part".
Part II of the Bill deals with investigations. Sections 7 to 13 deal with investigations under the auspices of the courts while sections 14 to 23 deal with investigations and less formal procedures under the auspices of the Minister. The court investigations proposed in the Bill replace similar provisions in sections 165 to 173 of the 1963 Act. Section 173 of the Principal Act included a saver for privileged communication by a solicitor. Section 10 (6) of the Bill defines an agent as including "bankers and solicitors of the company". Whereas section 23 (1) retains and indeed widens the saver for legal professional privilege in the case of investigations and so on initiated by the Minister, no such privilege is available for court-initiated investigations. It is considered that such privilege should be available in the extended format provided by section 23 (1). In order to achieve this it is now proposed to replace the specified sections in section 23 with reference to the Part as a whole and hence this Government amendment.
I move amendment No. 19:
In page 24, subsection (2), to delete lines 10 and 11, and substitute the following:
"the company under investigation or by any person involved with the company under investigation and required to produce information pursuant to section 19".
This is a drafting amendment intended to give a better understanding of what I believe the Minister means. The reference in the section to the "first-mentioned person or the customer is a person on whom a requirement has been imposed by virtue of that section" is somewhat opaque. If the Minister considers this amendment to be an improvement I hope he will accept it but if he does not consider it to be an improvement I do not intend to delay the House in debating it.
Section 23 (2) is reasonably straightforward and simply prohibits the Minister from requiring a bank to disclose any information about a customer except in two specific circumstances: firstly, where the Minister considers it necessary for the purpose of investigating the affairs of the bank, or secondly, where the person being investigated is a customer of the bank involved. I know the Deputy is trying to be helpful but against that background I do not think the wording of his amendment is logical. Taking the first part of his amendment and transposing it into subsection (2) would mean lines 9 and 10 would read "...for the purpose of investigating the affairs of the company under investigation". This appears to be somewhat circular and I do not see the merit in it.
The second part of the Deputy's amendment would allow the Minister to require information from any person involved with the company under investigation but this seems to be precisely what the last line and a half of the subsection states in any case and in the circumstances I do not think the amendment makes that much sense.
The amendment has given us some grounds for thinking and when we looked at the Deputy's amendment we asked ourselves whether we had got the provisions of section 23 (2) right in the text of the Bill or whether we were going too far in breaching the notion of confidentiality between a bank and its customers. I should like to give some more thought to this aspect and while I would prefer not accept the Deputy's amendment I should like to express my thanks to him for drawing this aspect to my attention. It has raised the more general question of what degree of privilege should extent to bank accounts under this Part of the Bill. I will give a lot more thought to this between now and Report Stage.
Under the amendment which the Minister introduced a moment ago, section 23 (1) shall now read: "Nothing in this Part shall compel disclosure by any person of any information which he would, in the opinion of the court, be entitled to refuse to produce on the grounds of legal professional privilege..." The opinion of the court will be sought under that subsection and it will be the court who will form the opinion about whether a solicitor or anybody acting in that behalf is entitled not to disclose information. Under subsection (2) the proviso about the opinion of the court will not apply in relation to banks. I know the Minister has said he is willing to have another look at this subsection in relation to confidentiality between a customer and his bank, but I wonder if it would be possible to include the words "in the opinion of the court" in subsection (2). in subsection (1) we have provided that a person may not disclose information which he would, in the opinion of the court, be entitled to refuse on the grounds of legal professional privilege so why do we not follow this on and provide, in the case of a bank, that no information shall be disclosed which in the opinion of the court, is not necessary for the purpose of investigating the affairs of a bank?
Is the Deputy saying that the requirement in the opinion of the court is provided in subsection (1) but is not provided in subsection (2)?
I will take a look at that.
The Minister said in reply to Deputy Bruton that he would consider this aspect but I believe the two subsections should be consistent as to whose opinion should be sought.
I am advised that under subsection (2) it is a ministerial requirement and that including the court requirement in that subsection might not be appropriate. However, as I said, I will take a look at this.
The section refers to legal professional privilege. A company may use the services of a large firm of auditors. The directors or other people in the company may also need the advice of accountants in that firm regarding their personal affairs. What about the activities of an accountant in his capacity as financial adviser in the company? The partners in the firm may also give taxation advice to the directors of the company in regard to other matters. Would privilege be extended to these people as well? They are not legal people but they are professionals acting with people in the company.
In general I am advised that confidentiality and privilege in the commercial area has traditionally been expressed in terms of the legal profession and banking. It has not been extended in legislation beyond those two areas.
I move amendment No. 20:
In page 24, before section 24, but in Part II, to insert the following new section:
"24.—In laying down the terms of reference of inspectors under sections 7 and 8 of this Act, the Court shall take account of the need to complete the investigations as quickly and as inexpensively as possible.".
I have expressed concern that the investigative procedures set up under earlier sections will be extremely expensive, with a lot of legal representation being required because of the rights that people who might be jeopardised have under various court decisions to be legally represented, to cross-examine other witnesses and to have access to books and documents that might be relevant to their own case. Anything said in an investigation may incriminate the person concerned. All those factors mean that investigation will be a very expensive procedure which will be seldom used or useful. I am suggesting in this amendment that in laying down the terms of reference for an inspection the court should take account of the need to complete the investigation as quickly and inexpensively as possible. It is important that the court in making an order should do it in such a way as to try to reduce the cost and increase the speed. I hope the Minister will be able to accept this amendment. It statutorily draws to the judge's attention the need to do the thing quickly and relatively inexpensively.
I agree entirely with Deputy Bruton and I should be happy to take this amendment, but preferably on Report Stage. I should like to try to improve the wording, if possible. I agree with the principle and will table an almost identical amendment on Report Stage.
I take it the Minister will bring the amendment back.
I move amendment No. 21.
In page 24, subsection (1), lines 36 to 44, and in page 25, lines 1 to 5, to delete paragraph (e) and substitute the following:
"(e) is a private company limited by shares.".
This amendment seeks to delete paragraph (e) of section 24 (1). As it stands, the section proposes to exempt private limited companies from the terms of the section if they do not comply with any two of three conditions. The three conditions are that their turnover exceeds £2.5 million, that their assets exceed £1.25 million and that the number of employees exceeds 50. If they do not reach those figures they are exempted. This is a fairly sweeping exemption. I understand from information given to me by the ICTU that approximately 80 per cent of all manufacturing companies here employ fewer than 50 people and that there are over 2,000 small IDA grant-aided companies with fixed assets of less than £500,000. There are over 75,000 private companies in Ireland but the number of such companies coming within the scope of the section will be very small. Perhaps the Minister will explain why such a sweeping exemption should be applied.
As I understand it the section is an attempt to prevent the directors of companies from doing deals outside the company for the supply of goods or money to themselves, for which the company would be responsible. Our amendment would do away with the exemption and provide that private limited companies would be obliged in the same way as public companies to comply with the terms of section 24.
We are now moving to Part III of the Bill. It deals in general with the question of loans and quasi-loans to directors and credit transactions in which directors may be involved. We are also trying to ensure that directors have as little involvement as possible in areas where there is conflict of interest. That is the general thrust of Part III of the Bill, the first section of which is section 24.
The section defines a number of terms for the purposes of Part III of the Bill. Throughout this Part, two important kinds of distinctions are drawn. Three distinct types of transactions are covered — loans, quasi-loans and credit transactions, depending on the type of company being referred to. The word "loan" is a straightforward term which does not need definition. "Quasi-loan" and "credit transaction" are somewhat more obscure and need specific definition. Accordingly these terms are defined in subsections (2) and (3) of section 24. The main distinction to be borne in mind in Part III is that the proposed restrictions on loans to directors apply to all companies, whereas the restrictions on the somewhat more sophisticated quasi-loans and credit transactions apply only to a relevant company.
A relevant company is defined specifically in subsection (1). Essentially it means a public limited company or a member of a group of companies which includes a plc or large or medium sized private company. The definition of relevant companies was queried in the Seanad and it was pointed out there that this definition would effectively exclude 80 per cent of manufacturing companies, including most companies where such abuses are likely to occur and be of concern. While accepting my arguments that policing of a prohibition of making quasi-loans and meeting credit transactions on behalf of directors would be burdensome, I undertook nevertheless to have a look at that whole area. That is a general overview of section 24.
The amendment tabled by the Deputies would have the effect of bringing all companies within the scope of the restrictions imposed in relation to quasi-loans. If, as I suspect, the intention of the amendment is to bring all companies, particularly small private companies, within the scope of the prohibitions on making quasi-loans to, or undertaking credit transactions on behalf of, directors then it could more easily be achieved by doing away with the definition of relevant company. That is just an incidental and technical comment as to how we might achieve what the Deputies wish to achieve.
The distinction between an ordinary company and a relevant company arises in section 31 which contains the prohibition on the making of loans, quasi-loans or credit transactions. In the case of loans, the prohibition on making loans greater than £2,500 applies at present to all companies. With regard to quasi-loans and credit transactions the prohibition applies only to relevant companies. I appreciate the concerns expressed by the Deputies but, as with so many aspects of this Bill, it also comes down to a question of balance. I realise that the number of companies covered in relation to the quasi-loan and credit transaction restrictions will be limited. However the matter has to be looked at pragmatically. We would not have the resources to police these provisions if they related to all companies. In the circumstances, to introduce a law that we suspected from the outset we would not be in a position to police would run the risk of bringing all the provisions of this section into disrepute.
At the same time we are not aware that private companies engage to a large extent in making quasi-loans or undertaking credit transactions for their directors. Obviously if this was shown to be an area of concern the matter would have to be looked at again and looked at quickly. For the moment I am happy that the most serious areas of concern are properly addressed in the Bill as it is framed. We are only interested in introducing these provisions and applying them in relation to those companies where the problem actually exists. If at a later stage it can be shown that the same problems arise in the type of companies we are currently proposing to exclude here, I certainly will undertake to look again at the matter. In the meantime I am not in a position to accept the amendment.
Deputy de Rossa's amendment gives us an opportunity to get an understanding of the whole purpose of this Part of the Bill. I take it that the Minister's purpose in dealing with quasi-loans and credit transactions is the same as his purpose in dealing with ordinary loans to directors — to avoid the interests of creditors being prejudiced by the directors having taken money out of the company by way of a loan which there is considerable difficulty in having repaid subsequently. Is that correct?
That is a wholly laudable purpose and one which I fully support. As the House may be aware, I do not believe loans should be given to directors. We should not be considering the limits which the Minister is allowing. If a company have to give loans to their directors there is something going on that should not be going on. I know it is done in practice as a means of avoiding income tax. Companies give their directors loans on very soft terms as a means of buying material things. If they were to give them the money to do so there would be a deduction of 58 per cent but if it is given in the form of a loan there is no deduction and they can buy a house in Foxrock and pay the company back over a period.
There is benefit in kind legislation to deal with that.
That is true. Under what circumstances are quasi-loans granted? In practice when does this happen? Is the effect of it not just as deleterious as the potential effect of an ordinary straightforward loan?
We are talking here about section 24 (2) which defines a quasi-loan. To put it simply, this would be a transaction between a company and a director or a connected person whereby the company paid or promised to pay a third party on behalf of that person. Such a transaction is, in substance, a loan. An example would be where a person uses a credit card to buy goods on terms that the liability to pay fell on the company as the card holder. If a company gave a person connected to that company a credit card and he wandered around the shops of Dublin or elsewhere buying goods on credit that would be a quasi-loan. The definition would also include any arrangements where a company laid out money on their own account for goods or services for a director's personal use on the basis that reimbursement would be made later. We can all think of dozens of examples of perks that a company would extend by means of credit cards, for example, to pay for a carpet, a new hall door and so on.
That is tax avoidance.
As I have said, most of this is subject to benefit in kind legislation under the Finance Acts. Any such perk is subject to benefit in kind legislation.
Why is it done then?
Deputy De Rossa's amendment to section 24, the definition section, gives us an opportunity to get information on the section. I would like to ask a question regarding what are termed, for tax purposes, as loans to directors. Most Irish companies, some of them quite large, are run by a husband and wife. Since the passing of the Corporation Tax Act, 1976, there has been a considerable change regarding what are termed as loans to directors. Up until the 1976 Act a person who owned a limited company could avoid tax very easily. For example, if a company made £200,000 a year and the director's salary was £10,000 a year, charged to the company's account in the same way as other wages, he could draw out as much money as he liked. The transactions in the books of the company would show a credit to the director's account for the amount of his salary less the amount of money that he has drawn out.
If that person owned the company that would not make much difference but the accounts of the company would look absolutely ridiculous. The director's loan account would come under the assets of the company. He could have drawn £200,000 from the company but he would only vote himself a director's salary of a certain amount. That was a legal tax avoidance measure. It meant one could effectively control the amount of money on which one paid tax, because one only voted oneself a salary of so much but one drew out as much as one liked from the company. Therefore, one could really run the company into the ground because one would be paying tax on a very small amount only, say, PAYE on one's director's salary. If the company was making money it would be paying corporation tax but if it was losing money there would be losses within the company in any event. It also meant one could draw out lots of money at the expense of creditors and everybody else. But in the accounts of the company there would be a big asset, like a debtor — amount due from director, classified as a director's loan. Anybody who has ever seen the accounts of a company that has been liquidated will know that is something one will always spot. On examination of the accounts one will see a wonderful asset which in reality will be a directors loan account, that is money that a director who owned the company in the first place owed to the company, but which de facto was never able to be collected for the simple reason that the director concerned used the company as a type of private bank account. He would run the company into the ground in that manner.
Arising from the provisions of the Corporation Tax Act 1976, if one draws more out of a company — putting one's directors account into debit, so that one owes money to the company — that attracts a tax charge and is classified in the company's accounts as a director's loan account; in fact as a loan because one is drawing out more than one is entitled to.
Will that type of loan be caught within the ambit of all of these sections as well with regard to loans, quasi-loans because, strictly speaking, it would be a loan not a quasi-loan, and that is how it would be described in the accounts of the company? Since the passage of the Corporation Tax Act, 1976 if, at the end of the year, one's company accounts show an overdrawn director's account, classified in the balance sheet as a director's loan, it will attract a tax charge. Would the Minister say whether that type of loan will be caught by the provisions of this section because some people have to engage in that practice even though they own the company themselves? Will that be caught under the definition of loans and so on?
There is something that concerns me about the whole of Part III, that is that, under section 60 (13) of the Principal Act — which has to do with financing by companies of purchase of their own shares — it is possible for a company to lend money to its directors. It is not possible under the provisions of section 60 (13) (c) of the Principal Act to lend money to directors for the purpose of purchasing shares in a company but it is possible under the provisions of section 60 (13) (b). Many companies, including some major ones — under the provisions of section 60 (13) (b) — are making loans to directors to enable them to purchase shares in their companies. It may be that some people think it is not possible to lend money to directors under section 60 (13) (b) but it is clear that one can. This is something I have come across in another context. It is clear that one can because under the provisions of paragraph 8 (d) of the Sixth Schedule of the Principal Act — loans are permitted. Some companies — and these are very respectable companies — now have schemes for the purchase of shares by employees, including directors. They have schemes for such employees to purchase shares on a company by way of loan and are doing so at present.
What worries me is that the exceptions provided for in Part III of this Bill do not seem to permit a loan made to a director for the purpose of an employees' share scheme. I should like to ask the Minister whether it is not the case that the effect of this Part of the Bill would be to prevent employee directors from receiving any loan to enable them to purchase shares as part of an employees' share scheme. That would be a retrogressive step and one that should be guarded against. There are large public liability companies which operate employees' share schemes under section 60 of the Principal Act. They give loans to some of their employee directors for the purpose of enabling them to purchase shares in the company. It seems to me that this Part of the Bill, if left alone, will prohibit such loans, which would be a retrogressive step.
I take the Deputy's point. I have been examining that section of the Bill. It is not my intention to prevent directors of companies getting loans under a suitable scheme to purchase shares in a company. Certainly I will have a very close look at that.
To revert to what Deputy McCreevy was talking about — a loan on a balance sheet being shown as an overdrawn director's account or whatever — it is intended to prevent such practice. We are talking here about the definitions section. The real meat of Part III is contained in sections 30 and 31 which deal with loans to directors, When we come to those sections we can deal in detail with that matter. I might say that the intention of the Part is to prevent, with certain limits and exceptions, directors turning their companies into their private bank accounts; to prevent directors borrowing from their companies, perhaps having the company close down a week later, leaving outstanding sums due. Liquidators have told me that a favourite device has been directors borrowing from a company, that company subsequently going into liquidation, when there is difficulty experienced in recouping the money from the relevant director. That has been a fairly regular practice. Therefore, any loan to a director — with the exception of what I said to Deputy McDowell — for whatever purpose but particularly those for any personal purposes we would envisage being caught under the provisions of this section. Obviously that would include the director's outstanding loan account as it appears on the balance sheet.
I will not get into a debate on taxation with the Deputy. I am here endeavouring to limit loans made to directors of companies. I must stress that I have not taken a taxation view or any taxation complications or otherwise into account. This is company legislation, not taxation or financial legislation. Our objective is quite clear, which is to ensure that directors do not over-borrow money from their companies, by whatever method, for personal purposes, leaving the company high and dry at a later stage. That is the import of what I am endeavouring to do here.
While the points made by Deputies McCreevy, Bruton and McDowell are interesting they did not refer at all to the amendment I have tabled and which the Minister has indicated he is not prepared to accept. The fact that other Deputies have not referred to it, I take it, means they are not inclined to support it either.
The Deputy would be surprised if we were.
No, I would be very pleased because I would then have some input into this Bill. What I want to tease out with the Minister is why he has decided to exempt such a large portion of private limited companies from the provisions of the Bill. He has said that effectively the intention is to protect companies from being run into the ground or deprived of assets by directors who might abuse their position.
By excluding such a large number of private limited companies, the Minister, in effect, is telling them that it is all right because we have not the capacity to police whether they are complying or not. Could the Minister explain, first, how he has decided on the criteria for exemption? The thresholds of 50 employees, £2.5 million of turnover and £1.25 million of assets are extraordinarily high. In order to come within the ambit of this section, two of these criteria must be met. I could understand the Minister exempting companies where the proprietor and his wife would be the main persons involved, with perhaps a son, or daughter, a nephew or a niece, who would between them run the company and would be quite agreeable to lending each other the assets of the company in terms of money. Companies with the other criteria of 50 employees, a turnover of £2.5 million or, alternatively, assets of £1.25 million are quite substantial companies. The interests of the employees, if nothing else, require that these companies should be policed as closely as those private companies which would be over the threshold. I do not have any examples in terms of companies being bled of their assets through quasi-loans or credit transactions, but there is a case to be made at least for reducing the thresholds proposed by the Minister.
In relation to policing, as I understand it every private limited company are obliged to have their accounts audited by a reputable auditor who is controlled by his professional body. One must assume that if their books are being audited by such a person and the returns are being made to the Companies Office on a regular basis, that in itself would be a method of policing the system. I would appreciate if the Minister would explain why the threshold has been set at such a high level.
It is the level of the 1986 Fourth Directive which we have adopted in conjunction with our EC partners. It was convenient and already set, so it was a handy reference point worked out at EC level. There was no other reason, other than that it was available and practical.
It is not that I do not want to catch all these companies in the quasi-loan area but just that it is not practical to do so. Any loans made by private or public companies are caught under the prohibition on making loans to directors above a certain level. It is only when we moved to the quasi-loan area, the credit card, the carpet being put in and matters like that, that we have had to confine it to two areas. The first is the public company, which is clear enough, and then the large, medium and private companies.
We still exclude the quasi-loan there to the set limit. The only group that we have left out are small companies below the set thresholds. It is because there are so many of these that it would be quite impossible to police them. I would have no difficulty in expressing the aspiration, but that is not what this legislation is about, it is about getting a job done.
It would be totally impractical and horrifically costly for the State to try to pin down all the quasi-loans in all the private companies in Ireland. How do we find out all the credit cards given in perhaps, up to 60,000 to 80,000 private companies? How do we audit that information? It would make a mockery of the legislation to include it. We simply could not get the information under the present format. We put in the loans aspect because that information would normally be in the accounts but the quasi-loan is entirely different. How do we find out that every small limited company with two directors and a small turnover give credit cards to their directors? I am rejecting the proposal only on the grounds of impracticability.
Is it not the case that what the Minister is doing here is making a straight copy from section 49 of the UK Companies Act of 1980? Section 49 says that in the case of all companies they shall not make a loan to a director and that in the case of what are known as relevant companies they shall not make quasi-loans. What were the reasons for those distinctions? We seem to be directly following UK law on this point and I wonder if it is necessarily correct.
In the definition of a company which is a relevant company, it is where the amount of their turnover exceeds £2.5 million. What does turnover mean in that context? Does it mean a single transaction, or must it be a trading company to have a turnover?
I take turnover to mean an annual sales figure, as would be taken for accounting purposes.
What about the sale of one asset, one block of flats? Is that a turnover?
Yes, that could be a turnover. Turnover is generally understood as the figure in the audited accounts which is described as turnover and signed by the auditors. That is the normal meaning of the phrase.
People will be floating into and out of this Act from year to year. They will be covered by it one year and the following year they will not.
That is the case with every threshold. There are thresholds throughout social welfare and company legislation and people float under and over thresholds all the time.
On Deputy McDowell's point, with regard to loans to directors for purchasing their shares, I appreciate that being drawn to our attention. It is not our intention to exclude those. I shall have to amend the Bill at a later stage. I do not want to put a major hold on the Bill, at this stage.
I shall put down an amendment.
I shall undertake to look at the matter carefully to ensure that we have not any inconsistencies in it. In reply to Deputy Bruton, we took some of the legislation from the UK. The quasi-loan is a very practical thing. The word "loan" did not describe what was going on in the company area. The words "quasi-loan" catches it very well indeed. It is all those other loans which would not normally be called loans, but which are extended.
I call Deputy De Rossa. I should like to remind the Deputy that there is only one minute left.
No problem. I can keep going for at least a minute without any difficulty. Does the Minister not think that it would be more appropriate to set the thresholds at a lower level? My amendment seeks to include all private limited companies. I would be quite happy if the Minister were to exclude the type of company that he describes, where the proprietor and his wife, or the sons and daughters, ran the company. I am thinking of small companies with no more than seven or 10 employees who would, in general, be related to one another. I have great difficulty in accepting that it is right to exclude companies as described in the exemption under section 24. The Minister said it would be impossible to police the section. I can appreciate the difficulty in locating all the credit cards which will be issued to the directors of about 70,000 companies.