Dáil Éireann debate -
Thursday, 27 May 1999

Vol. 505 No. 5

Companies (Amendment) (No 2) Bill, 1999: Second Stage.

Minister of State at the Department of Enterprise, Trade and Employment (Mr. Treacy)

I move: "That the Bill be now read a Second Time."

For the second time this month I am pleased to bring before this House proposals to amend company law. The Companies (Amendment) (No. 3) Bill, 1999, dealing with exempting price stabilisation actions taken in the context of the issue or offer of securities from the insider dealing provisions contained in Part V of the Companies Act, 1990, and certain of the disclosure requirements in Chapter 2 of Part IV of the same Act, passed all Stages in the House on 12 May last. It has since been signed by the President and was commenced earlier this week.

The proposals in the present Companies (Amendment) (No. 2) Bill provide for amendments to company law in a number of areas. These are: amendment of the Companies (Amendment) Act, 1990, relating to examinership; amendment of the Companies Acts, 1963 to 1990, and European Communities (Accounts) Regulations, 1993, to provide for the removal of the statutory audit requirement for certain private limited companies and partnerships; additional requirements in company law to tackle the problems created by Irish registered non-resident companies; and amendments to the Companies Acts, 1990, in relation to the timeframe within which summary prosecutions must be initiated, as well as amending section 16 of the Investment Limited Partnership Act, 1994.

It might help the House if I were to summarise briefly the origins of the legislation in each of these areas. I will then go on to explain in somewhat more detail the content of some of the provisions. The proposals for the refinement of the examinership legislation and the removal of the statutory audit requirement for certain private limited companies arise directly from the report of the company law review group which reported to the then Minister in December 1994, with the report being published in February 1995. At an early stage the decision was taken to implement those recommendations in the report which were considered appropriate, on a phased basis, start ing with those in relation to examinership and removal of the statutory audit requirement. However, for various reasons, the proposals were not progressed to draft legislation until the present Bill was published.

That is not to say other legislation was not progressed in the company law area, because in the interim, regulations to provide for the uncertificated transfer of securities were made pursuant to section 239 of the Companies Act, 1990. The Irish Take-Over Panel Act, 1997, was also enacted. One European Union directive in the company law area, dealing with the application of the second EU company law directive to subsidiary companies, was transposed into Irish law. Two regulations were promulgated consequential on the establishment of the Irish Stock Exchange Limited as a separate entity from the Irish unit of the International Stock Exchange of the United Kingdom and the Republic of Ireland. Work on tackling the problems created by Irish registered non-resident companies, which I will refer to shortly, also took up a significant amount of time during this period.

Turning to the proposals to refine the examinership process, it will be recalled that this process was introduced into Irish company law in the Companies (Amendment) Act, 1990. The underlying rationale for the examinership process is to assist companies in difficulties to address those difficulties, if possible, rather than have the company put into receivership or liquidation.

The company law review group, which was representative of a wide range of interests, concluded that the examinership process, which involves the impairment of the rights and interests of creditors, and indeed competitors, of any company which avails of the process, might be justified in the case of ailing but potentially viable companies that have been unable to ensure their survival by voluntary arrangements with their creditors, but where the imposition of a scheme of arrangement might facilitate their survival without undue impairment of the interests of their creditors, their competitors or the commercial environment – paragraph 2.11 of the report refers. Within the group, and in many of the submissions made to the group, there was the belief that examinership, albeit in a modified form, is a useful mechanism which should be available in Irish company law – paragraph 2.8 refers.

Essentially, the group took the view that there should be a greater focus on viable companies and there should be more recognition for the position of creditors. In general, I have accepted the conclusions and recommendations of the company law review group and the Bill will implement most of its recommendations.

To achieve a better focus on viability, the group recommended that the examinership process should be modified so as to provide that the court should not appoint an examiner to a company unless there is a reasonable prospect of survival of the company or the whole or part of its undertaking. Paragraph (b) of section 5 will now insert such a requirement into section 2 of the Examinership Act, 1990.

To assist the court assess whether this is the case, the group recommended that a report of an independent accountant should be available when the petition for the appointment of the examiner is made. In this regard, section 7 will in future require the submission of such a report and sets out the matters that must be contained in the report. This is essentially the material that is compiled by an examiner under section 16, but would only be available 21 days after an examiner is appointed. A small number of additional matters have been added to what must be included in the report, for example, paragraph (j) requires details of the extent of the funding likely to be required during the course of the examinership.

It is recognised that in exceptional circumstances it may not always be possible to have the report of the independent accountant available to accompany a petition for the appointment of an examiner and section 9 contains provisions to cater for this eventuality. In effect, a ten day period will be available during which such a report may be prepared, subject to meeting the specific terms contained in the provision.

Because of the changed requirements to demonstrate a "reasonable" prospect of survival and the preparation of the independent accountant's report, a number of consequential amendments are necessary to the Examinership Act, 1990. These are contained in a number of sections, for example, the amendments in sections 8 and 12 are directly consequential on the introduction of the "reasonable prospect of survival" requirement, while section 11 makes appropriate provision for the manner of making available copies of the independent accountant's report to the company and other interested parties. Section 14(a) is likewise consequential on the fact that the court will have the independent accountant's report available at the petition stage. It reduces the period of examinership from three months to 70 days, but the possibility for an extension of up to 30 days by the court, contained in section 18(3) of the original Act, will still remain an option.

In relation to giving more weight to the position of creditors who have to bear the brunt of the pain in an examinership, by virtue of the amendment contained in section 10 of the Bill, they will now have a statutory entitlement to be heard when the petition for the appointment of the examiner is being considered by the court.

While the expenses of an examiner will continue to be payable in priority to all creditors, secured and unsecured, any liabilities certified by an examiner under section 10 of the original Act will no longer rank in priority to secured creditors. Such certified expenses will continue to have priority over floating and unsecured charge holders. The necessary provisions to effect this change are contained in section 28.

I wish to refer to a number of other changes being made to the examinership process. Section 6 is designed to remove the requirement at present contained in the 1990 Act where any company which is directly or indirectly supervised by the Central Bank can only have an examiner appointed to it if the petition is presented by the Central Bank itself. By virtue of the amendment contained in section 6, this will still remain the case in respect of credit institutions, such as banks, building societies, etc. However, in the case of other companies which are directly or indirectly supervised by the bank, the company or its members, directors or other interested parties, or the Central Bank itself, may individually or collectively present a petition to the court for the appointment of an examiner to such a company.

In the light of the experience with cases which have come before the courts and as recommended by the CLRG, a specific obligation is now being imposed by section 13 on all parties involved in the examinership process when dealing with the courts to disclose all material information to the court and at all times to exercise utmost good faith.

By virtue of the repeal of section 5(2)(h) of the original Act contained in section 14(b)(ii), banks will no longer be prohibited from exercising their right of set off when an examiner is appointed to a company. This will enable a bank to effectively establish its net position, whether positive or negative, in relation to a particular creditor to whom an examiner is being appointed, and it is this net position that will then obtain as to whether moneys are owed or owing to the bank.

Section 15 introduces a restriction on what payments can be made during the examinership process in respect of liabilities incurred prior to the presentation of the petition. In future, but subject to the discretion given to the court in subsection (2), such payments can only be made where the independent accountant's report specifically recommends that this be done. The idea is to ensure that all interests, including the court, will be aware of what is proposed and interested creditors who are opposed to such payments will have the opportunity to express their concerns to the court.

Sections 16 and 17 are designed to clarify the law in circumstances where a receiver or provisional liquidator has been appointed to a company which subsequently becomes the subject of a petition for the appointment of an examiner. Section 18 amends the circumstances under section 7(5) of the 1990 Act where an examiner can repudiate a contract. In future, this will be limited to circumstances where the contract is entered into after the examiner is appointed to the company.

Arising from the repeal of section 17 of the original Act, as the court will now have the independent accountant's report when considering the initial petition, section 21 is designed to set out how the court can deal with matters that come to its attention which would previously have been dealt with under paragraph (d) of section 17. Section 22 makes adjustments to section 18 of the Examinership Act consequential on the fact that the court will already have decided to appoint an examiner. It also adjusts the applicable timeframes and the arrangements that obtain in relation to the provision of the examiner's report to parties concerned.

Sections 23 and 24, in various ways, deal with adjustments in relation to matters to be considered by, and the timing of, meetings of members and creditors to consider an examiner's proposals. In particular, it will no longer be necessary for a class of members to approve the examiner's proposals before they can be confirmed by the court. In circumstances where a company has had to have an examiner appointed, the company law review group was of the view that what was an effective veto on an examiner's proposals by members of the company was no longer considered appropriate.

Section 25 will put in place more specific provisions as to the manner in which the examinership process handles the position of a guarantor for the debts of a company which goes into examinership. First, it provides that a guarantee can be enforced, but retains the prohibition on this happening during the examinership process. Where a creditor proposes to enforce the guarantee, any rights to vote attaching to the creditor by virtue of the debt must be passed to the guarantor by the creditor. Where a guarantor makes a payment to the creditor, his or her right of recovery under the examiner's scheme of arrangement is also provided for in this section.

Section 26 contains specific provisions in respect of leases. Specifically, it prohibits an examiner's compromise or scheme of arrangement from containing proposals which would result in a lessor having to accept a reduction in the amount of rent or other payment due in respect of a lease of land after the scheme of arrangement is approved. Similar provisions are made in respect of property other than land where the value of such property is substantial. Guidance is contained in the section which can be used by the court in determining whether a lease will be considered to be substantial.

I have covered most of the provisions in this Part of the Bill. The remaining provisions in this Part to which I did not specifically refer make modifications or adjustments which were recommended by the company law review group or were consequential on other amendments being made.

In relation to the removal of the statutory audit requirement for certain small private limited companies, contained in Part III of the Bill, this proposal was first recommended by the task force on small business and endorsed by the company law review group. More recently, this proposal has been included in Partnership 2000. It is important to understand that this provision will only be available to certain private limited companies and certain partnerships. The partnerships in question were brought within the requirement to have their accounts drawn up and audited by the European Communities (Accounts) Regulations, 1993 (Statutory Instrument No. 396 of 1993) and are partnerships where all of the members have effective limited liability.

To avail of the exemption from audit, the company will have to satisfy the specific requirement set out in section 32. I wish to make a number of points in that regard. One is that the exemption will only be available to a company to which the Companies (Amendment) Act, 1986, applies. The particular relevance of this provision is that a number of companies, particularly guarantee companies, are outside the scope of the 1986 Act and such companies will not be able to avail of the exemption. The exemption will only be available to a company where the turnover does not exceed £100,000. While I appreciate that this figure may seem low, it was recommended by the CLRG. Also, it is worthwhile getting experience of how the exemption operates in practice before considering whether a higher threshold would be desirable. Finally, I draw attention to the fact that the exemption will not be capable of been availed of by a company which does not keep its returns to the Companies Registration Office up to date. This is a most important factor.

Section 33 contains a mechanism that will enable members of the company to insist on having the accounts audited. It also sets out supplemental requirements in relation to information that must be contained in the balance sheet, which the directors will still be obligated to prepare. Specifically, it must contain an acknowledgement by the directors of their obligations under the Companies Acts, 1963 to 1999, to keep proper books of accounts and to prepare accounts which give a true and fair view.

Section 34 contains provisions in relation to the manner in which the appointment of the auditor is terminated, consequent on a decision of a company to avail of the exemption. In particular, certain information which the auditor has may have to be brought to the attention of the members of the company. This is another important point. Section 35 obliges the directors of a company to appoint an auditor where an exemption ceases to have effect.

Section 38 contains the necessary provisions for the manner in which the exemption can be availed of by partnerships which, pursuant to the European Community (Accounts) Regulations, 1993, were brought within the requirement to prepare accounts and have them audited. Such partnerships, which are not very common in this jurisdiction, are made up of partners, all of whom have effective limited liability.

The proposals in Part IV, while dealing with two specific issues in relation to an amendment to the Investment Limited Partnership Act, 1994 – in section 40 – and extending the timeframe within which summary prosecutions under the Companies Acts maybe brought – section 41 – also contain the company law part of the package of measures approved by the Government which are designed to address the problems created by Irish registered non-resident – IRNRs – companies. It is no exaggeration to say that the problems created by these IRNRs over recent years rank as one of the greatest threats to the reputation of Ireland as a jurisdiction that is well and properly regulated.

While the number of IRNR companies which have been convicted of engaging in illegal activity abroad may not be that large, the fact that Irish registered companies were embroiled in controversies from locations as far apart as Russia to Mexico and Australia to Israel, as well as a number of instances within the European Union and the UK, meant that the problem was very serious and needed to be tackled. The concept of residency in this context is a taxation concept. However, it is necessary to recognise that even with the changes which have been introduced in the Finance Act this year, the necessity to be able to effectively police and enforce the provisions had to be addressed.

The basic change made in the Finance Act, 1999, to address the IRNR problem is that, subject to limited exceptions, every Irish registered company will now be tax resident in the State. However, based on past experience, that change alone is likely to prove to be ineffective unless it is capable of being and is rigorously enforced. The main reason for this is that parties who use these companies are prepared to ignore their obligations under both tax law and company law and to challenge the authorities to come after them. For instance, in 1995, an article in an international magazine suggested that parties could ignore requests for information from the Revenue Commissioners on the basis that the chances they would be pursued by Revenue were rather remote.

Accordingly, the provisions in sections 42 to 48, inclusive, cover a variety of aspects of the activities of companies, ranging from the imposition of requirements at the time of incorporation to the introduction of ongoing requirements. Thus, when in future people wish to incorporate a company, under section 42 they will have to show it will conduct or undertake some activity in the State. This is designed to establish a link between the incorporation of the company and the State.

Pursuant to section 43, for new companies the subscribers will also have to ensure that the company has a person who is resident in the State as a director, while for existing companies a transitional period of 12 months is being allowed before such a requirement becomes mandatory. Alternatively, the section provides that a bond to the value of £20,000 must be maintained by the company. The objective is to ensure that there is a person within the State whom the Revenue authorities and the Companies Registration Office can pursue where a company fails to comply with its obligations under Irish law. In this regard, section 84 of this year's Finance Act introduced changes to the Taxes (Consolidation) Act, 1997, so that the person who is a resident director of a company can be pursued to ensure that the company complies with its taxation obligations. These obligations, in the first instance, would entail the registration of the company for taxation purposes, or satisfying the Revenue authorities that it meets one of the exemptions clauses in the relevant tax provision.

Section 44 contains supplemental provisions to section 43. It is designed to provide that where a company can show that it has a real and continuous link with one or more economic activities being carried on in the State, it can be exempted from the obligations in section 43 to have a resident director, or the alternative of having a bond to the value of £20,000. It will be noted that the Revenue authorities will provide a statement to an applicant and on submission of this to the registrar of companies, a certificate will be given by the registrar effectively exempting the company from the requirements mentioned. There is a strong link between Revenue certification and the decisions of the Registrar of Companies. Provision is made for the withdrawal of such a certificate where information of changed circumstances comes to the attention of the Revenue authorities. This section also contains a definition of what is meant by "residency" in the context of the new obligation imposed in section 43 to have a director who is resident in the State.

Section 45 introduces a limitation on the number of companies of which a person can be a director or shadow director, to a maximum of 25. This is designed to tackle the problem created particularly in the context of IRNRs, where multiple nominee directors appear to be the order of the day. The spectre of a person being a director of many hundreds of companies cannot but bring the company law regime into disrepute. It is said that one individual is the director of in excess of 1,500 companies. Deputies will see that the section contains reasonable grounds for exemption in respect of what might be termed legitimate multi-directorships, and in the case of group situations such multi-directorships will be counted as one. For instance, where there is prior screening of directors, as happens in the case of companies which operate in the regulated sectors, holding of such directorships can be exempted from the prohibition on holding more than 25 directorships. The section contains a mechanism whereby applications can be made in the first instance to the registrar of companies and subsequently in certain instances appeals can be made to the Minister. Finally, the manner in which directorships held when the provision is commenced is dealt with.

Section 46 inserts a new section 12 into the Companies (Amendment) Act, 1982, in relation to striking off companies which fall to make annual returns. In recent years, the compliance rate by companies with the obligation to file their annual returns has been nothing short of abysmal, with only 13 per cent of companies meeting their obligations on time in the year 1997. While many of these companies are undoubtedly IRNRs, it is not solely such companies that are involved. The registrar of companies will now be entitled to move to have a company struck off where it is behind for one year or more with making annual returns. This is a new departure. A number of refinements are made to section 12 to streamline the procedure, including, for instance, allowing the Circuit Court and District Court to handle the applications.

Section 51 of the Companies Act, 1990, inserted a new section 195 into the Companies Act, 1963. Subsection (8) of the new section 195 permitted a director who had resigned from a company to notify that to the Companies Registration Office. Until then, the company itself was obliged to make the notification. While the obligation remained on the company, the facility was introduced to cater for situations where a company failed to make the notification, and the former director would now, so to speak, be able to correct the public record. However, various difficulties were seen with this provision; most notably, it could result in notifications being made to the CRO such that no director would be on the public record in respect of a company. Section 47 provides for the deletion of the said section 195 (8), and the substitution of a different mechanism to facilitate directors who have resigned to make the notification to the CRO. These are now set out in new subsections 11(a) and 11(b) in section 47.

Section 48 is tied in to the amendments being made in section 47, and will cater for cases where the records in the CRO show that no person is recorded as being a director of a company. In such circumstances, the Registrar of Companies will be able to move to have this company struck off. I emphasise, however, that by virtue of the detailed procedures in the previous section, the company will have had fair warning that a process had commenced that could result in the records in the CRO not showing any director as being appointed in the company in question.

I expect to introduce a further provision on Committee Stage in relation to IRNRs and this will be designed to ensure that, where the Revenue authorities find their approaches to a company to get the necessary information to enable them register the company for taxation purposes are ignored or not responded to, they will be able to notify the registrar of companies to this effect. On receipt of such notification, the registrar of companies will be able to write to the company informing it that if it does not comply with its obligations to provide the necessary information to the Revenue Commissioners, he or she will move to strike off the company. Thus, where people ignore their obligations to respond to and supply information to the Revenue authorities, the company may be struck off and dissolved. This is to ensure that where people are prepared to ignore their responsibilities, effective action can be taken against them. This provision was not included in the Bill as published because of the necessity to relate it to the relevant provisions in the Finance Act, which at the time of drafting of the relevant sections in the Companies (Amendment) Bill had not been finally settled.

In so far as possible, the proposals in company law to tackle the IRNR problem are designed not to have an unduly adverse impact on entrepreneurs who wish to use the company structure to progress their desired projects. Of necessity, some changes may result in a somewhat slower incorporation process, but it is not considered they will add to any significant extent to the cost of incorporation. I intend to ensure the provisions are monitored, and their impact is kept under close review so as that any unintended difficulties which arise for business can be addressed at the earliest opportunity.

That is a summary of the Companies (Amendment) (No. 2) Bill, 1999. I thank the House for its co-operation in arranging this debate. I look forward to hearing the contributions of all Deputies, on the Bill's contents because it is of major interest to most Members and to the public. I commend it to the House.

Mrs. Owen

I am glad this legislation is being introduced. Unlike the Companies (Amendment) (No. 3) Bill, there has been sufficient time between publication of the Bill and Second Stage for Members on this side of the House to consider the legislation. I also thank the Minister of State for the briefing I obtained from his Department. It was most helpful. Bodies outside the House have welcomed the consultation that took place before the legislation was completed by his Department.

This legislation is only a small part of required changes to company law following the publication of the Company Law Review Group report in December 1994. Most chapters in the report contained a minimum of ten recommended changes. The legislation introduced by the Minister of State last week was not required by the review group, so this Bill is merely the start of the process of change.

Indeed, given that the report of the review group was published five years ago, changes are probably also required to its recommendations. Despite this, the legislation regrettably incorporates some of them without alteration. I hope, therefore, the Minister of State will be open to the amendments I will put down on Committee Stage.

The Bill is broadly welcomed by such bodies as IBEC and the Consultative Committee of Accountancy Bodies in Ireland. The proposed changes to examinership are especially welcome. I will address the provisions regarding examinership, the new auditing requirement and the changes proposed to the Irish registered non-resident companies.

The use of the examinership procedure has been criticised over the years. The view has been taken that some companies have used it as a shel ter to hide from their responsibilities. Examinership legislation was enacted to give companies running into difficulties a refuge while they could examine matters, redirect their efforts, refinance the company, get more shareholders and do whatever was needed to give the company a chance to be viable and to continue to operate.

However, there has been a view that some companies have adopted the examinership process to hide from creditors who consequently suffered. An examination of the relevant statistics indicate that many companies did not have the potential to be viable when they went into examinership and they should not, therefore, have used that process. Given this, I welcome the provision that any petition for examinership must be accompanied by an independent accountant's report.

I hope the Minister of State will consider how best to ensure there is a coterie of independent accountants to serve the examinership process. Given the small size of the country, accountancy firms are well known and they operate for many of the companies which may go into examinership. There must be an independent accountancy system so that people can be called on to undertake an examination and to make petitions for examinerships to the courts.

With regard to the examinership process, I welcome the provision reducing the time for examinership from three months to 70 days. There is no doubt about the genuine concern, especially among American companies, that the legislation covering examinerships is lax. This has been put to me by people involved in company businesses. Overseas investors in what has been referred to as big ticketing leasing have been legally advised that Irish examinership legislation is weighted in favour of the ailing company and against the creditor. This has led to a reluctance by companies to enter the Irish market, especially in view of concerns about the ripple effect on businesses dealing with the large leasing companies, although the concerns expressed in the early 1990s have been ameliorated by the high growth levels in the economy. Given this, the proposed changes to the examinership laws are welcome, even if it has taken approximately five years to introduce them.

Section 10 provides creditors with the opportunity to be heard. However, the legislation covering their rights is not strong enough. They must be invited or make an application to be heard. The section states:

The court shall not make an order dismissing a petition under section 2 or an order appointing an examiner to a company without having afforded each creditor of the company who has indicated to the court his desire to be heard in the matter an opportunity to be so heard.

This puts a severe onus on creditors to make sure they know what is happening and to indicate their interest and their desire to be heard. Sometimes it is possible for companies to hide their lack of viability from their creditors. It is important, therefore, that creditors are given the right to be heard. IBEC and other bodies lobbied for this. They also lobbied to ensure that creditors would have a voice in decision making while IBEC lobbied to ensure that the legislation should require two-thirds majority approval before a petition could be brought to the court. Perhaps the Minister of State will indicate the thinking behind this omission.

Concern has also been expressed by the Consultative Committee of Accountancy Bodies in Ireland about the section 15 report requirement. The committee made a submission in May 1995 in response to the CLRG report and also made a submission on the Credit Union Bill, which Deputy Rabbitte brought through the House when he was Minister of State at the Department of Enterprise and Employment. According to the committee, some of the specified content of the section 15 report is normally not relevant to the forming of an initial assessment as to whether the company involved would have a reasonable prospect of survival. The term "reasonable prospect of survival" has been incorporated into the Bill.

The committee also points out that part of the information may take considerable time and effort to determine, which in certain circumstances might mean that by the time the information has been collated and the report presented, the opportunity for examinership will have passed and the company would no longer have a reasonable prospect of survival. If too much information is required and it takes too long to compile the period during which survival is possible will be too short.

Companies run into difficulties for various reasons. They may have lost part of their overseas markets or they may have to adjust their production to meet the challenges of other competition. It is important, therefore, that the examinership be used judicially to save companies and to ensure the maintenance of jobs. Will the Minister of State examine the reporting framework under section 21 between now and Committee Stage to ensure he is satisfied the concerns expressed by the consultative committee will not be substantiated.

Small creditors of companies may not have the facility to be involved in the court process. Often large creditors, such as banks and buildings societies, who stand to lose a good deal of money have their eye on the ball, but small creditors who supply a small service or product lose out.

Regarding the proposal to remove the requirement that audits be carried out by small companies, audits are useful in the case of companies that have shareholders, but I am not that convinced they need be carried out by small family owned companies that do not have outside shareholders provided proper books are kept. It is not proposed to remove the requirement that companies carry out audits except under certain very strict circumstances. We all know from our experience the difficulties associated with running a small company.

The Small Firms Association estimates that small firms must complete 80 core forms annually, which amounts to 5,000 feet of paper in order to comply with all the regulations. It is estimated that dealing with the paperwork and administration involved in complying with all the regulations of the Department and the tax system with which small firms are required to comply, takes half of one full job in a company with only eight employees. A major examination of the administrative blockages and red tape that prevent small firms from being efficient and effective was carried out in the UK. The slogan "think small and then grow from there" was adopted. The forms small firms were required to complete were examined on the basis of time involved in completing them, the information that had to be gathered and expertise that had to be brought in to complete them. The examination also involved investigating what happened to the forms once they were submitted. Following that examination, 300 forms that small companies were required to complete were discarded.

We need to carry out a similar audit of the forms used in our system. We need to examine what happens to them when they are submitted to the Department. Are they filed under A, B or C and not looked at again? What is the information on the forms used for? Is it relevant? Does it need to be collected by the Department? If such an audit of those forms was carried out in the Department, I am sure the Minister of State would find that many of the forms are not required. Some of the forms virtually require managers to state what they give their staff for their afternoon tea break and what they had for their breakfast. I hope the Minister of State will examine the number of forms required to be completed. I know some work has been done on that, but it is necessary to examine it with a view to gradually reducing the number of forms required.

Companies with a turnover that does not exceed £100,000 will be exempt from having to provide audited accounts. The Minister of State took that figure from the company law review group report published five years' ago, but it is unrealistic today. The limit in respect of a company's turnover is £350,000 sterling in Northern Ireland and a similar limit applies in the UK. The Minister with responsibility for commerce in the UK is examining the prospect of increasing the limit of £300,000 sterling or £350,000 sterling to £4 million sterling.

A small family owned pub with a turnover of £100,000 would yield a profit of 7 per cent. That means the publican would have only £7,000 profit for the service he or she provides and that income would not enable him or her to employ any staff. A business with a turnover of £100,000 would be a small operation and the income derived from it would also be small. That limit in respect of a company's turnover should be increased to a minimum of £250,000 and I recommend that it be increased to the limit that applies in Northern Ireland.

Many companies that operate in Ireland are very small and do not bother with the company registration procedure. Under our tax and other laws all companies are obliged to ensure proper books of accounts are kept. If companies obey that law, that is sufficient to ensure companies are run properly and comply with the law. I will table an amendment on Committee Stage to increase the turnover limit of £100,000.

A company need not register for VAT purposes if its turnover is less than £700 a week or £40,000 per annum. That figure is unrealistic today. It needs to be examined with a view to raising the turnover ceiling of £40,000 per annum to £100,000 per annum. I am sure all Members have met constituents in their clinics who have raised this matter. I am always amazed when I read about banks and individuals who manage to owe the Revenue Commissioners hundreds of thousands of pounds and, in some instances, millions of pounds. The amount of £1.5 billion was collected under the last tax amnesty. It amazes me how companies can get away with running up their tax bills to that extent.

People who run small companies have told me that the VAT inspectorate is on their doorstep on the twentieth day of the month asking for their VAT returns, yet large companies manage to get away with not submitting them. It is a case of the bigger the company, the better it can hide what it is doing, or people are afraid of it. We have heard in the tribunals how the banks said they were afraid of Mr. Haughey. They were afraid to go after him because he was somebody of great importance and they were afraid he might get at them in some other way, yet small companies are constantly being harried in regard to their VAT returns.

I do not believe the Minister of State's Department is sufficiently engaged with the concerns of small businesses. That was demonstrated by his lifting a turnover limit of £100,000 from a report that is five years' old instead of calculating what that figure would be in today's terms. He has provided that it can be reviewed year in, year out, but he should have set a higher limit.

Section 42 and later sections deal with proposals in respect of Irish registered non-resident companies. Up to now, Ireland was the only EU state which allowed the registration of companies without tax liabilities being incurred. The change in this year's Finance Act is welcome and these companies will now be subject to taxation. However, as Dermot Quigley was quoted as saying last year, there are about 200,000 non-resident companies registered in Ireland, with £20 billion going through them. In registered Irish companies that figure is £43 billion, so half that amount is going through non-resident accounts. Ireland was gaining a reputation as an offshore money laundering location for people and groups outside this country – the Mafia and criminals from Eastern Europe and the rest of the world.

I recall visiting Europol headquarters in The Hague when I was Minister for Justice. There was a great deal of discussion about money laundering as Europol has the power to go after those involved. I was appalled when I was taken into a very private room – the door was locked behind us – and shown a file. However, it was not a normal file but an enormous map of one money laundering exercise which required a large conference table for its display. The money laundering exercise started in a small bank in a small town in Austria – I will not say what town as I do not want to give too much information. From that bank there was a series of lines – it was like an enormous octopus. The map was of Europe and, to my shame, when I looked at Ireland there were 56 lines leading there from the various tentacles stretching across Europe – 56 lines representing 56 non-resident companies in this country, registered in an office on a street very close to this House. The scale of the map was not big enough to show the 56 companies but they were spread around the coast of Dublin. It frightened me to see how these non-resident companies could be utilised by criminals who knew our laws were lax and that we did not have sufficient powers to examine this companies.

I have been told that these companies setting up in Ireland were advised not to worry about making returns because the chance of the Revenue Commissioners or the fraud squad catching them was so slight that it was worth the gamble. We should not be proud that people can say Ireland is an offshore location for money laundering and that it is being talked about in the backrooms and haunts of criminals throughout Europe and the rest of the world. I welcome the introduction of the measure whereby a company must be able to show it is carrying on some trading activity in this jurisdiction.

However, I am concerned about one element of the legislation which provides that all these companies must have a resident Irish director. That sounded fine as a way in which one could have a link with these companies and their directors. However, I am mystified that a bond of £20,000 is the equivalent of having a resident Irish director. Perhaps I am not reading the legislation correctly, but that is how it seems to me. It is an either/or situation, one can have a resident Irish director or one can put up a bond. I do not believe putting up a bond will be much of a problem to people who want to set up a company for criminal activities.

It is like the argument I made when I was on the council. The council set down a condition where if a company wishing to expand its business or open a new shop did not provide for car parking spaces, a charge of £800 would be levied. I used to tell the council one cannot park on a levy and that it was no good charging one if there was nowhere to park a car, unless the levy was spent on the car parking space. I want the Minister to explain the inclusion of that either/or provision in this legislation. I would have thought it would be better to have a bond as well as a resident Irish director to ensure we have some influence on these companies and that they will not be used for criminal activities.

We have a reputation as a well regulated financial services centre which we must continue to protect. The minute we lose that reputation, some of the advances we have made in the last number of years will be put at great risk. I hope the changes recommended to registration, where one must have a resident Irish director, will help to ensure the Mafia and criminals from all over the world do not see Ireland as a place to practise their dubious activities.

There are a number of other provisions in the legislation which I welcome. Section 46 allows for companies to be struck off if they have not filed annual returns after a year. There is already a law which provides that companies should be struck off if they have not filed annual returns after two years. However, we all know the Companies Registration Office was not working effectively and efficiently. It is thanks to the former Minister, Deputy Rabbitte, and my colleague, Deputy Richard Bruton, that the Companies Registration Office can now boast it is doing the job it was set up to do. A new computer system has been installed. It is frightening that, as the Minister said, only 30 per cent of companies made their annual returns on time.

Mr. Treacy

The figure is 13 per cent.

Mrs. Owen

That is even worse. I welcome that the CRO now has the facilities to clean up its act and its books and that many companies have been struck off. All the people who have jobs in the current economy owe them to the policies adopted over the years by various Governments – our education policy and our desire to ensure we live within our means. However, if we allow our company law to fall into disrepute and do not keep it up to date – this is why this Bill is welcome although a great deal more work needs to done – we will lose the benefits we have gained because we will acquire a bad reputation. Good companies wishing to set up here will be concerned about bad practice. I welcome this Bill. I will put down amendments on Committee Stage but I hope it will pass Second Stage.

Mr. Rabbitte

I would also like to give a broad welcome to this Bill. One could not foresee the day when the company law code would be regarded as sexy material in political terms because it is a complex area requiring a great deal of expertise on the part of people who both operate and implement the law, especially as regards those who try to keep the company law code up to date, making changes and bringing forward amending legislation, which this Bill is. One only has to look at the background and the fact that the Tánaiste has 13 different inquiries under way at the moment to appreciate how relevant and urgent this kind of amending legislation is. The business environment changes and business practices evolve. There is a necessity to bring the law up to date and to keep abreast of these developments. The fact that the Tánaiste has established 13 different inquiries into the behaviour of many companies and company executives points to this.

The Tánaiste said in high profile statements that she possesses shocking information relating to breaches of the company law code, suspected tax evasion and other offences related to the conduct of company directors, owners and shareholders who considered themselves to be above the law. That is a serious indictment of sections of corporate Ireland. It is a cause of puzzlement for those who follow these issues that, six months after the Tánaiste started making such statements, we still do not know what she is talking about.

She recently started to circumscribe her statements by implying that she might have great difficulty in passing this information into the public domain. That is entirely contrary to the impression she has given for some time. If she has discovered that, under the sections of the Companies Act which she has invoked to cause the inquiries to be held in the first place, she is now prevented by law from publishing them, it was extraordinary that she gave a number of high profile interviews on how she was going to clean up corporate Ireland and how, to use her famous phrase, the public has a right to know.

She said that she is in possession of this information and it is clear that it seriously oppresses her, yet she cannot share it with the House. It is time for the Tánaiste to come clean and tell us what she intends to do. There is a great deal of concern about this. I do not think the Minister for Enterprise, Trade and Employment, not to mention Tánaiste, can make such statements and then resile from them or relax in the knowledge that she will be long out of office before the reports come through and that they will never be published. Speaking as someone who supports the Tánaiste's institution of the inquiries, that is not acceptable. She was courageous to institute the inquiries at the time. It represented positive political action and concern about the culture of a certain section of corporate Ireland, its ethics, its duties under company law code and the law generally, its approach to compliance and its relationship with the State, politics and political parties. I ask the Tánaiste to tell us, six months after she started these interviews, what we ought to know and what remedies are needed to address these factors.

Mrs. Owen

It would lift a burden from her shoulders.

Mr. Rabbitte

It would. She would be much happier if she shared this with us.

As regards the report of the company law review group, which the Minister rightly says is the basis of this Bill, or at least the sections of it other than those which deal with Irish registered non-national companies, it is a matter of where you stand on the usefulness of examinership in the company law code. We all agree it is a useful mechanism. The question of the rigour of the test applied arises then in terms of the practicality of examinership.

Examinership was born in extraordinary circumstances when the Dáil was reconvened in August 1990, when the Goodman group of companies was threatened with extinction. Something equivalent to examinership exists in many other jurisdictions – it is called Chapter 11 in the United States. Corporate rescue is a concept well known in company law.

I would like to hear the Minister comment on whether he has looked at the circumstances where a company can abuse the concept or appear before the courts to seek the appointment of an examiner because of reckless adventurism on the part of that company. Companies get into trouble for various reasons. There is no justifiable reason a company enduring temporary problems, which can trade out of those problems, should be able to resort to examinership to give a period of respite when it can get the show back on the road.

It could be said that all those features of adventurism and reckless trading were present in the Goodman group, yet we decided in this House, for the overriding reasons of the importance of the group of companies in the agricultural sector in terms of employment and the potential destabilising effect on the agricultural market, and notwithstanding the reckless trading on the London Stock Exchange, widespread tax evasion and other matters, that we would proceed with the examinership. We did that by agreement, albeit in an environment of serious criticism in this House in August 1990. The Minister did not, in an otherwise comprehensive script, advert to the possible abuse of resort to examinership and I would like to hear his views on that issue.

The point concerning examinership relates to the test to be applied. The courts have interpreted the Act of 1990 to mean that if a company has some prospect of survival, an examiner may be appointed. The company law review group report, in considering that, decided that the test ought to be changed to a reasonable prospect of survival. In the circumstances that is right. When one considers that the concept of examinership is an impairment of the rights of other people – creditors and competitors – surely it is right that there should be a reasonable prospect of survival. If all professional expertise and assessment concludes that the company will fail anyway, what is the merit of examinership?

Therefore, the application of the test of a reasonable prospect of survival is correct. I support the recommendation of the Company Law Review Group to have a report submitted at the time of the petition from an independent accountant. That is correct and fair. I do not know whether the Minister will say that will result in an additional cost to the examinership process. The examinership process can be expensive. That is not a big factor in the scale of a significant company but it might be a factor in the case of a smaller company. I do not know whether the requirement to introduce an independent accountant to do the kind of report which is envisaged to accompany the petition for examinership is envisaged as resulting in a significant increase in the cost associated with examinership.

This is a complex area which is not entirely value free. It is in danger of suffering from incestuous comment from people who have a vested interest and it involves a question of the public good. I am not just talking about examinership, I am talking generally about amendments to the company law code. On another occasion I set down my guiding philosophy. I said that the company law code is a crucially important aspect of the structure of the modern state. The rights of incorporation and limited liability are important for the proper functioning of the modern economy. However these are rights granted, or licensed as it were, by the State. The limited liability company is an artificial construct. With the rights of incorporation and limited liability go duties for those who avail of the licence – and also the State itself. If incorporation and limited liability are to work effectively, companies and their directors and managements must comply with the code and the State must efficiently and readily ensure its proper and transparent working and full compliance with the code. It is this latter aspect – the delivery by the State of an efficient, cost-effective register of companies and associated information – that lies behind the programme of investment and reorganisation, to which Deputy Owen referred, which I made in the future of the CRO. However I also stress that companies, their managements and directors also have duties. These include, in the context of the CRO, the duty to file returns on time. In this regard it has to be said that the record of the corporate sector has been, to use the Minister's term, abysmal. Compliance is crucially important precisely because the limited liability company is so central to economic life. The company is not simply its members or shareholders. Customers, creditors, staff, bankers and the wider community can all be considered stakeholders in the enterprise and all have, to my mind, certain rights to information – even the basic and limited information that is required to be filed at the CRO.

That is a statement of the balancing rights. That there are significant privileges and benefits conferred as a result of incorporation, limited liability, etc., means that there are duties and obligations on the part of the people running those enterprises and companies to the companies' stakeholders, who include the workers and a wider concept of consumers.

The record is not great, to put it mildly. Deputy Owen referred to the shambles which was the Companies Registration Office. I do not mean that in terms of the performance of the workforce, who were functioning in impossible circumstances, trying to do a job which simply could not be done with the investment, technology and space which was afforded to them. It is remarkable that they managed to do what they did, given the circumstances in which they had to work. The office has been a shambles for a long time and , as Deputy Owen commented, it is extraordinary that the Minister comes in here to say that last year there was 13 per cent compliance with the obligation to file annual returns, presumably within the required timescale. I am not blaming the Minister or the CRO for that because it must have taken it some considerable time to bring its systems and work up to date following the mess in which it was left over the years. As Minister, I provided for major investment in IT. In addition, we purchased and opened a new premises, Commerce House, Parnell Square. It houses, among other things, the CRO and the modern facilities are more in keeping with what one would expect. The shambles of the CRO illustrates the phenomenon about which I have been talking, the decades of neglect ending in the officers simply not being able to function and being swamped in a backlog of work bereft of resources.

That could not have happened without the State administratively and politically turning a blind eye over the years. The nod and wink political culture, which has obtained in Ireland and which is being swept away in many cases, was part of that. The Minister of State at the Department of Enterprise, Trade and Employment, Deputy Treacy, is an especially adroit proponent of the nod and wink culture but, nonetheless, he acknowledges that the situation must change if commerce is to perform efficiently in Ireland. The CRO, as it stands and following the enactment of the Bill, will be a significant resource for business and for compliance in this environment.

I ask the Minister to refer to the points raised by Deputy Owen about big-ticket leasing because I want to hear his views on the point lobbied for by some sections of business in respect of examinership and big-ticket leasing. The view I put on the record in the past remains my view and I want to hear what the Minister has to say about it in 1999. I said then:

The general scheme that I have approved to be brought to Government does not reflect the recommendations of the CLRG in respect of set-off and big-ticket leasing. The CLRG recommended that banks and big-ticket leasing companies be allowed the right of set-off or netting as it is otherwise known.

I thought long and hard about this issue and in the end, decided that the public good was better served by leaving unchanged the law of Examinership – as it relates to this issue. In this I have been influenced and guided by the decision of the Supreme Court in the Kentz/Holidair case and also the decision of McCarthy J in the case of Atlantic Magnetics.

This decision will clearly prove controversial. Therefore provision has been made to explore, during the preparation of the Bill, other mechanisms that might accommodate the concerns of the big-ticket leasing companies.

During my time in office, some sections of business expressed the view that this was a particularly important dimension for them. I was not persuaded for the reasons I have outlined but I would like to hear the Minister's views on the matter.

Will the Minister comment on the minority report submitted to the company law review group at the end of 1994? I refer particularly to the Sweeney minority report which recommended that employees' wages, salaries and holiday pay should be specified in every funding statement as pre-petitioned debts . That provision is not, to my knowledge, included in the Bill. The argument seemed to be a reasonable one as workers also have certain rights in these circumstances. If I am correct in concluding that the Minister has not included this measure in the Bill, I would like him to outline the reasons for that.

I take no great issue with the provisions on examinership. It is a useful mechanism and the change in terms of the test from a company having some prospect of survival to having a reasonable prospect of survival is reasonable in the circumstances. The Minister stated in his speech that he has accepted the conclusions and recommendations of the company law review group and that the Bill will implement most of its recommendations. Perhaps he will remind me which of the more serious recommendations have not been included and indicate the reasons for that.

Mrs. Owen

Insider dealing.

Mr. Rabbitte

The Minister stated that section 6 is designed to remove the requirement currently contained in the 1990 Act whereby any company which is directly or indirectly supervised by the Central Bank can only have an examiner appointed to it if the petition is presented by the bank itself. Does the Minister envisage any difficulties arising there in the context of the examination which is currently ongoing, which we are told is likely to recommend the creation of an independent financial regulator? It is very difficult to know from the dispute which has occurred within the McDowell committee which way this will go. The committee appears to be quite seriously divided between the nominees of the Department of Enterprise, Trade and Employment on the one hand and the Department of Finance and the Central Bank on the other. I do not know which view has won out in the McDowell report. When I put the question to the Taoiseach this morning, he confirmed that the McDowell report is currently with the Tánaiste. Is it likely that we will enact a section here which will be out of date in a few weeks' time or is the Government equally divided on the report? I would imagine that is extremely likely as I cannot see the Minister for Finance and the Taoiseach going along with the thrust of the McDowell report in terms of a financial regulator being appointed in a green field situation, separate and independent from the Central Bank. I would like to know what the situation is.

I am not greatly motivated in regard to the removal of statutory audit requirements as they relate to certain small companies in certain strict circumstances. Indeed, I am quite inclined to support the measure as this is not a major issue. A statutory audit can be a good thing in most circumstances, not least from the point of view of imposing a discipline on a small company which it might not otherwise have. As Deputy Owen stated, provided good books are kept, this may contribute somewhat to reducing the level of bureaucracy which exists in respect of these small companies.

Mrs. Owen

The audits cost in the region of £5,000.

Mr. Rabbitte

That is not an insignificant factor for small or micro enterprises. I wonder what thought has been given to the point raised by Deputy Owen about the £100,000 limit recommended in the five year old company law review group report. A sum of £100,000, not necessarily for reasons of inflation but also for other reasons, is not now regarded as a huge amount of money. If one was in the house building business, it would not get one very far. If we are convinced it is desirable to exempt certain small companies in certain strict circumstances from statutory audit, one wonders whether the £100,000 ceiling has any great relevance in Ireland in 1999. I understand the point the Minister made to the effect that he would like to let matters run for a while to ascertain what the implications might be, but some increase in the figure would be desirable if it is to have any great meaning.

That brings me to the phenomenon of Irish registered non-national companies. I hope we will have time on Committee Stage to tease out measures in this regard. I was not aware that this was a scandal of the dimensions adverted to by Deputy Owen until I left office. The omission may be partly my fault as the Department had a very heavy legislative schedule at the time. It has been very difficult to get any Minister to outline the precise scale of the problem, but if it is of the scale outlined by Deputy Owen, we should, in the interest of Ireland's reputation as a trading nation, clean up matters. I put forward certain proposals in the context of a previous Finance Act in regard to imposing additional duties on company formation agents which would allow us to track the conduct of these companies. I would like to return to that point on Committee Stage.

This problem was probably fuelled by measures taken in Britain in relatively recent times. When Britain tightened up measures, these companies fled across the channel to Ireland. As a result, the problem has worsened dramatically in recent years. Perhaps that makes it all the more urgent that we deal with the matter now. These companies have no regard to compliance with the measures which have been introduced in this year's Finance Act – the Minister stated as much in his speech. They will simply ignore them on the basis of the arithmetical risk that they will get away with it. Far more onerous requirements must be enshrined in the law and the power to strike off and dissolve companies, which is ultimately provided for in the Bill, is welcome. As Deputy Owen said, we should have an opportunity to debate this measure in more detail on Committee Stage, hopefully after the Minister of State's elevation to Europe – not that I do not appreciate his company. I hope he will be still with us but I do not know in what capacity. I ask that Committee Stage not be taken next week. I am sure the Minister of State has a busy schedule – there is much travelling to be done – but I hope he gives us an opportunity to deal with this matter on Committee Stage in a more leisurely atmosphere.

Mr. Fleming

I welcome the opportunity to contribute to this debate. The purpose of the Bill is to amend the Companies (Amendment) Act, 1990, relating to examinerships, the removal of a statutory audit requirement for certain private limited companies and partnerships and to introduce provisions to tackle the problems created by Irish registered non-resident companies. They are the principal matters being covered by the Bill.

The concept of examinership was introduced in this House in 1990. As part of this debate I would like people to review the position since 1990 to try to establish the number of companies which have used this facility successfully. The only information I could get in this regard was from the Company Law Review Group report published in December 1994. That report contains a table covering the first four years of the operation of examinerships, and some of the figures make interesting reading. One schedule appears in the report but there is a caveat in relation to the information in it which is based solely on the returns to the Companies Registration Office. One could be under the impression that it represents only 13 per cent of examinerships because that is the figure we have been given on compliance by companies making annual returns. I have no idea whether the registration of examinership details with the Companies Registration Office is any higher or lower; all we can do is deal with the figures that have been published.

In the four years from 1990 to 1994, 166 companies applied for examinership. An examiner was appointed in 138 companies. in other words, 83 per cent of the companies which applied to the courts for examinership were successful in having an examiner appointed. Of those 138 companies, 91, or two-thirds, devised a scheme of arrangement for the future viability of the company. Forty five of the companies, or one-third, to which an examiner was appointed were unsuccessful. Of the 91 companies which put in place a scheme of arrangement, there was an 88 per cent success rate in terms of their survival. These companies have served a useful purpose. I am surprised that the numbers were so low over a four year period. The Department informed me this morning of the figures for the subsequent four years. There were only 36 applications for examinerships between 1995 and 1998.

This facility is totally under-utilised. I am aware there have been some high profile cases over the past nine years, but I am surprised that the numbers are so low. If companies are experiencing difficulties in terms of creditors, banking institutions and the Revenue Commissioners, they might consider using the examinership procedure rather than opting for receivership or liquidation, a more common feature in Irish society. I would like to see the facility developed further.

Another document I examined before coming in to speak in the debate was produced by the Consultative Committee of Accountancy Bodies in Ireland which comprises the Institute of Chartered Accountants in Ireland, the Association of Certified Accountants, the Chartered Institute of Management Accountants and the Institute of Certified Public Accountants in Ireland. They have studied the proposed legislation in detail and I understand they have made important submissions to the Minister in the course of the preparation of the legislation.

Much of the Bill is taken directly from the conclusions and recommendations of the Company Law Review Group report which contains approximately six or seven chapters. The recommendations in respect of two or three of the chapters are incorporated in this legislation. I welcome the fact that the legislation substantially reflects the recommendations and conclusions in relation to those areas on which the Company Law Review Group reported.

The key changes in relation to examinership include amending the Companies Act, requiring the court to be satisfied before it appoints an examiner that there is a reasonable prospect of survival of the company in whole or in part. That is important because part of a company may be viable while another part may not and the court must be satisfied there is a reasonable prospect of a section of a company continuing in the long-term before it appoints an examiner.

Another major feature in the legislation is that until now, a company would ask a court to appoint an examiner, the examiner had to return in 21 days with a report to the court, and the examinership lasted in total for approximately 90 days or three months. That position has now changed. Before the examiner is appointed, he or she must first come forward with an independent report from an accountant. That has had a knock-on effect on the period covered by the examinership. Under existing legislation, the first 21 days of an examinership are used to compile a report on the future viability of the company. That would be done in advance, although I stress there is no timescale in that regard. A company might be in a position to compile a report in days or it could take several weeks. That is a matter for the company even before it approaches the court. The examinership period will be much shorter than heretofore because of the production of those reports at the outset.

In relation to the appointment of an independent accountant, the legislation states that it should be someone who is capable of being appointed a liquidator. Obviously that would be a professionally qualified accountant from one of the recognised institutes of accountancy, but it also provides that the company auditor, who had been precluded from being an examiner because a liquidation sometimes follows an examinership, may be appointed as the independent accountant. The auditor, however, cannot be appointed as the examiner because there is a restriction on an examiner acting as an auditor. The company auditor is probably the best person to produce a report to the court in the first instance. That will speed up the entire process. I have some reservation—

Mrs. Owen

There might be a concern that the auditor could be seen as having a vested interest in producing a good report to the courts.

Mr. Fleming

As a member of one of the accountancy bodies I cannot agree with the Deputy's imputation in respect of the character of some accountants.

Mrs. Owen

I am not doing that. I am simply saying it might be alleged that somebody was not quite independent.

Mr. Fleming

It is interesting that the legislation specifically deals with that point. It states that the court must be satisfied that the accountant is acting in the utmost good faith and discloses all facts material to the exercise of the court's decision. I welcome that provision because the Deputy's point is a legitimate one and it should be covered in the legislation.

People have been concerned that this practice may have been abused in the past. Based on the number of companies which have gone through this procedure, it appears it has been under-utilised but I am concerned that, until now, a company could go to court, have an examiner appointed and then produce a report from the examiner in 21 days. They now have to go to court with the report. I am concerned that if the management or shareholders of a company feel there is a need to examine the question of drawing up an independent report with a view to having an examiner appointed, that information could be leaked by employees, creditors, banks and other financial institutions. If an auditor asks a bank to verify loan and repayment schedules outside the normal course of audit work, the bank would know from the operation of the company's accounts that there were difficulties and there would be a temptation for some companies to appoint a receiver immediately, before the independent accountant produced his report. I am concerned that this issue is not dealt with. Under this legislation an examiner or a liquidator could be appointed while the report is being completed. The independent accountant and the company could go to court and state they need an additional ten days as they were unable to complete the independent report due to circumstances beyond their control. The fact that a receiver was examined could be used by the company as a reason for the judge awarding it ten days' breathing space to allow it finalise its report.

The accountancy bodies have asked for clarification as to whether the ten day period refers to working days or includes Saturdays and Sundays. They have also stated that ten working days is a little restrictive and that the court should be able to extend the period by a limited number of extra working days in exceptional circumstances. The court has no such facility under this legislation. Some flexibility should be introduced at that stage of the procedure.

In their presentations to some Members, the accountancy bodies also made a small but practical suggestion. At present when a company is under examinership, every document – bill, invoice, letter – which is sent out must bear a stamp stating "under the protection of the court". Most people would be worried if they saw this stamp on a document from a company with which they were dealing. The words should be changed to something like "under examination" or "under examinership". We can argue about the wording, but we should use words like "in receivership" or such terms with which people are more familiar. The current wording is a little heavy-handed.

Section 7 sets out the information to be provided as part of the independent auditor's report. I am pleased the independent report must state whether deficiencies between the assets and liabilities of the company have been satisfactorily accounted for. This is a welcome provision because if there has been fraud and the accountant has not been able to satisfactorily account for the deficiency that should be stated. I hope a judge would use such information as grounds for not granting an examinership.

We have discussed the issue of the survival of all or part of a company. The legislation, however, does not propose action in cases where there is evidence that assets have been removed. If the independent accountant finds prima facie evidence of fraud it should be referred immediately to the Garda Síochána. The Bill makes no mention of what should happen to such information. There should be a follow through as there is no point in highlighting such an issue if nothing is done about it.

There are a number of other important sections in the Bill. The creditor will have the right to go to court. Deputy Owen stated that small creditors may not have the resources to take a case, but the right exists and perhaps this could be spelt out in more detail on Committee Stage. The period of the examinership has been shortened considerably. This will bring a sharper focus to the procedure and people will be more willing to avail of the facility for proper uses. In the past it was sometimes used for the wrong purposes.

I welcome the Minister of State's reference to the viability of a company. If a company is not viable there is no point in going through the exercise of examinership. If a company is going down the tubes, the sooner that reality is faced up to the better for staff, creditors and others owed money. If we do not do so we are only prolonging the agony and adding to the company's deficit, leaving less funds for those owed money. The court should refuse the application for examinership if there is not a reasonable prospect of viability.

I have already queried the qualifications necessary for the independent auditor. In his funding statement to the court, the independent auditor can list the payments which should be honoured. Knowing some of those in the accountancy bodies, their fees for producing the report are the first payments they will list. If possible, however, the report should also list payments to staff as a priority.

The Bill includes a section dealing with audits of small companies. The legislation is correct in stating that the requirement should be removed in certain circumstances, primarily when turnover is £100,000 or less, or when companies are part of a larger group. Overall consolidated accounts might not be accurate if an individual small ancillary was not properly audited.

The provision that shareholders holding 10 per cent of the shares have the right to insist on an audit is also important for small companies. I agree the figure of £100,000 is unrealistic. For a retail business operating on a margin of 10 per cent or 7 per cent, a gross margin of £10,000 on a turnover of £100,000 is a very small amount on which to run premises. Such an amount would not even equate to a social welfare payment. The figure in Northern Ireland is £350,000. If the Minister of State does not agree to increase the figure to a more realistic amount, he should include a mechanism to review it in two or three years. The figure of £100,000 is far too small. We know the problems filling out forms create for small companies.

The Bill has some excellent provisions for Irish registered non-resident companies. There is the issue of a £20,000 bond . However, this figure is a joke if companies operate on the scale suggested by Deputy Owen. Will the Minister of State address the requirement that a director must be resident in the country? Does this mean the director must live or be resident here for tax purposes? If the latter is the case, the person may not have to be living in the country. Is the resi dency requirement a reality or a virtual reality in terms of the tax code?

Mrs. Owen

It is a bit like a hologram.

Mr. Fleming

Exactly. There is only 13 per cent compliance with practice in the Companies Registration Office. As a general principle, Members of the House should ensure that the laws passed years ago are enforced. Clearly, the law is not being enforced if there is 87 per cent non-compliance.

Rather than introduce various amendments to company law, existing company law should be enforced. In that regard, I urge that an annual report from the Companies Registration Office be laid before the Oireachtas, if that does not already happen. If those figures had been put before the House annually, Members would have been well aware of the problem before now and would not have been obliged to carry out this fire brigade exercise. I make that call in a positive manner to ensure that this matter is properly dealt with in the future.

I commend the Bill to the House.

Minister of State at the Department of Enterprise, Trade and Employment (Mr. Treacy)

I thank the Deputies for their interesting contributions. As I explained earlier, this Bill will bring about changes in a number of areas of company law. Parts II and III deal respectively with amendment of the examinership process and removal of the statutory audit requirement for certain private limited companies and partnerships. They arise directly from recommendations made by the company law review group. The provisions in Part IV of the Bill regarding Irish registered non-resident companies are the result of a detailed examination of the problems created for the State by the phenomenon we now refer to as IRNRs.

Deputies raised a number of specific issues in their contributions and I will attempt to deal with them. Of course, Deputies can discuss them in more detail on Committee Stage when I will be happy to explain what the legislation is designed to achieve. Deputy Owen referred to the refinements that are necessary to the company law review group recommendations. The McDowell committee on company law compliance and enforcement has made recommendations regarding investigations and restriction or disqualification of directors. That report was recently published by the Tánaiste, Deputy Harney. It makes far-reaching recommendations for changes in company law, including the establishment of a new office of director of corporate enforcement and the establishment of the company law review group on a statutory basis. Specific recommendations for changes in company law are also included. The Government recently approved the preparation of the necessary legislation to give effect to the recommendations of the working group. This will be treated as a priority and will be brought before the Oireachtas as soon as possible.

Deputy Owen pointed out that big-ticket leasing was adversely affected by our examinership legislation. The changes in sections 18 and 28 will address these concerns. She also asked that creditors' rights be protected to a greater degree. Section 10 is drafted to provide that the process cannot be delayed by creditors failing to signify their position to the courts as, if it is difficult to track them down, the process might be unduly delayed.

Another point made by Deputy Owen was that small creditors are not protected. Section 24(4) of the 1990 Act requires the court to be satisfied that the proposals are not unfairly prejudicial to any party. She also said that 50,000 foolscap pages had to be completed by companies in Ireland. The task force on small business did not identify company law as an area which imposed undue burdens. Only one annual return to the Companies Registration Office is required, but I accept the Deputy's general point that all burdens imposed by the law should be reduced. I agree it would be wonderful to rationalise, standardise and synchronise documentation and thereby reduce it.

Mrs. Owen

In the interests of accuracy, I referred to 5,000 feet of paper.

Mr. Treacy

Five thousand feet is the same as 50,000 foolscap sheets. We did the calculation.

Mr. Rabbitte

What does that cost in euros?

Mr. Treacy

Deputies Owen, Rabbitte and Fleming said the £100,000 turnover level is too low. While this figure might seem low, it is a reasonable first step. We cannot open the doors immediately, we must do so carefully. It would be useful to gain some experience of how this threshold operates and how many companies avail of this exemption before considering increasing it. However, there should be a facility in the legislation whereby this can be changed when it is deemed appropriate, whether that is after three, six or 12 months.

Mrs. Owen

The figure is five years old.

Mr. Treacy

I accept that. Deputy Owen also asked that the figure for VAT be raised from £40,000 per annum to £100,000. This is a matter for the Minister for Finance and I am sure the Deputy will give him good reason to consider it. She also referred to the problems created by Irish registered non-resident companies and she, Deputy Rabbitte and Deputy Fleming sought an indication of the number of companies which might fall into the IRNR category. This issue has been raised on numerous occasions. It is not possible, for reasons I will outline, to be definitive as to the number of companies which might fall into this category. This arises from the fact that resi dency in this context is essentially a taxation rather than a company law concept. In the debate on the Finance Bill last year, the Minister for Finance, Deputy McCreevy, suggested that the perception that there might be up to 40,000 of these IRNRs probably had its origin in articles which appeared in the British journal "Taxation" or in "Tax Planning International Review". These articles were, apparently, written by a Dr. Michael O'Brien and the figures were subsequently quoted in the Irish media.

It is not possible from Companies Office records to identify companies that wish or claim to be non-resident. Moreover, the experience of the Revenue Commissioners has been that many companies which are incorporated fail to respond to queries sent by the Revenue Commissioners. While some of them are, undoubtedly, IRNRs, no accurate figure can be given as to how many there are.

The IRNR problem has been a source of concern for many years and increasingly so since the early part of this decade. In discussions with their counterparts, for example, officials of the Revenue Commissioners and the Central Bank have received requests for information in respect of Irish registered companies that are engaging in undesirable activities, such as money laundering and fraud, in other jurisdictions. The Garda bureau of fraud investigation has received numerous requests from authorities in other countries regarding specific companies that are under investigation for illegal activity in other jurisdictions. Deputy Owen, when she was Minister, saw at first hand the logistical situation in this regard.

In the Department's files there are newspaper cuttings dating back to 1992 which variously recount the activities of Irish registered companies. Headlines such as "£18m deals link Ferruzzi to Dublin" in the Sunday Business Post of 5 September 1993 dealt with alleged irregularities in consultancy expenses. Another headline in the Sunday Business Post of 17 May 1992 read “Worldwide fraudsters use Dublin home as HQ”. The Irish Times carried an article, headlined “Irish-registered ‘shelf' companies linked to corruption in Russia”. An article in the Irish Independent on 25 September 1995 carried the headline “Fraud fast and loose in Dublin”. These offer a flavour of some of the articles which have appeared in the press in recent years. Deputies will also recall the extensive debates on this issue which occurred in 1998, which also led to much coverage in the media. Essentially, I am giving a flavour of the extent to which Irish registered non-resident companies have featured over the years in articles dealing with illegal activity.

Deputies also asked about the strike off of companies, particularly since last year. Using existing provisions, the Registrar of Companies has been engaged in a process of striking off companies. This is directed at those companies which have failed to submit their annual returns for two years. Since October 1998, 25,117 companies have been struck off. Notices initiating the strike off process have been issued to a further 44,438 companies and it is likely that a significant number of these companies will also be struck off unless they regularise their affairs in the immediate future. Section 46 will enhance the ability of the Companies Registration Office to pursue those companies which fail to comply with their filing obligations.

Deputy Owen made the point that the £20,000 bond is the equivalent of or an alternative to the resident director. The resident director can be targeted in the first instance; the bond is an alternative. Where a company fails to meet its responsibilities, a fine or penalty can then be levied. The strike off proposal by the Companies Registration Office at the request of the Revenue Commissioners will be introduced on Committee Stage. Our obligations under European Union law must also be borne in mind.

I assure the House that, in developing the proposals, every effort was made to ensure the requirements were designed in such a way that none of our obligations under European Union treaties was transgressed. It must be remembered that these provisions are designed to tackle abuses such as fraud and money laundering which, in the context of the European Union, have also been the subject of other measures. Ireland was the only country in the EU which did not treat for tax purposes companies registered in this jurisdiction as resident. Ireland was availed of in ways which could not be allowed continue. It was vital to implement measures which would tackle and eradicate the problem. I am satisfied the measures proposed do not infringe our treaty obligations.

Deputy Owen made the point that companies must have an Irish resident director on board or a bond. The alternative to a bond has been included to ensure we comply with European Union requirements with regard to right of establishment and ensure we do not discriminate against people from other member states wishing to set up companies here and for whom having an Irish resident director would be an undue burden.

Mrs. Owen

It is one or the other.

Mr. Treacy

Yes. I will expand on that point as we proceed. Deputy Rabbitte said the Minister for Enterprise, Trade and Employment has 13 investigations ongoing and queried the difficulties regarding publication of some of the reports. These matters are ongoing. This issue will arise in the context of Deputy Rabbitte's Bill published earlier this year, namely the Companies (Amendment) Bill, 1999.

Deputy Rabbitte also said the examiner process may be abused by companies which traded recklessly. The introduction of the test of there being a reasonable prospect of survival and the availability of the independent accountant's report are designed to address this issue and I am satisfied this is the most appropriate method. Regarding independent accountants, the legislation means what it says when it refers to independent accountants. If a large group conducts the accounts and auditing of the affairs of a company and that company requires examinership, I cannot see how anyone within that group, apart from a director or otherwise, could have any part in providing an independent report on the company for the courts. It would have to be separate and from another group of accountants. I cannot see how the independence could be sustainable otherwise.

Deputy Rabbitte said the cost of examinership may increase because of the independent accountant's report. The information required in the report is covered under existing legislation, the so-called 21 day report. Therefore, there is no evidence to suggest that introducing the concept of an independent accountant's report will increase the overall cost of examinership to companies.

Deputy Owen made the point about the requirement to either have an Irish resident director or a bond of £20,000. We wanted to have an Irish resident director only, but after clear legal advice to us, it was obvious we needed the alternative to meet our European Union obligations. The legal advice recommended that and we have included it. There are advantages in having both in that both the director and the bond can be targeted rather than having a zero rated situation.

Deputy Rabbitte made a point about "big-ticket leasing". While the company law review group suggested specific measures might be necessary, the changes in sections 18 and 28 will address these in another way. The reason for this change is that the Supreme Court held that the provision of section 7(5) of the 1990 Act enables an examiner to repudiate any contract entered into by a company. This includes contracts entered into by a company prior to the appointment of an examiner. This could have a serious impact on Irish business by undermining the reliability of contracts entered into with Irish companies, especially as far as international companies are concerned, and our credibility would be called into question. It means that someone transacting business with an Irish company cannot be certain that contracts will be honoured if an examiner is subsequently appointed to that company.

It is proposed to limit the circumstances where a contract can be rescinded to those instances where an examiner has already been appointed and the management, who normally continue to run the business while the examiner is preparing his rescue proposals, enter into a contract which the examiner considers inappropriate. An exception to this new provision relates to the so-called negative pledges. Examiners will be permitted to rescind negative pledges entered into by a company prior to the appointment of an examiner to facilitate the financing of the company during the examination period.

Section 28 provides that the liabilities incurred by the company to which an examiner has been appointed and which have been certified by the examiner should be paid in full. However, in future, these will rank after fixed securities thereby giving additional protection to secure creditors. As the ability to secure debts is an important element of the financing of commercial activity in the country, any doubt over the value of a security, especially a fixed security, impacts on the availability and cost of credit to Irish business.

Under this legislation, there will also be a focus on companies which have a reasonable prospect of survival, and the courts will be furnished in all cases with the funding report setting out how the company's trading will be financed during the examinership period. Furthermore, as the period of examinership will be shortened, there should be less need for the examiner to certify liabilities. For all these reasons, I am satisfied the rebalancing between the different interests provided for in section 28 is appropriate.

Deputy Rabbitte made another point about the minority report in the company law review group. The minority report of the group related to the inclusion of salaries, etc., of employees of companies seeking to be entered into examinership in the independent accountant's report with a view to their payment in all cases at all times. I have taken the view that the legislation should not be prescriptive in this matter.

Deputy Rabbitte made another point that the proposals regarding the single financial regulator may overtake the contents of section 6. As a decision has not been made about the report, I am satisfied we should proceed with the proposal. Obviously it should be kept under review as other decisions are taken.

Deputies Owen and Rabbitte referred to the impact of measures already taken in the Companies Registration Office. I acknowledge the work done there by Deputies Richard Bruton and Rabbitte when in office. Obviously the lack of financial resources over the years was a major difficulty in investing in many State services, including the Companies Registration Office. It is regrettable that successive Governments neglected to provide the necessary resources to keep checks and balances on company performances. I continued Deputies Bruton's and Rabbitte's work and made further resources and staff available. We now have in the Companies Registration Office one of the most efficient and sophisticated public service operations. I salute the Registrar and his staff and thank them for their work. I acknowledge the work done by Deputy Rabbitte in that regard as one of my predecessors and thank him for that.

The Government package to tackle the IRNR problem was announced on 11 February 1999. From that date, the change in residency for tax purposes took effect for any new companies which are incorporated. It is interesting to note that the trend of incorporations, which had been increasing over recent years, appears to have reduced in the period since the announcement was made, when compared with the same period last year. For example, the following figures show how incorporations have gone: 1,621 companies were incorporated in January 1998 and 1,633 in January this year; 1,567 in February last year and 1,595 in February this year; 2,481 in March 1998 and 1,914 in March 1999; and 3,166 in April last year and 1,649 in April this year. While the fall-off in March was relatively significant at about 25 per cent, the fall-off in April was even more significant resulting in a decrease of almost 50 per cent. However, these figures can be influenced by other factors such as the level of economic activity or the stage at which proposed projects lie. It will be some time before one can be certain that the measures we have introduced in tax law, which are now being complemented by the provisions in Part lV, have the desired effect of tackling the IRNR problem. We gave this matter a great deal of consideration and consulted widely in respect of it. We felt that the changes to tax law to which I referred would make a major contribution to resolving the problem. We are confident they are working but we cannot be certain because the new tax laws must be in place for a year before an objective analysis can be provided.

Deputy Fleming inquired about the number of companies which have used the examinership process. Section 12 of the 1990 Act requires information to be sent to the Companies Registration Office. Annual statistics are included in companies annual reports submitted by the Minister under the Companies Act. The figures for the years subsequent to 1994 are as follows: for the four years 1995-98, there were 38 applications to the court for the appointment of an examiner, 48 court orders were made to appoint examiners and 18 court orders were made to confirm the scheme of arrangements. Based on those figures, it cannot be said that anyone has been able to abuse the examinership process.

Deputy Rabbitte inquired about the company law review group recommendations that are not being implemented. The main recommendation not being implemented is that at paragraph 2.30, namely, that a statutory requirement to pay VAT, PAYE and PRSI be included in the Bill.

Deputy Fleming inquired about the number of companies availing of examinership. As he is aware, the examinership process is designed for companies in some difficulty. In a time of economic boom, such as Ireland has experienced in recent years, with record growth rates and increasing numbers of people in work, the number of companies encountering difficulties will not be as significant as in times of lower rates of economic growth. This is probably the main reason for the relatively small number of companies availing of this legislation and long may that continue.

Deputy Fleming stated that the preparation of an independent accountant's report could cause a receiver to be appointed. I suggest that section 9 will cover this. The ten days stipulated include Saturday and Sunday, therefore, the ten day period is continuous and there can be no procrastination. When a crisis occurs, a company makes an application and has ten days to produce an independent accountant's report. If the report is not received within the ten day period, the case is not valid. I am satisfied that ten days is appropriate and it gives people a reasonable period within which to produce an independent accountant's report.

Deputy Fleming also referred to the issue of residency. This is defined in section 44(8) and it is, therefore, a company law concept.

Mr. Rabbitte

Is it not a tax concept?

Mr. Treacy

No, it is a company law concept. The section refers to resident directors.

Mr. Rabbitte

Must he or she be domiciled in Ireland?

Mr. Treacy

Yes. We had many discussions on this issue and I was of the opinion that such directors must be domiciled in this country.

Mrs. Owen

That is fine. The legislation merely refers to the term "resident".

Mr. Treacy

I do not wish to introduce a discordant note to the debate but I take grave exception to Deputy Rabbitte's statement that I am an adroit proponent of a nod and wink culture.

Mr. Rabbitte

I withdraw the remark categorically, I had no intention of casting a reflection on the Minister of State's reputation.

Mr. Treacy

I emphatically reject such a scurrilous statement.

Mr. Rabbitte

I did not mean my comment to be interpreted in that way.

Mr. Treacy

If I was to place my feelings on record, the Deputy would prefer that he had not made that comment.

Mr. Rabbitte

I withdraw the remark which was not meant in the way it has been interpreted.

Mr. Treacy

I accept that. I am aware that Deputies raised a number of other issues. Many of these are not directly pertinent to the current legislation and, accordingly, I have not responded directly to them. Deputies will be aware that their contributions are on record and our Department will examine these in the context of legislative proposals brought forward in the specific areas to which the comments relate.

I thank the Deputies who contributed to the Second Stage debate on the Companies (Amendment) (No. 2) Bill, 1999. Their contributions were wide-ranging, detailed and positive. I have worked for ten years in nine different Departments and I pay special tribute to the staff of the companies law divisions of the Department of Enterprise, Trade and Employment. I have dealt with many public and civil servants in the past and the quality of their contributions, intellectually and otherwise, has been outstanding. I thank them sincerely for the work they have done under tremendous pressure in recent years to ensure that proper legislation was introduced in this area.

This is a complex Bill. In light of the fact that no one has a monopoly on wisdom, I have always been open to good ideas from all Members, particularly those in Opposition. I look forward to the proposals that may be put forward on Committee Stage. If the amendments put forward are positive, sensible, practical and capable of implementation, they will be taken on board.

I thank the Leader of the House and the Opposition for facilitating the early introduction of the Bill and I look forward to the debate on Committee Stage. I thank Members for their attention.

Question put and agreed to.