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.