This Bill will amend and extend the Companies Acts, 1963 to 1982, to give effect to the EEC Second Directive on company law and certain related matters. That directive is concerned with the formation of public limited companies and the maintenance and alteration of their capital.
It will be recalled that, very recently, the Oireachtas passed the Companies (Amendment) Act, 1982 which was a short measure to improve the facilities and information available to the business community at the Companies Registration Office, to make certain minor revisions and to update the fines and some other figures in the Companies Act, 1963, which is the basic statute governing the operation of different classes of companies in Ireland. At that time, I described that short Act as the first step in a considerable programme of company law reform. The Bill before us today is the second stage in that programme and makes considerable amendments to the 1963 Act.
Before the short 1982 Act, there were only two small amendments to the 1963 Act. One of these was in 1973, by way of regulations, to give effect to the EEC First Directive which was concerned with the publication of documents and certain other information about various classes of companies. The other was the Companies (Amendment) Act, 1977, which was concerned with the transfer of title to securities on the stock exchange.
Before moving on to some details of the Bill in hand, it would be appropriate, by way of information, to say something about the EEC approach on company law matters. Though it is not an area of great popular appeal or political interest, it is one in which there has been a very large number of EEC initiatives. Seven directives have already been adopted and, consequently, require translation into Irish law. There are various other proposals at different stages of development in the EEC negotiating process and the study, discussion and servicing of meetings in Brussels in relation to these proposals puts considerable demands on the resources of my Department. The European Community approach has been one which seeks harmonisation in relation to different aspects of company law and sets out principles about those aspects to be included in its laws, by each member state, in an appropriate form. It is this approach that brings about the numerous different measures.
Some Senators will be aware that the EEC Commission has brought Ireland before the European Court of Justice for failure to implement the second directive by the appointed date, December, 1978. One reason for that failure has been a shortage of suitable staff resources but there are other significant considerations. It is no accident that five other member states were brought before the European Court on the same charge. It is only now becoming clear that the requirements of the directive are more complicated than was first realised and call for complex adjustments of legislation. Given the burden of the other EEC company law activities to which I have referred, it has taken much longer to make the necessary changes in legislation than was originally envisaged. Senators will appreciate that the Bill which we as a member state have to produce as a consequence of the directive is not any less complex than that required of the other larger administrations who have also encountered difficulties in meeting the deadline. The case against Ireland and the other member states concerned was heard at the end of April 1982 and those proceedings are not yet concluded. The House will recognise, therefore, that we are dealing with an urgent matter.
I am quite sure that, as regards the other directives which have been adopted by the Community, Senators will be looking for some mention of the Fourth Directive which, of course, is of considerable interest. The Fourth Directive deals with the content and format of company accounts, their presentation and publication, and it embraces both public and private limited companies. Work is proceeding on a Bill to give effect to that Directive, and I propose to introduce that particular measure later this year. In addition, as I have already mentioned in the Oireachtas and elsewhere, I propose to introduce a further Bill which arises from domestic, as opposed to EEC, considerations, and which will aim at removing some of the abuses that can occur in the direction and management of some companies and at bringing about other desirable improvements in company law.
I now wish to turn to the content of the Bill before us, the basic purpose of which, as I have said, is to give effect to the EEC Second Directive. In doing so, I want to draw the House's attention to one very fundamental factor, which is that the principles of the Directive, having come through the administrative process of the EEC and having been adopted some years ago, are not negotiable at this stage. Consequently, most of the provisions in this Bill which implement those principles are not negotiable either. Put quite simply, there are provisions in it which we in this House are not free to dilute or avoid even if we were inclined to do so. I would ask Senators to bear that basic factor in mind when they are examining the different aspects of the Bill.
The objective of the directive and, consequently, of this Bill is the protection of the interests of both shareholders and creditors in relation to the formation of public limited liability companies and the maintenance, increase or reduction of their capital. Obviously, the proper conduct of such companies in relation to those matters is also of considerable benefit to employees. The greater part of the provisions of the directive are given force in Parts II, III and IV of the Bill and the remaining three Parts deal with ancillary matters and companies changing between limited and unlimited status.
Part I contains the usual provisions associated with any Bill concerning title, citation, commencement, interpretation, repeals and savings. As regards interpretation, it will be seen that a "public limited company" answering the requirements of the directive is separately defined in section 2, as is a "public company". I want to make it clear that those definitions do not impinge upon or in any way affect the position of private companies, which will continue to be defined by section 33 of the Companies Act, 1963.
I am drawing the House's special attention to this matter because the Oireachtas Joint Committee on the Secondary Legislation of the European Communities, in a report in 1978, recommended that the definition of a private company as in the 1963 Act should be maintained. It is important to leave that definition stand because the private company so defined has long been the dominant corporate entity for business ventures here. The significance of private companies in the economy is best indicated by the fact that at December 1981 there were about 65,000 private companies and 340 public companies registered at the Companies Registration Office. The measures in the directive apply only to public companies limited by shares and public companies limited by guarantee and having a share capital. As there are only two or three of the latter type of company in existence it is clearly not a very effective business vehicle, so I am taking the opportunity in this Bill to discontinue any further registrations of this particular form of company.
Part II implements the requirements of the directive as to the name and registration procedures for new public limited companies. These are that:
the name of a public limited company should distinguish it from other types of company; the memorandum of such a company must state that it is a public limited company; and
the allotted share capital of a public limited company must not be less than a specified minimum and must be paid up as to, at least, 25 per cent of the nominal value of the shares and all of any premium on them.
I am providing for the designation "public limited company" or "p.l.c." or the Irish equivalent of these so that an incidental, if technical, income as far as public companies are concerned is that the old identification of "and Co. Limited" will be replaced by "p.l.c.". However, private limited companies will continue to use the well recognised "and Co. Ltd.". The Bill provides for an authorised minimum capital of £30,000.
The remainder of Part II sets out the re-registration requirements for companies changing from their existing status to that of a public limited company. As might be expected, the key requirements in those changes which are imposed by the directive are that they observe the rules as regards the name, authorised minimum capital and the payment up of shares. Of particular interest here is that existing public companies limited by shares, or limited by guarantee and having a share capital, are defined as "old public limited companies". These companies, if they wish to retain their present status, must re-register as public limited companies within 15 months of the appointed day and appropriate provisions are specified. Accordingly, it is the 340 existing public companies, to which I have already referred, which will be affected by those provisions, and to the extent that those companies do not have the £30,000 authorised minimum capital they will have three years within which to bring their capital up to that level or, alternatively, to re-register as some other form of company. As they may under existing legislation, private companies will be free to become public companies, but if they wish to re-register as public limited companies in the new form they too will have to comply with the requirements as to name, capital and payment up of shares. There is also provision for a public limited company to change its status in the opposite direction, so to speak, and to re-register as a private company. If it does so it will, of course, have to meet the requirements in the definition of a private company in the 1963 Act. Briefly, a private company must—
Have a share capital,
restrict the right to transfer its shares,
limit the number of members, and
prohibit any invitation to the public to subscribe for shares.
Part III implements the provisions of the Directive relating to the share capital of public limited companies. Requirements are set out as to the issue of and payment for share capital, the maintenance of share capital, the rights of existing shareholders on the occasion of the issue of further shares in the company and the variation and registration of class rights attaching to shares. Part IV deals with distribution of profits. I have already mentioned that the Second Directive only applies to public limited companies. However, many ideas of the directive in relation to the share capital and profits of a company simply reinforce existing practice or have, for some time, been recognised as desirable for the proper conduct of companies generally.
Though there is no obligation to do so, I consider it appropriate, in the interests of the development of company law generally, to apply some of the provisions in Parts III and IV to private companies. In adopting this approach, I am carrying out the wishes of various interested professional bodies which made representations on the subject. In taking this course I have been careful to strike a balance between, on the one hand, the need to develop proper commercial practice which would result in some benefit for members, employees, creditors and the business public generally and, in the other, the necessity to avoid imposing unnecessary and fruitless burdens on private companies which, as I have said, form the backbone of the Irish business scene and provide considerable employment.
I wish to refer specifically to some of the provisions in Part III of the Bill. As required by the directive, the idea of an authorised minimum share capital for public limited companies is introduced and is set at £30,000. This figure is somewhat above the minimum requirements of the directive, but since the underlying principle is that small entities may not seek to become public companies and that such companies should not be allowed to commence business without some semblance of financial viability, it would not be appropriate to fix a lower figure. In any event, I have taken account of representations which have been made on the subject and of the desirability of avoiding frequent amendments to recognise inflation or currency fluctuations. The authorised minimum capital requirement applies to public limited companies only.
There is also a provision, new to Irish law, that directors of a company may not allot shares unless they are authorised to do so by the articles of association or by the company in general meeting. Such an authority must state the maximum amount of shares to be allotted and the duration of the authority given, which may be for a period up to five years but can be revoked, varied or renewed. This kind of control over the issue of shares has been mooted for some time. It should be to the advantage of shareholders in private as well as in public limited companies, in so far as it should prevent directors making an offer to issue shares to some members of the company or even outsiders on terms below market value which would result in the value of the holdings of the remaining members being reduced.
The directive requires that provision be made in relation to pre-emption rights. These are the rights of first refusal when the capital of a company is being increased by a new issue of shares for cash. The provisions in this Bill, which apply to both private and public limited companies, set down the principle that such shares must first be offered to existing shareholders in proportion to the nominal value of shares already held by them. These provisions will have the effect of safeguarding the interests of all shareholders against any allotments which might change control of the company or damage the relative position in the company as represented by their holdings. While the setting out of pre-emption rules is new in our company law, it is not a new idea and it is, in fact, a requirement for those public companies which are quoted on the stock exchange.
Similarly, some of the ideas in Part III in relation to the payment for share capital are not really new. The provisions that shares may not be issued at a discount and must be paid for in money or money's worth represent what is, in practice, the existing position and it is appropriate, therefore, that they be applied to all companies. The directive makes it necessary, however, to introduce a partial restriction on the existing position in that it specifies that an undertaking to perform work or supply services may not from part of the assets paid for the shares of public limited companies. One of the innovations of the directive and, consequently, the Bill, is that, as I have already mentioned, the shares of a public limited company must be paid up as to at least 25 per cent of their nominal value and the whole of any premium on them before they are allotted. At present, the Companies Act, 1963 requires only 5 per cent payment on application.
In relation to shares which are not paid for by cash, the directive introduces another new idea in that it requires the valuation by an independent expert of considerations other than cash paid for shares in a public limited company. A further requirement is that such payment of non-cash assets for shares must be made in full within five years of the allotment. An expert's valuation is also required where a public limited company proposes to acquire non-cash assets from a subscriber to its memorandum and the value of those assets exceeds 10 per cent of the subscribed capital. These provisions of the directive are reflected at sections 29 to 33 of the Bill, and it will be appreciated that they are a serious attempt to get an objective assessment of the proper value of non-cash assets transferred to a public limited company. This is in line with the objective of the directive to preserve the capital of the company and thus provide protection for all those involved with it.
In order to encourage the participation of employees in the capital of companies the directive provides that the payment up before allotment of at least 25 per cent of the nominal value of shares need not apply to shares issued in connection with employee share schemes. The concept of employee share schemes is not, of course, new to our company law code. Section 60 of the Companies Act, 1963 already recognises the special place of such schemes by providing that financial assistance may be given by a company for the acquisition of shares in the company or its holding company to be held by its employees or the employees of a subsidiary company. I understand that a number of Irish companies already operate share purchase or share option schemes for employees.
In Part III under the heading "Maintenance of capital" there are provisions preventing companies from acquiring their own shares either directly or through nominees. We have provisions in section 60 of the 1963 Act which enable a company to provide financial assistance in certain special circumstances for the purchase of its own shares and, while the directive requires us to amend those provisions so that they no longer apply to public limited companies, that section will remain in force for private companies. I would also like to draw the House's special attention to the provision at section 40 of the Bill which requires that, where it becomes known to any director of a company that there is a serious loss of the subscribed capital, an extraordinary general meeting of the shareholders must be held to consider what measures should be taken to deal with the situation. In the present difficult economic circumstances there is a growing number of company failures and it is now widely accepted by persons such as receivers, liquidators and financial bodies closely involved in such matters that most of these failures have a common factor, which is that company directors and managers do not take appropriate action when financial difficulties first appear on the horizon. I think that it is useful to apply this general principle to all companies if only to encourage those concerned to tackle the situation in good time with a view to doing everything possible to prevent the failure of the company and all the attendant adverse consequences, particularly the loss of employment.
Part IV of the Bill implements the requirements of the directive concerning distributions to shareholders including, in particular, the payment of dividends. The general basic principle governing distributions, to be found in section 45, is that distributions may only be made from profits available for that purpose. In this context, "available profits" are defined to mean a company's accumulated realised profits less its accumulated realised losses. The idea that distributions may only be made from profits available for that purpose is already included in the First Schedule to the 1963 Act, but the definition of available profits clarifies a situation that has been in some doubt.
Under this Bill the position will be that a company may not make a distribution until accumulated losses have been made good. These principles represent prudent accounting practice, and the accountancy bodies agree that they should be applied to all companies. The directive imposes a further restriction on public limited companies in that they may only pay dividends where the amount of the net assets is not less than the aggregate of the called up share capital and undistributable reserves and where the payment of the proposed distribution would not have the effect of reducing the net assets below that level.
The remainder of Part IV deals with ancillary matters arising from the basic rules which I have just mentioned. It takes account of the special position of assurance companies and investment companies and specifies the accounts, and regulations concerning them, to which reference must be made before any distribution is contemplated.
Part V provides for companies changing between limited and unlimited status. These provisions do not arise from the directive but since this Bill deals, to some extent, with the question of re-registration of companies, I think that it is appropriate to include them. The Companies Act, 1963, already authorises an unlimited company to re-register as a limited company. There is no provision in that Act, however, to enable a movement in the opposite direction, that is a limited company to re-register as unlimited. I propose making this facility available now in section 52 because various representations requesting it have been made to my Department.
I have mentioned earlier, in relation to Part II, that existing public limited companies must within a given period re-register as the new public limited company, or as an alternative, be re-registered as another form of company. This provision will enable an old public limited company to re-register as an unlimited company if it so desires. A change from limited to unlimited status will require the assent of all the members of the company. Such a change has serious consequences for the members of the company involved in that the assumption of unlimited liability means that the members will be responsible for the debts of the company to the full extent of their personal assets. Where such change takes place the position of creditors and employees is of course enhanced. Therefore it is clear that a change in status from limited to unlimited is not one that will be lightly taken. Section 53 replaces section 20 of the 1963 Act and makes better provision in relation to the protection of the interests of its creditors where an unlimited company re-registers as limited and, subsequently, goes into liquidation.
Finally, Part VI covers matters such as publication requirements, the use of misleading names, penalties and procedures for indictable offences, expenses and order-making arrangements.
From this review of the Bill I am sure that Senators will appreciate that the subject matter is fairly complex. In formulating it, I have had regard to the views of various interested professional groups and I would like, therefore, to take this opportunity to thank them for offering those views.
In conclusion, I need hardly remind Senators that the enactment of this particular Bill is a matter of great urgency. I have referred to the proceedings before the European Court regarding non-implementation of the EEC Second Directive so I am sure that the House will understand my anxiety to get it through the Oireachtas with maximum speed. As the Bill itself is generally dictated by that directive, is largely technical and is, therefore, uncontroversial. I think that I am justified in urging Senators to refrain from pressing for amendments in relation to other general matters not connected with the Second Directive on the clear understanding that I will be introducing further measures for the reform and updating of company law as soon as possible. Given the special circumstances which surround it, I look forward to the House's co-operation in processing this Bill quickly, and recommend it for the approval of this House.
