The purpose of the Bill is to give effect to the Fourth EC Company Law Directive which deals with the content and publication of the annual accounts of public and private limited companies. The main impact of this Bill will be to increase the level of detailed disclosure required in the accounts of public and private limited companies and in particular to remove the current exemption under section 128 of the 1963 Companies Act whereby private limited companies are not at present required to publish their accounts.
It is fair to say that the removal of this "privilege" of non-disclosure, if I can call it that, will have an important bearing on the operation of private companies in the State. Such companies have, for valid reasons, put some value on the fact that they do not have to publish accounts.
There are times when disclosure of information is the best course. Indeed some would say it is not non-disclosure which is the privilege, but limited liability, and disclosure of accounts to benefit creditors, employees and others is the price that should be rightly asked for this privilege.
I mention these points only to show that there are differing views and philosophies; that disclosure of company information can produce both positive and negative results; in short that in deciding on how to apply the Fourth EC Directive it was necessary to strike a balance, and that hopefully, Senators will agree with where the balance has been struck.
These comments apply particularly in the case of small and medium sized companies. In recognition of the restricted economic importance of such entities and the disproportionate effect of the Directive on their activities, the Council of Ministers decided to allow certain exemptions from publication in the Directive for companies defined as small and medium sized. These exemptions are contained in the Bill and I will go into these later. The basic point I wish to make here is that, notwithstanding the exemptions which we have followed in this Bill, small and medium-sized companies will still be required to publish substantial information on their activities.
I have referred to the small and medium-sized options in the Directive. Indeed in the Directive as a whole, because of the complexity of differing national systems, there are close to 60 options available to member states in applying the Directive.
Many of the options relate to technical accounting matters and were included in the Directive to permit the continuation of accepted accounting practice in the individual member states. The Bill avails of these options for that purpose. Notwithstanding the many options, there is still a central core of basic provisions in the Directive which we have to follow in legislating here today. I must emphasise, therefore, that in many respects the Bill now before the House is merely reflective of the mandatory requirements of the Fourth Directive and as such contains a substantial range of provisions which we are not at liberty to vary. I would ask Senators to bear this in mind during the debate on the later stages of the Bill.
I now wish to turn to the content of the Bill and its implications for change in the current requirements. The Companies Act, 1963, and in particular the Sixth Schedule thereto, sets down the disclosure requirements applicable to the annual accounts of public and private limited companies. These requirements reflect the basic principle that such accounts should provide a "true and fair view" of a company's position and, subject to this overriding principle, the Sixth Schedule to the 1963 Act set out certain information to be contained in the balance sheet, profit and loss account, notes to the accounts, directors' report and auditors' report. These provisions do not, however, lay down precise formats of presentation to be adopted in the accounts, but rather indentify the main headings under which disclosure must take place. In practice, the requirements of the Sixth Schedule to the 1963 Act have been supplemented by companies' adherence to developments in accounting practice, as reflected in the accounting standards issued by the accountancy bodies in Ireland and the UK.
The Bill before the House retains the overriding principle of true and fair view. This is in line with the Directive, and indeed it as an achievement to have this provision built into the Directive since the true and fair view requirement was not generally part of the Continental practice. However, the Directive and the Bill do not stop there. The Bill specifies the format which the balance sheet and profit and loss account should take and prescribes rules in relation to the treatment of individual accounts items; the valuation procedures which can be applied to assets and liabilities; and the supporting information which must be provided by way of notes to the accounts. This specification of detail is reflective of the approach in some other member states, and taken together with the true and fair view principle represents a hybrid approach, with the true and fair view the dominant strain, as it were.
Essentially, therefore, the Bill will have the effect of substituting the more detailed and precise accounts disclosure requirements contained in its Schedule for those currently contained in the Sixth Schedule to the 1963 Companies Act, in so far as the accounts of public and private limited companies are concerned.
In so far as the formats of accounts are concerned, companies are being given a choice in the Bill of one of two balance sheet formats and one of four profit and loss account formats. The differences in either sets of formats are basically presentational. The Bill allows companies to choose so as not to upset whatever current format arrangements they may be using. Once a company has chosen a particular format it must, with very limited exceptions, stick to that format in subsequent years and not chop and change. In practice, the choice of formats is not of such diversity as would cause difficulty for people in understanding the accounts.
I now wish to turn to particular provisions of the Bill and to offer some comments by way of explanation. Section 2 (1) of the Bill proposes to exclude certain companies of a non-profit, religious or charitable nature from the scope of the Bill. This proposal has attracted some comment. What is proposed in effect in the large majority of cases is not an exemption from publication, since many of the companies involved are public companies obliged to file accounts, but an exemption for such companies from having to follow the detailed rules, formats et cetera of the Bill. Senators will be familiar with the type of companies involved — social, cultural, community, educational, religious et cetera companies. The word “company” usually suggests a commercial connection. However, the type of entity covered here is well described in L.C.B. Gower's Principles of Modern Company Law as:
companies formed for purposes other than the profit of their members i.e. those formed for social, charitable, or quasi-charitable purposes. In this case incorporation is merely a more modern and convenient substitute for the trust.
I am certain Senators will agree with the proposed exemptions in section 2 (1).
I am also proposing in section 2 a particular application of the Bill's requirements in the case of banks, other financial institutions and insurance companies. Effectively, the Bill's proposals will result in such bodies having to publish their accounts by filing with the Companies Registration Office and to comply with certain detailed requirements in the Bill, for example, in relation to the directors' report and publication of information on subsidiary and associated companies. However, it is not proposed to require them to follow the specific technical, accounting and presentational measures contained in the Bill, since these are not designed for application to such companies.
Indeed, the need for special accounting treatment of banks and insurers was recognised in the 1963 Companies Act and more recently in the decisions of the EC Commission to bring forward special directives for application to the accounts of such bodies.
In so far as insurance companies are concerned such companies are currently required under the Insurance Acts to submit to the Minister their annual report and accounts laid before their AGM, and these reports and accounts are lodged in turn by the insurance section of my Department, together with other returns made by insurers, in the Companies Office. The provisions of this Bill do not alter that position.
Section 5 of the Bill sets out the basic accounting principles to be followed in preparing accounts. These are essentially the principles of going concern, consistency and "prudence" which are part of present practice. Directors may depart from these principles in drawing up accounts in special circumstances, but full details of the departure and the reasons for it and effect on the balance sheet and profit and loss account must be given in a note to the accounts.
Section 7 of the Bill procures the publication of accounts by requiring them to be annexed to the annual return filed with the Registrar of Companies under the 1963 Act. The provisions in section 7 mirror those in section 128 of the 1963 Act.
Sections 8 and 9 set out the criteria, turnover, gross assets, numbers employed, for qualification as a small or medium-sized company. The sections apply only to private companies. The threshold levels used are those which follow the new figures for turnover and gross assets inserted in the original Directive by an amendment to the Directive in November 1984. The rules for qualfication as a small or medium-sized company may appear somewhat tortuous. They are but they are what is required by the Directive. We can go into these rules in more detail on Committee Stage. Sections 10 to 12 contain the exemptions for small and medium-sized companies. I will come to those later.
Section 13 of the Bill provides that the directors' report must give certain additional information to that required by section 158 of the 1963 Act. The extra information now being asked is a fair review of the development of the company's or group's business during the financial years under review, particulars of important events since the end of the financial year, an indication of likely future developments and an indication of the activities of the company and their subsidiaries, if any, in the field of research and development. This is important information. Some of it already appears on a voluntary basis in the chairman's report of the larger public companies. I feel it is useful information to have. What has caused comment however is the requirement in relation to research and development which some seemingly feel obliges the company to lay bare their business research and development plans to the advantage of competitors. I see no such implications in the section and a careful reading of the wording will confirm that. It is up to the directors to decide the extent and nature of the comments they put in their report under this heading, as long as the comments are accurate and convey the information required.
Section 14 of the Bill is a requirement of the Fourth Directive, and the Second Directive, for the directors' report to give details of acquisitions by a company of their own shares. This is of limited effect in the Irish context. Section 15 is new and requires the auditors to testify to the consistency of the directors' report with the accounts being reported on.
Section 16 of the Bill provides for the disclosure by companies of information on subsidiary or associated companies. The information required is the name and registered office of the subsidiary or associated company, the nature of the business carried on, details of the shares held, the capital and reserves and profit or loss of the subsidiary or associated company.
Disclosure of this type is not new to us here. Section 158 of the 1963 Act already contains such provisions, although these are limited to the name, registered office and the nature of the business. "Associated company" is defined in the Bill generally speaking as one in which the investing company has a more than 20 per cent interest. Certain exemptions from the disclosure rules in respect of the data on reserves and profits are provided for in the section.
Section 17 of the Bill introduces a novel provision into company law in Ireland. I referred earlier to the view that disclosure is the price for limited liability. On the basis of that equation the assumption of unlimited liability, or some similar guarantee, should earn one the right of non-disclosure. Section 17 follows this logic.
Section 17 provides a facility which is allowed in the directive whereby subsidiaries of a parent company in the EC may stand exempted from the requirement to file accounts once a number of strict conditions are fulfilled. The subsidiary must be a private company, every shareholder in it must agree to the exemption, the parent must guarantee the debts of the subsidiary, the accounts of the subsidiary must be consolidated in the parent's accounts and the group accounts must be drawn up and published in accordance with the Fourth Directive. The use of the exemption must be notified to the Companies' Office in the annual return of the subsidiary.
The section as it now stands has been amended from its original form. The procedures to be followed are now spelt out with greater clarity. The debts to be covered are specified precisely and the irrevocable nature of the guarantee in respect of those debts is firmly stitched into the text.
Sections 18 and 19 contain provisions concerning the publication of accounts. The principal feature in section 18 is the special auditor's report to attest to the fact that a small or medium-sized company can avail of the exemptions in filing accounts in the Companies' Office. This procedure is necessary since the registrar could not, nor would it be sensible for him to assume the role of, and become liable for, checking the annual accounts of companies to see if they were qualified for exemption. The registry acts as a public filing office, not as a supervisor of companies.
Sections 20 and 21 are relatively minor amendments to existing law required by the Directive. Section 23 was inserted by amendment to cater for a problem which section 222 of the Companies Act, 1963 has caused for persons wishing to pursue rights under employee protection legislation in the case of insolvent companies.
The remaining sections of the Bill deal with the usual provisions of offences and penalties, power to modify the Act, and the citation and commencement clauses.
The penalties for offences are substantial and the fine on summary conviction is set at a maximum of £1,000. I feel these fines are adequate. There is no need for draconian penalties. For most companies the commercial consequences of preparing and publishing inadequate accounts will be a sufficient deterrent in itself.
The commencement date for the Bill is not specified and will be laid down by order. I want to give a reasonable period to companies to comply with the new requirements, but at the same time, the measures in the Bill are long overdue. Furthermore we are also being brought before the Court of Justice for failure to implement the Directive in the time laid down. My options on the commencement date are limited, but I will exercise them to give companies as much time to prepare as is reasonable.
As indicated earlier, I now wish to go into more detail on the publication requirements for small and medium-sized private companies. The precise size thresholds for qualification as "small" or medium-sized are set out in the body of the Bill and are based on the level of a company's gross assets, turnover and number of employees. A company is required to satisfy any two of these three criteria for two years running in order to qualify for the reliefs provided and of course the extent of these reliefs is greater for small companies than for medium-sized companies. The reliefs in question relate to both the preparation of accounts for shareholders and the publication of accounts through lodgment with the companies registration office. In the case of preparation of accounts a small company is permitted to prepare a balance sheet in which certain individual accounts items may be combined under more general headings. In the case of publication of accounts, a small company is permitted to publish this modified balance sheet and is not required to publish its profit and loss account or its directors report.
A medium-sized company are permitted a more limited range of exemptions. They may prepare a profit and loss account in which certain information relating to costs of production may be combined under one heading. This facility will also extend to small companies since a small company are also, by definition, a medium-sized one. In the case of publication of accounts, a medium-sized company may publish their modified profit and loss account and also a balance sheet in which certain individual accounts items may be combined under one heading. The balance sheet in this case is, however, more extensive than that required of small companies. With regard to the proposal to avail of the options for private limited companies of limited size, it is important to mention that in no case will the level of disclosure involved be less than that required under the Companies Act, 1963. Indeed, even for small private limited companies the requirement to publish a balance sheet, together with notes to the accounts, will result in the provision of important information on the affairs of such companies.
I am confident that the approach adopted in this Bill for the treatment of small private commercial concerns represents a reasonable balance between the interests of users of accounts and the need to avoid an excessive burdening of small industry at a time when the importance of such industry to our future development is becoming more and more apparent. I know that Senators will be supportive of these proposals.
The view has been expressed that the Bill ignores one important set of interested parties and that is the company's employees. This is not an accurate representation of the position. Employees, like others, will have access to the published information. I am in favour of employees being given information on their work-place and their company. Much of this data, however, can be sensitive. In my view, it is best given by direct exchange, and not by filling in a public office. There is nothing in company law to prevent employees, or their representatives, from seeking the communication of such data as part of the ordinary industrial relations procedure.
Senators will also notice that the Schedule to the Bill contains information on staff matters of direct relevance to employees. Furthermore, and this is not in the directive, I have inserted particular provisions requiring detailed disclosure of pension arrangements for employees, a topic of some importance. I know that this type of information disclosure will be welcomed.
This brings me to the Schedule to the Bill. While the Schedule is of particular relevance, dealing as it does with the more detailed technical aspects, I must confine myself here to a general overview of it. In addition to the formats of accounts, the Schedule sets out the procedures to be followed in valuing assets and liabilities under the historic cost and current cost methods of valuation, both of which are permitted by the Bill, and itemises the matters to be covered by way of notes to the accounts. It also contains requirements aimed at identifying the nature and extent of inter-company dealings and provides certain reliefs considered necessary to cater for the specialised activities of certain types of investment companies.
The main disclosure elements in the Schedule are contained in Part IV. This part sets out the information to be given by way of notes to the balance sheet or profit and loss account. Under section 12 of the Bill small and medium-sized companies are exempt from having to publish the information required by certain of the notes to the accounts set out in Part IV. These exemptions parallel those already described in respect of the balance sheet and profit and loss account. Thus, if one is exempt from giving certain data on the face of the accounts, a similar exemption will apply to any notes to the accounts concerning such data.
Finally, the point has been made that companies should not be allowed to be remiss in fulfilling their statutory obligations. It must be said that failure to file accounts in companies offices is a problem which other EC registries also face. For our part, I can assure the House that determined efforts are being made to remedy this problem and will continue to be made. I realise that the disclosure requirements of this Bill are, to a large extent, only as good as what is ultimately filed in the companies office. It is the Government's intention to make the Bill as effective as possible.
From this review of the Bill, I am sure that Senators will appreciate that the subject matter is fairly complex. In formulating the Bill, I had regard to the views of industry, the trade union movement and the accountancy profession and I should like to avail of this opportunity to thank all those bodies for their submissions on this subject. I believe that this Bill has important consequences of benefit to many, and I recommend it for the approval of the House.
