Companies (Amendment) Bill, 1985: Report and Final Stages.

I move amendment No. 1:

In page 18, between lines 6 and 7, to insert a new subsection as follows:

"(6) In this section ‘properly prepared' in relation to accounts shall mean that the accounts in question are consistent with the accounts prepared pursuant to section 3 of this Act. Any summary of or omission from the accounts prepared pursuant to section 3 of this Act necessary for the purposes of conforming with the formats for accounts prepared pursuant to sections 10 to 12 of this Act shall not mean that the accounts in question are not properly prepared."

The Senator is aware that he can only speak once. He can conclude on his amendment.

I took the opportunity of the Report Stage to reintroduce the amendment which I withdrew on Committee Stage dealing with the problems associated with the implementation of this very fine measure. Specifically, section 18 of the Bill as it is before us makes provision with regard to certain steps to be taken by a company. It is proposed to deliver to the Registrar of Companies amended accounts under sections 10 and 12 of the Bill on the basis that they are either small or medium sized companies. During the discussions in the House on the last day I put it to the Minister — which was unfair without notice — that various problems arise out of that. Since that time I know the Minister has had discussions with a number of people who appreciated that a lot of problems are being sorted out by discussion. I myself have also had discussions with people who are concerned with this.

My amendment is framed on an assumption. It is necessary to explain what that assumption is in order to make sense of the amendment. It may be that my assumption is incorrect. I think my assumption is the most correct interpretation of the Bill as we propose to enact it. I acknowledge that it is not the intention of the Bill to have interpretations which, I think, will come apart as a result of legislation. There is a problem relative to this matter. I should explain that there is an obligation under the Companies Act on every company to produce a set of accounts for the benefit or the shareholders. It must be a full set of accounts. Various regulations must be followed. The Senators will all be familiar with them. That obligation applies to every company. What does not apply to every company, but only to public companies is that the public companies must file a copy of the accounts in the Companies Registration Office. Most of the companies in this country are private companies and they do not have to do that. Only the public companies have to do it. The purpose of this, which is the implementation of the appropriate directive, is to change that position. Every company will be under an obligation to produce accounts. Some companies will be able to file abridged accounts. With small companies there will be no change. They will still have to publish in the normal way and conform with the format in the Act. No problem arises with regard to small and medium-sized companies.

Within the Bill as proposed, section 3 re-enacts the obligation on a company to produce and set the accounts before the annual general meeting. Under the Companies Act 1963 there is an obligation to produce accounts. Now there will be an obligation under the Companies (Amendment) Bill. Section 3 reads:

(1) Subject to subsection (2) of this section, every balance sheet and profit and loss account of a company laid before an annual general meeting.

This specifically discusses the balance sheet laid before the annual general meeting of the company. They might have other accounts. There is a special kind of account to be laid before the annual general meeting. Nowhere does it state that the obligation to produce a full set of accounts is being done away with. Nowhere does it state that if an abridged balance sheet is drawn up that that fulfils the requirements of section 3. It should state that if that is what it means. It is quite clear that is what is actually meant to happen.

The explanatory memorandum states that section 10 specifies the exemptions which may be availed of by companies. The exemptions in question relate both to the preparation of the accounts for shareholders and the publication of accounts through lodgement with the Companies Registration Office. Nowhere in section 10 does it say that it relates to the preparation of accounts for shareholders. I did not take too much notice of the explanatory memorandum because I read the Bill. I assume that the correct interpretation is that a company which will avail of the small reliefs provision is always under and obligation to prepare a full set of accounts for the information of shareholders. It appears from the memorandum and from discussions which have taken place outside the House that this is not the Minister's interpretation. The Minister might well be right. I hope I am wrong. What I am saying is that I am not so aware that this is clearly stated in the Bill.

My amendment makes no sense unless one understands that that was my interpretation — that a small company had to do two things: they had to prepare a full set of accounts under section 3 and prepare a full set of accounts for lodgement with the company office. I am anxious that the Minister would give his views on that aspect. If my interpretation is wrong then my amendment does not make much sense. If there is only one set of accounts they must give a true and fair view.

If the Bill provides for what I think it provides there is an obligation on a small company to produce a full set of accounts for its own use and an abridged set for use in the companies office and my amendment slots into that position. As I explained last week abridged accounts cannot give a true and fair view. My amendment states:

...in relation to accounts shall mean that the accounts in question are consistent with the accounts prepared pursuant to section 3 of this Act.

I have assumed that section 3 accounts must be prepared. The amendment continues:

Any summary of or omission from the accounts prepared pursuant to section 3 of this Act necessary for the purposes of conforming with the formats for accounts prepared pursuant to sections 10 to 12 of this Act shall not mean that the accounts in question are not properly prepared.

There is a division in the other House which the Minister will have to attend.

Sitting suspended at 10.45 a.m. and resumed at 11 a.m.

Before the break, I had fully explained to the Minister the reason behind my amendment and the interpretation that I put on a company's obligations as a result of the enactment of this legislation.

I second the amendment.

Senator O'Leary's amendment gives me an opportunity to clarify a number of points. I shall deal directly with the amendment and state my position in relation to it.

The amendment deals with section 18(4). It refers specifically to the duties of auditors when the directors of a company wish to avail of the provisions of sections 10 to 12, that is, where a company wishes to benefit from the exemptions specified in sections 10 to 12 the auditor has two specific duties under section 18(4). Those duties are quite clear and simple. Subsection (4) states:

...it shall be the duty of the auditors of the company to provide the directors of the company with a report in writing stating that, in the opinion of the auditors of the company, the directors of the company are entitled to annex those accounts to the annual return...

In other words, where a company wish to be defined as a small company and are availing of the exemptions in sections 10 to 12 the first duty of the auditor shall be to provide a report in writing that the company is entitled to avail of the exemptions. The second duty of the auditor is that he must give a report in writing stating that in the opinion of the auditor the accounts so annexed are properly prepared as aforesaid.

The second obligation on the auditors is the subject of the amendment put down by Senators O'Leary and Cregan and put down initially by Senator O'Leary on Committee Stage. It has also been the subject of a meeting I had with the consultative committee of the accounting bodies, who expressed concern about the phrase "properly prepared as aforesaid".

I am satisfied that the wording of subsection (4) is quite clear and does not need to be amended. If an amendment on the lines submitted by Senator O'Leary were to be adopted it would possibly cause confusion. It could also raise problems of a legal nature. The words "properly prepared as aforesaid", merely state that the abridged accounts — for a small company the abridged balance sheet or for a medium company the abridged profit and loss account and balance sheet — have been prepared in accordance with the entitlements under sections 10 to 12. It does not impute any qualitative judgment on the account. The auditors' report in this regard merely states that the accounts have been properly prepared as aforesaid. In other words, that they have been properly prepared in an abridged form as allowed by this Bill.

The abridged versions of accounts and balance sheets for small companies must at all times give a true and fair view of matters in the company. In relation to the balance sheet the true and fair view required by section 3 follows throughout the Bill. There is no mechanism whereby any accounts filed in the Office of the Registrar can do anything other than reflect a true and fair view of the company whether those accounts are in an abridged or in a comprehensive form. There is no getting away from the concept of a true and fair view. Otherwise, the Bill would become valueless. If the Bill did not have the philosophy of a true and fair view running through it we would not achieve what we set out to achieve. If it is necessary in order to achieve that true and fair view, that notes would have to be submitted that will have to be done.

The second matter I should like to comment on relates to whatever structures or rules an auditor may wish to put on an account. This is dealt with in section 18 (3)(b) which states:

"a copy of the report of the auditors under section 163 of the Principal Act".

In other words, an auditor has to certify the accounts under section 163 of the Principal Act. It is there that whatever strictures the auditor has in relation to the qualitative aspect of the accounts are entered. There are different certificates, the report under subsection (4) and the report of the auditors under section 163 of the Principal Act. I am satisfied that the requirements of this Bill when it comes into force, will be of benefit to companies and auditors and will not impose any undue burden on them.

The Senator raised a separate issue in relation to the rights of directors to draw up abridged balance sheets for small companies under section 10. Section 10 (1) which refers to small companies states quite specifically:

notwithstanding paragraph (a) of section 3(1) of this Act, but subject to paragraph (b) of the said section 3(1) the directors of a company treated as a small company pursuant to section 8 (1) of this Act may draw up an abridged balance sheet showing only those items preceded by letters or roman numbers in Formats 1 and 2 of the balance sheet formats set out in the Schedule to this Act:

In other words, the directors may draw up an abridged balance sheet and submit it to the Companies Registration Office. They may draw up a full balance sheet or an abridged one for their shareholders but they still have to comply with the Principal Act. They will also have to have their auditor's certificate, directors' report and notes for their shareholders. In all probability, small companies would have a more comprehensive set of accounts for shareholders. What we are doing in section 10 is giving small companies the right to lodge abridged balance sheets, in other words, balance sheets showing only those items preceded by letters or roman numerals in formats 1 and 2 of the balance sheet formats set out in the Schedule to this Act.

This is an enabling section which we are allowing small companies to avail of. They may draw up and lodge an abridged version of the balance sheet. They will also have to report to their shareholders and may or may not draw up a more comprehensive set of accounts. They are two different things. We are facilitating small companies. As I said in my Second Stage speech we are not anxious to put an undue burden on small companies. I know Senator O'Leary accepts this concept. Whether the balance sheet is an abridged version or not it must still comply with the concept of giving a true and fair view of the company. If in drawing up an abridged balance sheet notes will be required to achieve that end then notes will have to be produced. One has to understand that there are certain obligations on directors and auditors and these obligations are being strengthened where companies wish to avail of sections 10 to 12. Nevertheless running right through the Act is the principal philosophy that company accounts must at all times show a fair view of the company.

I hope I have answered all of Senator O'Leary's questions on this matter. I will be glad to address any other points he wishes to make by way of questions if this is allowed under the procedure.

I thank the Minister for dealing with both of the matters I raised, using this amendment as an opportunity for doing so. As the Minister will appreciate if my interpretation of sections 3 and 10 and the combined effect thereof is incorrect my amendment makes no sense at all. I must however reiterate to the Minister the following: while section 10 allows a company to draw up an abridged balance sheet and subsequently allows them to file it in the company's office, it does not override the requirements of section 3(1) which quite clearly states:

...every balance sheet and profit and loss account of a company laid before an annual general meeting of the company, pursuant to section 148 of the Principal Act, shall comply with the following requirements and section 149...

That is the bedrock. Section 10 in providing for what may be in the balance sheet allows an abridged balance sheet not to conform with subsection (1)(a) of section 3 but does not rule out the applicability of subsection (1). That is important. While it rules out the applicability of (1)(a) it does not rule out the applicability of subsection (1). Subsection (1), therefore, is not in any way subject to any restriction under section 10. If I were a shareholder of a company and attended an annual general meeting of that company I would say, "under section 3 of the Companies (Amendment) Act, 1986, you are under an obligation to provide a full balance sheet in accordance with sections 148 and 149 of the Principal Act". I am quite sure that what I am saying is correct. However, I realise what the Minister has in mind but he should have a further look at it even after the legislation is passed.

With regard to the substance of the amendment, the Minister has dealt with problems which arose, either here on Committee Stage or privately, about the obligations which are put on auditors. We could discuss them in detail. For example, does their obligation precede the signing of the accounts? Ultimately auditors are in a position to put pressure on companies in that regard.

I am quite clear about what the Minister said in relation to "properly prepared" and that section 18(4) does not impute any qualitative certification in respect of that particular certification. "Properly prepared" cannot be looked at on its own. It is properly prepared pursuant to sections 10 and 12. These sections refer back to a true and fair view.

I accept what the Minister said. If it is the intention that there should be only one set of accounts they should do everyone and my amendment makes no sense at all. If my interpretation is correct there will be a residual obligation on a company to produce accounts under section 3. In those circumstances my amendment or something similar would be a useful addition. Bearing in mind what the Minister has said and realising that the enactment of company legislation is an ongoing process and that further opportunities will be presented to us within the near future to have another look at this matter, I am happy to leave the matter at that and to withdraw the amendment.

I take note of what Senator O'Leary said and of his reservation in regard to director shareholders. I understand it. It is not my wish to support anything that would deprive shareholders of full disclosure of information particularly where there are minority shareholders and where accounts could be used to suppress the minority. I do not want that situation to arise. Senator O'Leary has made an interesting point. I am not saying that it may not have validity. We are allowing small companies to draw up an abridged balance sheet. They may draw up an abridged balance sheet for submission under section 10, assuming that they comply with the criteria for a small company. They must also report to the shareholders and in doing so they may draw up an abridged balance sheet or they may draw up a full balance sheet. They will also have to submit to the shareholders the directors' report as well as notes which must comply with this Bill when it becomes law and the various auditors' certificates.

We are trying to lighten the burden on small companies but in doing so I should not like to see a situation where shareholders would be deprived of the right to disclosure. Company law is an ongoing process and will continue to be so.

My understanding is that abridged accounts will give shareholders the quality and quantity of information at present given under the 1963 Act. I am satisfied that if there are any difficulties at a later stage — which I do not think there will — they can be corrected in a further Company Law Bill. I take the point that the Senator has made but I am satisfied that the Bill in its present form will be of assistance to small companies. It is not intended to put an undue burden on them nor is it intended that the Bill will mitigate the rights of shareholders or indeed obviate the responsibilities presently on directors to report fully to shareholders. I am satisfied that the existing law is comprehensive and sufficient to attain that objective.

Amendment, by leave, withdrawn.
Bill received for final consideration.
Question proposed: "That the Bill do now pass."

I am grateful to the Senators who took part in the debate, particularly to Senator O'Leary, whose knowledge of the Bill was quite thorough and testing. No one can assume tremendous knowledge in what is a complicated area and I do not wish to assume tremendous knowledge of it. I hope that in giving effect, as we must, to the Fourth Company Law Directive we are complying with that directive and modernising our approach to companies. Hopefully this Bill will go some distance towards reducing the burden particularly on small companies.

I thank the Minister for the way in which he dealt with the Bill. If I said anything in the heat of the moment last week which was a bit explosive I apologise for it.

I also apologise.

Question put and agreed to.