First of all may I take the opportunity on this my first visit to the Seanad since having the honour and the privilege of being appointed Minister for Industry and Commerce to congratulate you, a Chathaoirligh, and Senator Charles McDonald who has just been elected Leas-Chathaoirleach and to extend good wishes to all those who have either been re-elected or elected for the first time. I hope that on this very important Bill we will have meaningful constructive discussions. I come in here with an open mind on this Bill. Work was started on this Bill back in 1982. Since then seven Ministers for Industry and Commerce have had their finger in the pie. I cannot claim to have been one of the previous six although I was there as a caretaker for two weeks.
On assuming office and recognising the many malpractices that exist and the bad name that business is getting and, indeed, the damage that can be done to the promotion of enterprise in our society I felt it incumbent on me not to look at aspects of this Bill which personally I have certain reservations about. We would like to strike the right balance but, rather than take the course or amending this Bill and sending it back for redrafting and so on, I decided to take the Bill as it was printed and published just before the general election and bring it here first for a constructive debate knowing full well that the Seanad will have a great input into the various sections. It is against that background that I take this Bill to the Seanad. I hope we will hear from the various Senators their views in relation to whether this Bill strikes the right balance between eliminating malpractices and, on the other hand, not being seen in practice as a deterrent to the promotion of enterprise.
Everybody will agree that the world and his wife have been calling for the stamping out of many of the malpractices this Bill sets out to address. I am not exaggerating when I say that this Bill is the most radical overhaul of Irish commercial law since the Companies Act, 1963. That Act has stood the test of time extremely well, but it has become increasingly obvious in recent years that some of the joints were beginning to leak, as it were, and needed to be replaced by more modern approaches.
In the past 20 years alone Ireland has undergone an industrial and commercial revolution. The number of companies registered with the CRO has mushroomed since 1963. At that time there were about 11,500 companies registered. Today there are well over 100,000. Company law has only begun to respond to these changes. It is inevitable that, here as well as elsewhere, the pressure created by an accelerating pace of change has had its negative spin-offs. The increasing incidence of all types of criminal activity including sophisticated "white-collar" crime bear testimony to the fact that commercial standards have been allowed to decline. While there can be no doubt that fundamental reform is needed, I want to stress that what we are talking about here generally is a minority of cases in which directors have abused their position. A large majority of people in business conduct their affairs honestly and honourably, and have no intention of defrauding their company, its creditors or anyone else.
However, I am equally satisfied that legislation to tackle abuse of limited liability and to put a stop to the activities of rogue directors has the support of a wide consensus of opinion in commercial and political life, and is not the result of pressure from any one interest group. It was undertaken, not because of a few spectacular scandals, but as a result of growing public concern about the increasing incidence of malpractice in companies, and in particular about abuse of limited liability status.
This concern was shared by employers, employees, accountants and other professionals in the business area. It was reflected in wide media coverage and also in the commitment of successive Governments to the introduction of legislation. Failure to deal with abuse and malpractice in a strong and decisive way would be seen in the public mind as condoning and, even worse, encouraging it.
One of the main purposes of this Bill, therefore, will be to discourage the reckless and the dishonest from being involved with limited liability companies. Such a development can only be beneficial to the community — far from inhibiting enterprise, it can only strengthen it. The enterprise we wish to promote is honest enterprise. Fraud does not benefit the community, but eats away at the heart of the free enterprise system. Fraud must be liquidated.
Faith in the integrity of the institutions and in the practices of commerce and finance underlies all developed economic systems. It is certainly crucial to the free enterprise system and, if the public are to have confidence in the system, we must continually strive to eliminate malpractice. Otherwise there will be fewer small investors, more corruption, more manipulation, and less attention paid to the interests of proprietors, creditors and workers in companies. Taxpayers are one of the greatest sufferers from any of those malpractices. Many times when a business closes overnight, we find that the largest creditor is the taxpayer. Investment is about confidence. Commercial abuses destroy trust and erode confidence in commercial institutions. In a society which is averse to risk taking and views the Stock Exchange with hostility and suspicion, every incident of malpractice, every dubious insolvency, every abuse of limited liability serves to reinforce existing fears and prejudices. It turns people away from speculative commercial enterprise to the bank, the building society or even the mattress.
Far from being a threat to investment, therefore, greater investor protection must be regarded as an integral part of any strategy to encourage both the development of industry and commerce and more widespread participation by individual investors in new commercial ventures.
This, then, is the general thinking behind the Bill and, I hope, it is fairly reflected in the kind of detailed provisions contained in it. It would be impractical for me to try to cover all of the Bill's content in a Second Stage speech, but I will nevertheless try to give a general overview of the main provisions of each Part.
I believe the main "meat" of the Bill lies in Parts VI, VII and IX and I will comment in more detail on them later on. However, the first part of substance is Part II, which deals mainly with official investigations of various kinds into a company's affairs. There have, of course, been provisions like this in company law for many years now, but experience has shown that inspectors have met severe difficulties in trying to make them work effectively and we have seen important investigations frustrated as a result.
The main change in emphasis in Part II of the Bill, therefore, is the moving of the role of appointing inspectors to investigate a company's affairs from the Minister to the High Court. We expect that the path of any future investigations will run more smoothly under the aegis of the court and that any procedural or legal problems which arise can be quickly and effectively settled there.
Part III of the Bill contains a series of detailed provisions to deal with situations where a company director might be tempted to put his personal interest before that of the company. The main emphasis is on loans to directors and other similar transactions.
Specifically, sections 31 and 32 prohibit a company, subject to certain limited exceptions, from making loans in excess of £2,500 to any of its own directors or their families or to other companies in which such persons have a controlling interest. However, because experience has shown that restrictions on straightforward "loans" can often be avoided by using other more subtle techniques, these sections also extend the restrictions, in the case of public limited companies and large and medium-sized private companies, to what we call "quasi-loans" and "credit transactions". Briefly, these are arrangements whereby third parties pay a director's liability in a financial transaction or provide him with goods or services on the understanding that the company will eventually pay the third party.
There are also other important provisions in this part dealing with matters such as directors' service contracts, section 27, substantial property transactions by directors, section 28, as well as a series of sections on disclosure in the annual accounts in relation to loans and other transactions in favour of directors.
The basic idea running through this whole part is that a director should not use his company to divert what is essentially creditors' money to his own personal use — in other words he should not regard the company as his own private bank.
Part IV of the Bill contains detailed provisions about disclosure of interests in shares. The bulk of these apply to public limited companies, although I will mention the case of private companies in a few moments.
The central idea of Part IV, contained in Chapter 3, is that the beneficial owner of a given percentage of the issued share capital of a public limited company should be required to declare that fact to the company, and that such information should be available to directors, shareholders, employees and creditors of that company. Section 62 sets the reporting threshold at 5 per cent but allows the Minister to vary this by order.
Whereas Chapter 3 applies to the general body of public company shareholders and is totally new, Chapter 2 applies solely to directors and secretaries of such companies and their families and strengthens existing provisions in the 1963 Act. This chapter will require such people to keep the company informed of their dealings in the company's shares and the company, for its part, must keep a separate register of such dealings.
While I do not think a general regime of disclosure is necessary for private companies, there may be circumstances in which a person with a direct financial interest in such a company may want to establish who really owns it. Such a person could be a banker or a creditor, another shareholder perhaps, or even a liquidator. Chapter 4 will enable such a person, in exceptional circumstances, to seek a disclosure order from the court.
The basic philosophy behind Part IV is that, first, a system of disclosure makes for more efficient credit and investment decisions. Secondly non-disclosure of beneficial ownership facilitates fraud and insider dealing. That is a subject that has had wide media coverage in more recent months. Thankfully, it did not affect this country but up to now there has been no legal ban on insider dealing here. It ran free and with the experience of more recent years behind us it is time that we legislated in that regard. The insider or the "tipper" can conduct all his operations through nominees and, thus, avoid detection.
Another powerful criticism of the non-disclosure of the true ownership of shares is that it can facilitate corruption. In a company the nominee system can allow directors, other officers or even public officials to channel contracts to firms in which they or persons connected with them have an interest. In a sense what is important here is not whether corruption exists or the extent of such corruption. What is important is that abuse of the nominee system is seen as an effective means of facilitating corruption.
Part V of the Bill concerns the unscrupulous practice of insider dealing. This practice, or should I say malpractice, is clearly contrary to the principle of an efficient and fair shares market, involving equal access to information etc. Obviously, it also hinders the aim of promoting wider share ownership among the general public. Such people will certainly not be encouraged to invest in Irish industry via the Stock Exchange if the general impression is that someone else always has the "inside track" on relevant information.
Although hard evidence on insider dealing is extremely hard to come by, there can hardly be any doubt that it exists. Indeed, I might say in passing that I am somewhat disappointed that the market authorities themselves do not appear to have acted more decisively to root out this cancer in the securities markets.
Of course, other countries have been having similar experiences, and we have paid close attention to the approaches they have adopted by way of tackling the problem.
The approach we have taken in the Bill is to make it a civil offence to deal in securities on the basis of inside information, to pass on such information by way of a "tip", or to deal on the basis of a "tip". In this way, a person who suffers loss as a direct result of insider dealing will be able to win compensation from the insider. I have looked at the situation in the UK and it is a criminal offence there; in the US it is a civil and criminal offence. The Bill had already contained this provision of making it a civil offence. I am not absolutely convinced or certain at this stage that the penalties are stiff enough. I will be listening with interest to what the various contributors have to say in that regard. Accepting that it is very difficult to prove, we should have a deterrent there. What is the right way and the right balance with which to get a deterrent is basically what I am looking for. This is an area of the Bill to which I will be paying close attention to see if it needs to be improved or strengthened.
I consider Part VI to be one of the most important in the Bill. It is in winding-up that most company law abuses eventually come to light and that is also where there is most public demand for dishonest directors to be made more fully accountable for their actions. Each and every one of us knows of cases where this situation has been abused.
Probably the most significant area being tackled in this part is that of fraudulent and reckless trading, sections 106 and 107. I think many people do not realise that we have, in fact, had provisions on fraudulent trading in company law since 1963, under which company directors could be made personally liable for their company's debts. However, liquidators tended to shy away from seeking such declarations, on the basis that, as the law stood, it was too difficult to establish the necessary standards of proof. All the same, since the early eighties, the courts have, in some notable cases, made declarations of personal liability for company debts, thus "lifting the veil" of limited liability.
Section 107 will, I think, encourage liquidators, in two ways, to seek such orders more often in future. First, the criminal and civil offences of fraudulent trading have been split into two separate sections, thus lowering the standard of proof required in a civil case brought by a liquidator or creditor. Secondly, section 107 introduces the notion of "reckless trading", with the possibility of personal liability where this is proved. There have been many cases where directors have operated a company in a way which, while not actually fraudulent in intent, nevertheless completely disregarded the interests of its creditors, and indeed its shareholders and the taxpayer also.
The Department, in devising the "reckless trading" provision, were very conscious of the need for careful drafting in this important area, to ensure that it would not have adverse effects on businesses generally. That is why we have built in a series of safeguards to protect the "honest director". For example, so long as a person can, if required, show that he acted honestly and responsibly, he can be relieved of liability. I am confident that in this section, we have got the balance right, and that honest directors who play by the rules will have nothing to fear.
There are many other important provisions in Part VI, of which the most crucial, perhaps, are section 104 dealing with fraudulent preference, section 105 on the validity of certain floating charges, and sections 109 and 110 which tackle abuses which often occur in inter-company "group" situations.
Part VII covers the area which has probably been the subject of the loudest public calls for action, that is, the "fly-by-night" director who liquidates one company, leaving a trail of unpaid creditors behind, then turns up in business again shortly afterwards under another name — the famous "Phoenix syndrome". I am sure we have all seen instances of this happening over the years — I certainly have — and am equally sure there is a strong consensus that firm remedial action needs to be taken.
Section 184 of the 1963 Act already allows the court to disqualify a person from being a director where such person is convicted on indictment of any offence in connection with the management of a company or of any offence involving fraud or dishonesty, whether in connection with a company or not. What we are saying in Chapter 2 of Part VII of this Bill is that such a person will be automatically disqualified for, effectively, a minimum of five years following such a conviction.
We are also providing, in this chapter, a discretionary power for the court to disqualify a person in a wider range of circumstances than heretofore. For example, a disqualification order could be made against a person who had been made personally liable for a company's debts in a fraudulent trading case, or where the court is satisfied that a person's conduct in relation to a company makes him unfit to be involved in company management. I think the House will agree that this is the correct approach in such serious cases and that, if the Bill is to have the desired effect, it must provide a clear and visible deterrent to fraud.
Chapter 1 of Part VII, on the other hand, does not prohibit, or disqualify, anyone from being a director. What it does is to say that, if you are a director of a company going into liquidation which turns out to be insolvent, leaving unpaid creditors behind, you cannot set up shop again with impunity, around the corner, under a different name. It is not saying that you cannot be a director, but it is saying that, next time, your company must meet a number of modest conditions, including greater capitalisation, as a protection to the creditors of the new company.
The minimum capital requirement for the "new" company with which such a director becomes involved will be £50,000, fully paid up in cash for a public limited company and £10,000 in the case of a private company. There may be different views offered here in respect of that and I am prepared to listen to those views. Other restrictions are contained in sections 119 to 121. I think Senators will agree that, overall, the restrictions proposed are modest enough, and I will be ready to listen to arguments in favour of, for example, different capital requirements in section 117, or any other views on the matter.
The provisions involved are based on the simple philosophy that we should learn from experience. If someone has a record of being incompetent, reckless or dishonest in the management of company affairs, it is necessary in the interests of creditors to establish significant safeguards to be met by him in the formation of a new company. I repeat — we are not preventing directors of insolvent companies from starting up in business again — we are simply putting a minimum set of safeguards in place in the interests of their future creditors. The honest director who makes an honest effort to run his company has nothing to fear from this legislation but the dishonest ones have a lot.
I believe that honest businessmen are extremely discouraged at the sight of their defaulting debtors setting up shop again in the same place and under a similar company name after putting their original company into liquidation. The level of psychological pressure on honest entrepreneurs by widespread malpractice should not be underestimated. If some are seen to be involved in malpractice with impunity and to grow rich in the process, this can create tremendous pressure on others to follow suit. Too many small businesses have been put out of business by fly-by-night directors who leave these businesses with the impossible task of trying to continue on. Surely the time has come to stamp out that malpractice.
In Part VIII of the Bill, we are taking the opportunity to tighten up certain aspects of the law in relation to receivers. We hear plenty of complaints about those from time to time. The amendments are mainly concerned with the status of the receiver and a clarification of his powers and duties. They include a new duty, in section 136, on the receiver selling property to get the best price reasonably obtainable, and a new procedure in section 135 whereby a creditor or person involved with the company may apply to the court for directions in connection with the performance by the receiver of his functions. Many people have found themselves with no recourse, when they saw the business which they had built up over the years being sold very cheaply by a receiver, either to go to the court or take any action whatsoever. This section, I hope, will change that situation.
Part IX of the Bill introduces a radical new legal mechanism for the rescue or reconstruction of ailing, but potentially viable, companies. There is obvious merit in providing a system whereby a company in temporary financial difficulties can be given a breathing space in which to reorganise or reconstruct. The central feature of the new system will be the appointment by the court of an examiner and the placing of the company concerned under the protection of the court for a period of three months; for so long as the company is "protected", it may not be wound up; a receiver may not be appointed; debts cannot be executed against it, and no security can be enforced against it. If the examiner considers that the company or a part of it can be saved and that this would be more advantageous than a winding-up, he will prepare a draft rescue plan. This will be put to appropriate meetings of members and creditors and, if agreed, will be put to the court for confirmation. If the court confirms the plan, it becomes binding on those concerned and the examiner's appointment will be terminated.
How often do we see companies being put into receivership or put into liquidation overnight? People come to us as public representatives saying it was just a temporary cash-flow problem: they never got the opportunity to recover with banks refusing finance; they had no recourse. Somebody appoints a receiver on the foot of a debenture and the receiver takes over, sells off the business or a liquidator eventually comes in and breaks it up. This is a new provision to give the company in that kind of situation the protection of the court for three months, an opportunity for the business to be sorted out. Maybe receivers are appointed in the middle of financial negotiations between various banks. Where there are three or four banks involved in a business how many times do we see one bank agreeing to go forward, another bank refusing to go forward and the matter comes to a head so fast by perhaps a bank refusing to pay the day-to-day cheques of the company, that the owners and shareholders of the company have no opportunity to act. Given a week, two weeks or a month, if they got that chance they could put that company back on the rails and hold it there.
This is what this provision is about. It is time it has come. All of us have experience of a situation where many a company could have been saved and need not have gone under if this type of provision existed. It gives the company full protection from anybody executing or moving against them for the three months period. The court has to be satisfied that the examiner's plans will work and, if they work, the company stays in business. We are losing enough companies and enough jobs in this country. This section is to be commended to the Seanad.
I see this new procedure as an encouragement to firms in difficulties to face up to those difficulties at a much earlier stage and take action to salvage the company instead of letting it slide towards liquidation, perhaps leaving many dissatisfied creditors behind. To put it another way, the new system will be a counter-balance to other provisions of the Bill which carry the possibility of personal liability for company debts. Companies will be able to seek protection from their creditors and work out a rescue plan. In a nutshell, they will, in effect, have no excuse to trade while insolvent. They can get the protection of the courts. That is what this section is about.
Part X deals with the inter-related areas of company accounts and audit. There is clear evidence that many Irish companies suffer chronically from poor account keeping and, indeed, that this is the reason many of them fail. Sections 180 to 182, therefore, will strengthen legal requirements in relation to keeping of books of account. There is also clear evidence that the law in relation to auditors needs to be tightened up, both to clarify their duties on one hand, and strengthen their own hands in their dealings with company managements on the other.
Part X contains a number of detailed provisions with these twin aims in mind. I will be interested not alone in the debate here but the submissions I will get from outside. It is important to strike the right balance in this section so that auditors do not go overboard in interpretations of this and put restrictions on companies that are not necessarily required. On the other hand, they need strengthening in relation to what their duties are with creditors and the general public.
Part XI is basically an "odds and ends" part, although there are many important provisions in it, dealing mainly with offences of one kind or another. I would, however, draw the attention of the House to one particular provision — section 189 which applies certain provisions of the Bill — and indeed of the 1963 Act — to companies who go out of business without formally winding-up. This is an increasingly common way of avoiding those penalties in the Companies Act which apply only in a winding-up. Unless this gap is filled, many of the Bill's provisions could be avoided by the simple device of not putting companies into liquidation. This, then, is a general tour of the main thrust of the Bill and its most important provisions as I see them. There have been widespread and frequent demands from all parts of the community for this kind of legislation and the individual provisions have been carefully researched and thought out over a number of years by the Department on that basis. The project has been helped along the way by many submissions and representations by interested parties as to what needed to be done and I would like to place on record our appreciation of the time and effort which went into these submissions. I also understand that many associations, auditors, accountants, CII and the business community are looking at the provisions of this Bill and I will welcome submissions from them. We are not rushing into anything. We want to get it right or as right as it can be got.
Indeed I would like to renew the invitation I issued on the publication of the Bill last week to anyone with an interest in the subject matter to give us the benefit of their views on the details of the Bill. While I am confident that it strikes a fair balance between the need to tackle abuse firmly and a wish not to discourage honest enterprise, I will certainly consider any reasoned arguments to the contrary. Indeed, I would be open to any reasonable suggestions as to how the Bill could be improved or made more effective. We do not say that we have all the collective wisdom within the Department of Industry and Commerce. There are many other views and aspects to be discussed and we are open to listen, to read and if we can strengthen the Bill we will be prepared to do it.
There may be those whose first impression is that this measure is "anti-business" or "anti-director" in some way. I would be disappointed if this were the case. I can assure everybody that this is not my approach. The practical difficulty with a Bill of this size and complexity is an entirely understandable tendency to generalise that it is "pro" this or "anti" that. This tendency to generalise obscures the real merit and value of the individual provisions of this or any other similar Bill which would become apparent on closer analysis.
If I had to generalise, I for my part would maintain that the effect of the Bill will be to encourage honesty and confidence in business dealings, that it will encourage directors of companies in difficulties to face up to their problems at a much earlier stage and that there is no reason why honest directors who play by the rules should have anything to fear from this Bill.
The fact is that the Bill is aimed directly and solely at the growing level of abuse and malpractice in company affairs. While it will certainly involve the bringing to book of unscrupulous company directors and managers who engage in malpractice, an equally important purpose will be to act as a deterrent to those in business who might be tempted to deviate from the highest standards of efficacy and ethics in their business affairs. As well as curbing outright fraud and dishonesty, if such a deterrent encourages higher standards of company management, it will indeed have been well worth while.
I believe I have given a fair balance. It could be said to be a carrot and stick approach, an approach to stamp out fraud and malpractice with which we are all too familiar. In the area of the evasion of taxation and the amount of money which is unpaid by many companies in a mad rush to become insolvent or close down overnight, by and large, the taxpayer is in many cases the largest creditor. It could be said that the law is deficient in this regard. There may be views on how the taxation system could be improved. It is our duty to stamp out malpractice and fraud so far as we can while, at the same time, ensuring that we do not deter the development of enterprise and enterpreneurship so badly needed at the moment.