I welcome the Minister of State and wish him well in his undertakings. He is well equipped to deal with his new remit. It is important nationally that he should succeed.
Senator Fitzsimons spoke about the lack of representations made to him and, indeed, as far as he knew, to all Members of this House about this Companies (No. 2) Bill. That is something that had occurred to me because it is important legislation. It is significant in its impact and the fact that there has been so little representation is a cause for concern. I wonder if it is in some way connected with the general feeling of disparagement which is being promoted about this House by people who are opposed to its very existence and if in some way Senators have been so denigrated publicly that those who have a legitimate concern about the Companies (No. 2) Bill have not found it worth their while to voice their concerns to us since this Bill is going through this House in the first instance. If that is the case I would certainly be extremely worried because those on whom this Bill will have a significant impact have missed an opportunity to ensure that their views are known to Members of this House and that their views receive expression in the course of the debate in this House.
I am very pleased that this long overdue legislation, which has almost been five years in gestation, has been brought into this House in the first instance. The track record of Bills which have been initiated in this House indicates that significant amendments have been put down. Bills have been fine tuned and improved upon and gone to another House in a far tighter, leaner, fitter state than when they came into this House in the first place. The debate in this House, both Second Stage and Committee Stage, will continue for some weeks. I would alert those people who have a concern about this legislation that it is not too late and, if they want to have a particular point of view aired, they must lobby and contact and make representations, and contact Senators who will be speaking on the Companies (No. 2) Bill.
The last major piece of legislation dealing with companies and company law dates back to 1963. I was very struck by the open, frank and receptive manner in which the Minister, Deputy Reynolds, made his introductory speech. He made no secret of the fact that he did not go back to the drawing board with this piece of legislation, as he very well might have done. It is of course largely the product of the last Government. It has been brought forward to this House unaltered. The Minister also stressed that he was open to change and alteration. He encouraged submissions from the public within the next three or four weeks. Those of us who have a concern in this area have, in the absence of representation, been scouring the newspapers, the economic correspondents and those people who have taken up the matter of this Bill and who have voiced areas of disquiet, or concern, or reservation about the Bill. I hope to come to that in the course of my contribution.
As I said, I welcome the Bill being brought into Seanad Éireann in the first instancce. I trust that the deliberations in this House will fine tune and improve the legislation, which is long awaited and very welcome. It has been recognised for quite some time now that we need legislation to give greater protection to the public against dishonest, fraudulent or incompetent directors and also to overhaul insolvency procedures generally. Every Senator who has contributed to date has accepted that fact and has welcomed the initiative in bringing forward the legislation.
The general purpose of this Bill is to strengthen some of the provisions already in existence under the 1963 Companies Act and to introduce new measures in an effort to eliminate, deter and penalise certain abuses which can occur in the management of companies. The level of corporate collapse has increased over the past about ten years or so and has become a marked and disturbing feature of industrial and commercial life here. With this kind of increase the short comings of the present legislation have been highlighted, the shortcomings which do not deter or properly penalise those who engage in abuse or malpractice. It is good that this response in the shape of this legislation should come on stream.
The public, I think it is time to say, have a general feeling of disgust, bitterness and alienation from the kind of thing they have witnessed over and over again. Well meaning, diligent, in the main small business people have been clobbered by fly-by-night merchants or cowboys who have hidden behind the limited liability clause. It has been grossly unjust to have witnessed the downfall of so many worthy people at the hands of these cowboys, as I call them. The accompanying press release on the publication of this legislation did not put a tooth in it. The press release was headed "Cowboys to be tackled". That is the kind of language that the cowboys understand. It is also the kind of language that the general punters out there, the public, understand. It was refreshing in a political context to see that kind of common or garden everyday language employed to illustrate the significance and importance of this legislation.
This Bill is a reasonable response to this abuse which we all recognise has crept into the system. In many cases of corporate failure, where the failure was due to mismanagement, the promoters of the company involved have quite blatantly hidden behind the protection of limited liability. This Bill is an attempt to restrict the activities of such persons in future without hampering genuine efforts to increase economic development.
The Bill also proposes to introduce similar provisions to those recently introduced in the United Kingdom by positively encouraging companies in difficulties to address those difficulties at a much earlier stage by offering short term protection through the High Court. Three months protection from creditors is thereby afforded and there is time to establish the feasibility of a rescue package. That kind of provision could have been extremely helpful in so many cases which have experienced difficulties, most notably in the case of the Leinster Paper Mills. If there had been that kind of provision in existence it would have gone a long way towards averting a crisis. I am very pleased that it is part of the provisions of this legislation. What it does, in effect, is that it gives breathing space, often at the very height of crisis. It keeps the appointment of a receiver or a liquidator on hold or at bay until it is seen if there is any way forward and, if so, what way that can be.
However, the question must be asked — and I hope to return to it in detail on Committee Stage — is three months too short a time? Could it be varied? Could it in some way be related to the magnitude of the problem which has developed within the company? Obviously, when a time limit, or a ceiling of eligibility, or any border line is set in any piece of legislation, it is inevitable that there will be queries about what happens if somebody finds themselves marginally on one side or the other. To have a three month period in all cases may not achieve what it sets out to achieve. This is something which could be debated on Committee Stage and perhaps illustrated with practical examples of where an additional amount of time or an extension of time could be more helpful in an intricate, complex circumstance.
The first part of substance in the Bill comes in Part II which deals with official investigations. Many of these investigations have met with stone-walling tactics in the past. Indeed, the frustration level of the inspectorate and the affected parties must have been extremely high. The Bill introduces provisions for the appointment of an examiner by the High Court to examine the State of a company's affairs. The moving of the role of appointing inspectors to investigate companies' affairs from the Minister for Industry and Commerce to the High Court is to be welcomed. It should have the effect of smoothing the path of future investigations.
Part III of the Bill tackles an area in need of tightening up. It restricts companies from giving direct or indirect loans or loan type facilities to directors. Subject to certain limited exceptions, the Bill prohibits all companies, both public and private, from making loans in excess of £2,500 to its own directors, close family relatives of directors, or indeed companies controlled by those directors. The Minister summed up the situation succinctly when he said: "A director should not regard the company as his own private bank". I would say about the language employed in the Minister's speech that, again, it was frank, succinct and the kind of language that is clearly understood in the business world and among the general public. There has been a tendency for directors to dip into the accounts and the revenue of a company. This has come out in subsequent investigations and in insolvency procedures. It is an abuse and it should certainly be very carefully monitored and guarded against.
Part IV of the legislation contains detailed provisions about disclosure of interests in shares. I absolutely subscribe to the general thinking behind this provision. I approve of the fact that a company will be required to keep a register of all interests notified to it and that this register will be freely available. It is important that directors, shareholders, employees and creditors should have the fullest possible information. This kind of openness will go a long way towards combating fraud. Indeed, it will help in some way to head off insider dealing.
This brings me to Part V of the legislation, the part which has perhaps evoked the widest public response. In the wake of certain activities elsewhere, the whole notion of insider dealing is one which has been discussed, debated and highlighted. This practice will, by virtue of this Bill, become illegal. That will be widely welcomed, because recent flagrant and blatant abuses of insider dealing on the stock market, both in New York and London, have hit the headlines. It is inexcusable to think that such abuses have, up to the introduction of this Bill, been perfectly legal in this country. For this reason particularly I wish this Bill a speedy passage through both Houses of the Oireachtas.
Since the beginning of the year the Irish Stock Exchange has launched as many as 15 different investigations into unusually large share price movements. Obviously, there was a concern that there could be insider dealing practice obtaining here. It is interesting to note that in most of the cases the price changes were regarded as normal market movements. The President of the Irish exchange, Aengus McDonnell, has gone on record as saying that insider dealing is not anything like as common as people say it is, whereas Senator Shane Ross, a Member of this House and a stockbroker too, has publicly gone on record as stating that the practice is indeed widespread. Obviously, there is a divergence of view and there is controversy about it on the Stock Exchange itself and within the business community. To my knowledge, Senator Ross has not yet made his contribution on this Bill. I look forward to hearing him expose, if indeed there are matters to expose, the practice of insider dealing and the basis for his widely quoted and public remarks that there is in fact insider dealing. In Senator Ross's speech on the Seanad and the functions of this House, if I might digress briefly, there was much talk about bringing the special expertise of individual Senators into the work of the House. Here is a heaven sent opportunity for Senator Ross to bring that kind of expertise, inside knowledge, into the whole area of insider dealing. Obviously, I look forward to that contribution.
A person who engages in insider dealing is basically and fundamentally dishonest. There are no two ways about it. Senator Cullimore has said that such a person is guilty of fraud. The only way to deal with that, as with most dishonest dealings, is to make the penalties so harsh and so excessive that the gain is not worth the candle. I am happy enough with the nature of the controls and regulations in the Bill, but I think that the penalties are insufficient and that they will not work as a deterrent. That is something we could look at again on Committee State. I hope on Committee Stage to encourage the Minister to consider increasing the fines in order to deter the sort of people who can happily engage in insider dealing.
Fear has been expressed in most of the newspapers, and more particularly in The Irish Times, whose finance section is a particularly useful reference source for those interested in legislation of economic matters. The Irish Times published an article on Tuesday, 13 January 1987, page 15, columns 1 and 2, headed “Not an offence yet in Ireland”. The person generally quoted in the article is a Bob Wilkinson, who is in charge of surveillance at the London Stock Exchange. The fear is expressed in this article and Dublin could become a base for international insider dealing, which, as I have already stated, is not yet a criminal offence here. As more and more countries outlaw the practice, the particular official of the London Stock Exchange, Bob Wilkinson, has voiced a fear that several rings operating in the London market could very easily move base to this country.
The way these people operate is rather interesting. Indeed, I suppose it is the stuff of thrillers and the kind of blockbuster novels that I look forward to reading on holiday and the sort of novels that make television and film extravaganzas. Such people typically work in cahoots and in collusion with dishonest employees at merchant banks, accountancy firms and other financial institutions. These employees tip off the people on the insider ring about impending take-over bids or profit announcements which they have learned about through their employers' confidential dealings with clients. These tip-offs can take place at night clubs, in pubs, in golf clubs and in other places where such people consort. The net effect of this kind of activity is, of course, catastrophic to individual companies and indeed to shareholders. The practice has been outlawed in Britain since 1980. The Stock Exchange have been pushing to have it outlawed elsewhere. The Isle of Man has agreed to make insider trading illegal and other countries are also planning to do the very same thing.
As Senator Cullimore said, the practice is not a criminal offence in the Republic. This legislation is going to make it a civil offence. Many Senators who have spoken have expressed a concern and a reservation about this. They have indicated that this is a weakness in the legislation. It is not a criminal offence in Northern Ireland either. It is human nature to a large extent that people will use whatever advantage they can to increase their own stake or economic holding. We must be aware of that and we must head off that kind of difficulty.
David Fassbender, managing director of ICC Corporate Finance, has gone on record as saying that there have been some instances of people using prior knowledge in dealing in shares. He then went on to modify the statement by saying that he would not think there had been much of it. We have to know, we have to be able to quantify, we have to be able to head it off and we have to be able to penalise it so that it does not become a feature of business or commercial life here. David Fassbender also went on to say that he thought the code of conduct in respect of dealing with confidential information within advisory houses, including ICC, has been adhered to, but that there may be others who do not act properly. He believed that it would be wise to make insider dealing a criminal offence. He went on to qualify it, as Senators who contributed have also, by saying, "After all, it is stealing". It is important to note that.
The proposal to make insider dealing illegal is long overdue. People with inside information will not be allowed to deal in shares on that information but if they do, those who suffer loss as a result will be entitled to damages as a result of this legislation. That is good and proper and only as it should be.
Part VI of the Bill is extremely significant. The Minister stated that he felt it was one of the most important parts of the Bill. I would concur in this. This section addresses the problem of fraudulent and reckless trading. It is generally recognised that a situation has existed in which some company directors have exploited the privilege of limited liability to enrich themselves at the expense of their creditors. Obviously, commentators have voiced concern about whether or not the Bill could be flawed in some way and I would like to bring one particular commentator and his views to the attention of the Minister, and I hope in the course of his reply to Senators that he will take up this matter. I am quoting from The Irish Times of Monday, 1 June 1987, page 14. This is an article by John King, who is a solicitor in charge of the commercial insolvents department of Ivor Fitzpatrick and Company, solicitors. Mr. King in the course of his article says:
Whereas the present situation is clearly unsatisfactory the proposed legislation may, in time, be found to be flawed in that it goes too far in certain areas and in other areas does not go far enough.
If in a liquidation it appears that the business of a company has been carried on in an intentionally fraudulent manner those responsible may be held personally liable for the debts of the company, as well as being punished for the criminal offence of fraudulent trading. There have been a number of successful fraudulent trading actions brought by liquidators in recent years.
Frequently, however, liquidators have failed to proceed against directors even where there has been evidence of fraud. There are two possible reasons for this failure to embark on litigation.
On the one hand there has been criticism of the legal concept of fraudulent trading itself. Under the present law in order to impose personal liability on a director the liquidator must be able to prove that he was motivated by a consciously fraudulent intent. It is not enough to show that a company continued to trade at a time when it ought to have been clear to the directors that the company had no realistic prospect of paying its debts. It is necessary to prove deliberate cheating, and this involves looking, not only at the behaviour of the directors, but at their subjective intentions. These provisions have been criticised on the basis that fraud is difficult to prove.
On the other hand a major problem has arisen as a result of the manner in which liquidations are funded. The expenses of the liquidator are borne out of the assets of the company which is being wound up. A liquidator may believe that the business of a company has been carried on fraudulently prior to the liquidation, but if there are no assets in the company he may be unable to fund an action against the directors.
Indeed, a Senator on the other side of the House in his contribution amply and vividly illustrated the amount of take of the liquidators out of the particular company and certainly it was an eye-opener. Again I quote from Mr. John King:
The proposed legislation incorporates a response to criticism of the concept of fraudulent trading. It is to be replaced by the new concept of reckless trading. The Bill provides that civil liability for the debts of the company which is being wound up may be imposed on a director who knowingly contracts debts which he does not honestly believe on reasonable grounds can be paid, or otherwise knowingly carries on the business of the company in a reckless manner.
The substitution of the test of recklessness for that of fraud is clearly intended to make it easier for the liquidators to impose personal liability on directors. It may be felt that if the new formulation is adopted the need to look at the motives of the directors as well as their behaviour may be removed. If this is the intention then the practical effect will be either where a business has failed a Court may be given the task of deciding, with the benefit of hindsight, whether a business risk undertaken by the directors of the insolvent company was justified.
Mr. King goes on to say:
Under these circumstances honest entrepreneurs may be deterred from taking risks by the prospect of being subject to enormous financial penalties in the event of business failure.
On the other hand, the Bill does nothing to tackle the problem of the liquidator who is without funds to pursue directors in a situation where he has good reason to believe that there has been fraud in the period prior to liquidation. A solution to this difficulty has been advanced by Patrick Ussher in his excellent work on Company Law in Ireland. This solution, regrettably, has not been taken up in the Bill. Ussher suggests that a fund be created to enable liquidators to pursue dishonest directors.
I think that is something that perhaps we could tease out on Committee Stage and see if there is any way in which this could be dealt with. Mr. King continues:
The cost of creating this fund could be spread over the business community as a whole, as for instance by the imposition of a levy on all companies registered at the Companies Office. He proposes an alternative approach which involves shifting some of the burden of dealing with the consequences of company failure from the ordinary creditors to the secured creditors. The secured creditors, banks and financial institutions who have charges over assets of the company, could be required to devote a proportion of their secured claims to the liquidator's fund to enable him to pursue directors who have been guilty of fraud.
It is suggested that the problem of company fraud would be much better attacked by providing liquidators with adequate resources to pursue directors who have deliberately cheated their creditors rather than by providing for directors to be made liable for the debts of companies in cases in which there may have been no conscious dishonesty.
I look forward to a fairly detailed response from the Minister to the points which Mr. John King makes in that article, which I think are well worth making and which, perhaps by way of amendment, could be incorporated in the Bill if the Minister so wishes.
Part VII of the legislation deals with the fly-by-night director who operates what is commonly called the Phoenix Syndrome. In order to combat this scandalous activity the Bill proposes to debar directors of a liquidated company which is unable to pay its debts from becoming directors of another company. It is high time that this was done and indeed is very welcome. However, there is an exemption clause whereby directors of insolvent companies may become directors of other companies providing the new one has a paid-up share capital of £50,000, if it is a public limited company of £10,000, if it is a private company. Insolvency experts have expressed grave reservations about that latter exemption which they feel will really only have a limited impact on directors intent on going about the business of liquidating to avoid debts. Again, that is something which the Minister might respond to and he might consider upping that latter amount which obtains in private companies, because there is no point in being half-hearted about this: either we mean to eliminate that kind of activity or we do not. Small sums of money are hardly deterrents to somebody who really means to stay in business, even if he has proved himself unworthy and lacking in honesty. I hope we will come to this again on Committee Stage.
It was interesting that the Minister stated that he would be willing to listen to arguments in favour of, for example, different capital requirements in section 117.
Part VIII tightens up aspects of the law in relation to receivers, and Part IX I have already dealt with. Indeed, I see the introduction of the radical new legal mechanism as a positive advance and one which will give ailing companies some leeway or some space within which to come to grips with obvious structural and cash flow problems.
Part X deals with the interrelated areas of company accounts and audit. The Minister came right out with it in his remarks when he stated that many Irish companies suffer chronically from poor account keeping. It is important that we recognise our own failings, our own weaknesses and our own faults. I certainly hope that this Bill will strengthen that whole area of business life, which can be directly attributed to company failure. As Senator Fitzsimons said in his contribution, there have been people who have been heavily reliant on auditors and accountants, who had no idea of the actual state of company finances and who found to their shock and horror that the whole thing had been in a parlous state and going down the tube but that it was too late to redress the situation. I am glad that this Bill proposes changes in those sections of the 1963 Act which deal with qualifications for appointments as auditors.
Part XI deals with penalties and the keeping of information by the Registrar of Companies. It is good to see measures included which will strengthen the requirements on companies to keep proper accounts. The duties of company auditors have been clarified, something which I expect will be welcomed by auditors as much as by everybody else.
This new Bill, although it has shortcomings, which I hope in the course of my contribution I have alluded to, is a step in the right direction; but it is not, and it must be stressed, a panacea for all ills. It contains uncertainties, and many Senators have alluded to those uncertainties. They may be ironed out in the course of Committee Stage, both in this House and in the other House, although I hope we will send the Bill to the other House in such an improved state that they will have very little work to do on it. In the final analysis, all of this may find itself being clarified by subsequent High Court interpretation. That may be the way in which it finds itself ironed out. I wish the Bill well and I commend the Minister on bringing it forward in its original state. I look forward to Committee Stage when we can tease out the individual parts of the Bill and fine tune and improve it.
