Companies (No. 2) Bill, 1987: Second Stage (Resumed).

Question again proposed: "That the Bill be now read a Second Time."

Mr. Mooney

May I take this opportunity, in resuming my contribution on this Bill, to add my congratulations, with other Members of the House, to the Minister of State who has graced us with his presence and to wish him well in his important responsibility for science and technology.

I do not propose to go over a lot of the ground which has been covered by other Members on both sides of the House on this rather detailed and complex Bill. There are areas of it which relate to fundamental changes in company law that should be emphasised. Perhaps in some cases there will be repetition. I propose to look at areas of the Bill in which I have taken a particular interest and I signal my intention, if amendments are put forward in these areas, to debate them in more detail.

Members of the House have gone through the various Parts of the Bill so I will take the areas that have a particular interest for me. Section 32 (1) states:

Where a relevant company is a member of a group of companies, consisting of a holding company and its subsidiaries, subparagraphs (ii) and (iii) of section 31 (1) (b) shall not prohibit that relevant company from—

(a) making a loan or quasi-loan to another member of that group; or

(b) entering into a guarantee or providing any security in connection with a loan or quasi-loan made by any person to another member of the group;

Section 32 (3) states:

Without prejudice to any other provision of this section, section 31 (1) (a) shall not prohibit any company from making a loan to a director of the company or of its holding company if the aggregate of the relevant amounts does not exceed £2,500.

I would like to question the limit of £2,500 on the basis that a director of a solvent company with surplus funds may require a bridging loan to finance the purchase of a house, or something that is fundamental to his livelihood, but he would be guilty of an offence under the proposed new Act if that loan exceeds £2,500. I do not think the figure is realistic in that context. I can understand the thinking behind it, that there could be an unscrupulous company director in a successful company who was using his privileged position as a director to fleece the company of its profits. I can understand why this section is included in the Bill but a commonsense approach would seem to suggest that there should be some flexibility in that area. Perhaps the limit of £2,500 might be looked at in that context.

Part VI relates to circumstances where companies might be wound up by the court. Section 95 states:

Section 214 (a) (which relates to the circumstances in which a company is unable to pay its debts) and section 345 (5) (a) (which relates to unregistered companies) of the Principal Act are hereby amended by the substitution in each case for "£50" of "£300".

That is suggesting that the figure in the Principal Act of 1963 should be increased from £50 to £300. I suggest that this amount is too low. An account could be in dispute and a solvent successful company could face the embarrassment of the legal costs and exposure of a High Court action. The original figure of £50 at that time might have seemed like an appropriate amount but 24 years on it seems rather low. I would suggest that this could be looked at and an amount substantially higher of £1,000 to £2,000 might be more appropriate in the circumstances.

Section 117 is a restriction on a director of an insolvent company acting as a director of another company. The Bill stipulates that if a person is a director of an insolvent company, on winding up he may not act as a director or shareholder of another company unless he invests in cash £50,000 in the case of a public company and £10,000 in the case of a private company. A person with special expertise could be invited to act as a director of a public company and, through no fault of his own or her own, this person may have been associated with a previous insolvent company and will be prevented from being appointed a director unless he or she invests £50,000 in the company, I know that several other speakers from all sides of the House referred to this section and some said the figure is too low, that the cash limit of £10,000 for a public company and £5,000 for a private company is too low.

I understand the reasons behind this. A cowboy director fleeces a company, retains substantial sums of money and over a period of time is aware, because of his privileged position within the company, that it is going downhill and will eventually become insolvent. Perhaps for fraudulent reasons he may decide to use the company's assets for his own uses and take whatever funds are there, fold up the company at an appropriate time leaving creditors, the Revenue Commissioners and the banks clamouring for money. These people can then set up again tomorrow morning literally in the same premises with the same office staff and all they have to do is change the name. I can understand why this aspect of the Bill has been looked at closely and has attracted a great deal of comment.

However, there are people who through no fault of their own get involved in companies which because of the prevailing market conditions are unable to trade properly and effectively. I would hate to think that in this country, where there seems to be within the national psyche a negative attitude towards failure, any legislation dealing with company law would take account of that national characteristic. One does not find that in the largest trading bloc in the world, America, or to a lesser extent in some of the European countries where being a failure in a company is not looked on in any way as a social stigma. If one were to delve into the family history or the business history of some of the most successful entrepreneurs internationally one would find that in a substantial number of cases they failed not just once or twice but several times before they have eventually came up with an idea that proved to be successful in the marketplace.

I would hate to think that would happen in Ireland which is a developing economy and where we should be encouraging as many people as possible to set up business. If business is successful it creates wealth and a country that creates wealth is in a position to help the less well off in the community. We are in favour of that. For that reason I am questioning the sum of money and I am wondering if there could be an exemption when this law is implemented and that the director or directors involved might have some recourse, some appeal. There are people who through no fault of their own have failed and who might not have the financial wherewithal to start up again but who, at the same time, have a sound business idea and would like to get involved in business again and who are not fraudulent, are not criminals or people who in any way wish to defraud — just honest brokers who have failed. There is also a disqualification included in that section. Perhaps it should be for a limited period of, say, three years.

Part IX deals with the appointment of examiners to companies in difficulties. Section 145 (1) reads:

During the period beginning with the presentation of a petition for the appointment of an examiner to a company and ending with the expiry of three months from that date or the withdrawal or refusal of the petition, whichever first happens, the company shall be deemed to be under the protection of the court.

I do not think a period of three months is long enough. Other Members of the House referred to this. As someone who is involved in business I do not think it is fair that a company in difficulties because of prevailing market conditions should only be given three months to get themselves back on the rails again. For example, the books and records may be in a very poor condition. There could be many reasons other than just the simple matter of a product not being successful in the marketplace. To give just three months for the sort of restructuring and reorganisation that is necessary seems to be a little stringent and perhaps might have resulted from an attitude within the draftsman's office amongst people who may not have been involved in business themselves or involved in the day-to-day operation of business. On paper it may look to be a sufficient length of time, but I suggest that it should be considered and that a longer time, say six months, should be given to it. That would be much more logical.

Part IX, deals with costs and remuneration of examiners, and states specifically in section 165 (1):

The court may from time to time make such orders as it thinks proper for payment of the remuneration, costs and expenses of the examiner.

It goes on to say in subsection (2):

Unless the court otherwise orders, the remuneration, costs and expenses of an examiner shall be paid and the examiner shall be entitled to be indemnified in respect thereof out of the revenue of the business of the company to which he has been appointed, or the proceeds of realisation of the assets (including investments).

Subsection (3) states:

The remuneration, costs and expenses of an examiner which have been sanctioned by order of the court shall be paid in full and should be paid before any other claim, secured or unsecured, under any compromise or scheme of arrangement or in any receivership or winding-up of the company to which he has been appointed.

Subsection (4) states:

The functions of an examiner may be performed by him with the assistance of persons appointed or employed by him for that purpose provided that an examiner shall, insofar as is reasonably possible, make use of the services of the staff and facilities of the company to which he has been appointed to assist him in the performance of his functions.

Subsection 5 states:

In considering any matter relating to the costs, expenses and remuneration of an examiner the court shall have particular regard to the proviso to subsection (4).

Section 165 (4) is of particular interest. It is difficult to compel the examiner to use existing staff. The experience in these cases seems to be that the examiner will be inclined to use his or her own staff to augment the company fee. On that subsection I suggest that the doctor's bill could kill the patient. Where an examiner is coming in he will be more inclined to use his own staff rather than use the staff of the company. Again, it is an aspiration but I think it could be strengthened a little, keeping in mind that the reality of the marketplace is that an examiner going in will be as concerned about making money for himself and for his company as he is in helping the particular company he is helping to salvage.

Part X, specifically section 173 (1), relating to the appointment of a close family relative as auditor of the company states:

A person shall not be qualified for appointment either as an auditor of a company or as a public auditor unless—

(a) he is a member of a body of accountants,

(b) he is, having regard to the obtaining by him of an accountancy qualification...

Subsection (2) states:

None of the following persons shall be qualified for appointment as auditor of a company—

(a) an officer or servant of a company...

(b) a person who has been an officer or servant of the company within a period in respect of which accounts would fall to be audited by him if he were appointed auditor of the company,

It is limited to a parent, a spouse, a brother, a sister or a child of an officer of the company but it does allow a grandson or granddaughter to act as an auditor of the grandparent's company. Perhaps that prohibition could be extended in section 173 (2) (c) because the area of family involvement is a bit restrictive if one is concerned — as obviously this particular section is — to ensure that everything is done according to the law.

Sections 168 to 183 of the Companies Act, 1963, are dealt with, that is, in relation to auditors. This country accepts the self-regulatory concept for the control, standards and discipline of accountants who act as auditors to companies. None of these bodies stipulates that their members should be adequately insured when they accept appointments as auditors. I suggest that the Minister should at the least threaten legislation if the accountancy bodies fail to compel members to be adequately insured, particularly when they act as auditors to public companies, friendly societies, trade unions and credit unions. In this way an element of protection and confidence will be given to the public because when you have auditors going in who are not insured it obviously leads to enormous difficulties at a later stage.

Recent cases such as the PMPA and the Insurance Corporation of Ireland give credence to that. Audited accounts indicated solvent companies in both instances but subsequent investigations revealed massive deficits. I suggest that perhaps the professional bodies who recognised auditors should put their house in order. The Minister should look at that area and perhaps threaten that, unless they put their house in order for the protection of the public, particularly where it related to the companies I have mentioned, he will force them to do so by introducing legislation.

In conclusion, I should like to reiterate what I said at the outset. It is the easiest thing in the world for any Administration to introduce legislation that tightens up. This legislation was introduced in response to public clamouring for a number of years that the increase in the number of private companies over the past 25 years necessitated a critical look and an indepth analysis of the original Companies Act, 1963. It has been generally recognised on all sides of the House and by those outside that the Minister has attempted successfully to strike a balance. I am sure this can be dealt with on Committee Stage.

I echo what has been said about the honest broker to the people who are involved legitimately, honestly and conscientiously in business. We are a developing economy. There is no hope for this country unless we can manage to manufacture products which we can then sell effectively in the wider world. We are a trading nation. It is important that every possible incentive is given to the enterpreneurs who wish to stay in this country, to make a living here, to create wealth not only for their own company but for their workers and ultimately for the country itself. There is a very real obligation on whatever Government are in office to ensure that the business community is given as wide a latitude as possible to carry out trading effectively, fairly and honestly.

This is not to diminish in any way the reasons behind many of the sections in the Bill which are to outlaw fraudulent and reckless trading. All of us would welcome those aspects of the Bill but, at the same time, I would not like to think that when the Bill eventually becomes law and is being operated and worked in subsequent years, there will be criticism from the business community that it has proven to be too restrictive in ordering their business affairs, in helping them to develop their products, to create more employment and ultimately to create more wealth which is something this country needs. All in all, it is an excellent Bill, one that is welcomed by all sides of the House. I would like to expand more on some of the points I put before the Minister on Committee Stage.

Mrs. Robinson

I welcome the fact that this important Bill has been revived and introduced into the Seanad. I was pleased by the approach adopted by the Minister in introducing the Bill. He made it quite clear that he wished to revise the Bill as it had stood under the previous Government because of a concern for the importance of introducing safeguards against malpractice, against fraudulent trading and so on. I sensed an openness to the possibility of amendments or improvements to the Bill but that the emphasis was rightly laid on introducing and commencing a debate on the Companies (No. 2) Bill. I welcome this debate because there has been a long gestation time. It has been a very considerable time since the initial worries and concerns were expressed in the public arena and also by an increasing number of public representatives who shared the concern to ensure that our company law contained adequate safeguards.

I should like to pay tribute to the work done and the commitment given at an earlier stage to this proposed legislation by Deputy Frank Cluskey in his time as Minister with responsibility and also by the subsequent Ministers of the previous Government. There is a bipartisan or across-the-political divide view about this. Some of the concerns of Members may differ. I would certainly differ in emphasis from Senator Mooney, but I want this Bill to be a good one appropriate to Irish circumstances and one which addresses the main purpose of having the Bill which is to eliminate, deter or penalise certain abuses and malpractices which can occur in the management and direction of companies.

I should like to turn to the main provisions of the Bill. Before I do so, I want to make it clear that although I am a lawyer — somebody told me that I am now the only lawyer in the Seanad which is an astonishing change from previous Seanads — I am not an expert in company law. Therefore, Senators can be relieved that I am going to speak neither at great length not with great technicality. I simply want to make some observations and also to raise questions on the broad scope of the provisions of this Bill. From the whole shape of the Bill and its sheer technical content it is obviously a Bill we shall have to look at with considerable care and over some considerable time on Committee Stage.

I noted that the Minister emphasised that he had sought and was indeed receiving a number of representations from interest groups and those who would be concerned to make representations to him and that he was not in an hurry for the conclusion of the debate on the Bill for that reason. Although it is important that this legislation should be on the Statute Book fairly quickly, there is something to be said for allowing adequate time for those who have an expertise and an interest on both sides of the divide in relation to company law to make representations. When I sought the views and advice of certain individuals with expertise in this area, the reponse I got was of some surprise that the Second Stage debate had already started. These were people whose views had been sought and who thought they would have an opportunity to make their views known in more of a lee time, to put it that way. That does not matter provided we have the benefit of this feedback and this reaction from informed groups and individuals by the time we get to Committee Stage.

I should like to turn to the broad provisions which are of particular interest. Part II of the Bill, as the Minister made clear, strengthens the provisions in relation to the investigation of the affairs of companies. There was already provision for the Minister to cause such investigations to be made under the 1963 Act. There is now to be a change and the appointment of inspectors will be made by the High Court. When I looked at that provision, my first reaction was: are we quite satisfied that that will achieve a substantial improvement?

I would be interested when the Minister is replying to the Second Stage debate if he would explain why there have been so few investigations of public companies up to now. There have been approximately six in past years. They have tended to be inconclusive. It would appear that they tended to put enormous strains on the resources of the Department when investigations were caused to be made. Our courts do not have unlimited administrative capacities or administrative efficiencies. We would need to know what exactly this will result in as a proposed change. For example, in the United States they have a structure of insolvency courts. They have specialist insolvency judges, a number of them certainly in my experience with considerable business acumen and experience. Indeed, they are appointed to the insolvency courts: they are not lawyers in the normal sense, sitting in the ordinary courts.

The United States is a very different country and a different size. They have different company law. Can we be satisfied that the High Court as it exists is adequately equipped and in a position to respond to this new statutory function and can we be confident that this in itself is a significant improvement? As I understand it, the scope of the power to inspect will extend to private companies. I will be interested in the Minister's response as to what are envisaged to be the appropriate circumstances in which such an inspection would be likely to be warranted and to be called for.

The next area I want to look at at this stage — I am really concentrating on the main provisions of the Bill — is Part IV which deals with the disclosure of interests in shares of companies. I welcome this further improvement in the scope of disclosure but I join with some Senators who have already contributed to this debate in looking for a greater disclosure in relation to contributions, particularly contributions by political parties to companies. I recall supporting a Private Members' Bill former Senator John Horgan promoted in 1975 or 1976. It was published as a Bill before the Seanad and there was an initial debate on it. It proposed the disclosure by political parties of contributions to companies. That is a matter of clear public interest. We are one of the few countries where that kind of disclosure is not required. We should include that kind of disclosure in a Bill such as this which is basically addressing the possibility of abuses or malpractices, which is basically looking for fuller information as a safeguard to the nature and quality of the companies.

I turn next to Part V of the Bill which contains provisions in relation to insider dealing. This, of course, is the buzz issue of the moment in company law in other countries, in America and in the United Kingdom. I noted the Minister's concern that there did not appear to be very full information or feedback from the Stock Exchange, in other words, not very full evidence of self-regulation in the area of insider dealing. I find it very hard, on the basis of the existing information accessible to me, to estimate to what extent we have a serious problem, or a potentially serious problem, or a small problem which needs to be nipped in the bud. It would be useful if the Minister could elaborate on that in his reply.

Part VI of the Bill contains a number of provisions relating to winding-up. My question is rather general, but I would appreciate it if the Minister would respond to it. One of the major problems in liquidation is the lack of resources available to the liquidator to chase up those who have allowed the company to go into liquidation, causing a shortfall in relation to creditors. This problem does not seem to be tackled in the Bill. Yet it is an urgent problem because when a company goes into liquidation the strong are generally protected. You have a bank which will be an insured creditor; you have the Revenue Commissioners who are preferred creditors. Who loses out? Small traders, small pensioners who put their funds into what they thought was a good thing. There is no real provision because there are no real resources — for liquidators to chase up the malefactors and get some of that money.

I do not know what the appropriate mechanism would be but we should be considering, in the context of a liquidation, devising some sort of resources, whether by the insured creditors deferring a little and the Revenue deferring a little as a preferred creditor in order to create a resource for the liquidator, specifically to take up. Our law, as I observe it, in relation to liquidation is highly unsatisfactory. Often the problem meanders on for years and may never really come to a termination but the strong are reasonably protected and the vulnerable and insecure are not protected. We should come back to this specific area on Committee Stage and see whether it is possible to provide greater safeguards for small, unsecured creditors in the context of a liquidation.

Part IX of the Bill introduces a new legal mechanism for the rescue or reconstruction of ailing but potentially viable companies. Again, this Bill proposes that the High Court should have a major role in the appointment of an examiner and that the company would, in effect, be placed under the protection of the court for a period of three months. I was interested in Senator Mooney's comment on the period involved — three months. There were other areas where I did not share his specific comments on the Bill — although they were obviously informed comments. I have a different approach and philosophy in some measure from Senator Mooney — but I feel that the period of three months is very short for an effective approach to the revitalisation and reconstruction of a company which is in trouble but which is basically viable. The Minister might look at that and see whether it would be possible to have perhaps an initial three months which could be extendable, and if so, what criteria would be appropriate for extending it.

Standing back from the new legal mechanism which would be involved in this Part of the Bill, we are again imposing a considerable responsibility on the courts. I have to ask the question again, as I did in relation to the Part on the appointment of inspectors: are we in a position to be confident that the courts will be equipped, will be effective, will follow-up and will be able to discharge, in an adequate manner, that responsibility?

Those were the main specific comments I wished to make, other than in relation to the redefinition of fraudulent trading which is contained in section 106 of this Bill. As the Minister pointed out, we had a concept of fraudulent trading under the 1963 Act, which is simply being redefined, in relation to the criminal liability of persons who are concerned with fraudulent trading in section 106.

In section 107 there is provision for civil liability of persons concerned for fraudulent or reckless trading of companies. I would like the Minister to tell the House why, in his estimation or in the estimation of the Department, there have been relatively few cases under the 1963 Act where fraudulent trading has been followed up and pursued. If we knew why that was perhaps we could be more sure that the provisions of sections 106 and 107 of this Bill would close a gap and help in that regard.

I have a certain concern — it is not a primary anxiety — with this Bill. I have read with care the definition of reckless trading, the carrying on of any business of the company in a reckless manner and there is some indication of how that is to be considered:

Without prejudice to the generality of the foregoing the contracting of a debt by the company, which the officer did not honestly believe, on reasonable grounds the company would be able to pay when it fell due for payment as well as all its other debts (taking into account the contingent and prospective liabilities)...

I would be concerned that a concept such as recklessness is often something which is much easier to discern ex post facto, afterwards. It may not be quite so evident at the time. Like other Members of the House, I am deeply anxious that we would have a possibility of controlling and imposing civil liability for what is behaviour which, in a genuinely irresponsible manner, causes loss to others even if it was not fraudulent. I have a certain hesitation with the approach and the concept of reckless trading simply because it may be quite difficult for somebody making decisions at the time to be aware at the time of something that may become much more obvious subsequently. Perhaps we can talk about that in more detail on Committee Stage.

Like other Senators who have contributed, I believe one of the important reforms in the Bill, and one which must be brought in as a matter of some urgency, is in Part VI, dealing with the so called fly-by-night directors. I am not happy that that part is, as yet, strong enough. We need to go further in ensuring that the well known fly-by-night boys who have been able to form and dissolve companies, either to evade their tax responsibilities or to evade creditors, can be limited not only in establishing future companies but can, in effect, be barred from being involved in establishing companies for a period, if necessary. If their track record is such that it has caused the kind of suffering and hardship which a number of these people have caused by the manner in which they acted, I do not see why they should be able to capitalise — for a quite small figure of £50,000 — to yet again establish themselves in a similar position and potentially cause further problems down the line. I should like to see a strengthening of that part of the Bill.

My overall view of the Bill is not dissimilar from the comments made by a number of other Senators. It is very elaborate. Perhaps we have to be elaborate in this area in the kind of rules we devise precisely because it is a difficult area and we are talking about potential abuses and malpractices. I am concerned that it is a heavy overlay of complex law to achieve frontline objectives, to protect, in many instances, the weak and less secure in dealing with companies in Ireland.

We must ensure on Committee Stage that, despite the technicality of the language and despite the elaborate sections of the Bill, it meets the particular objectives. I would like the Minister, in responding to the debate, to go into as much detail as he is in a position to at this stage about the new and expanded role for the High Court in relation to this area. That is one device that I have to be sceptical about unless substantially reassured by what the Minister says. Simply moving the appointment and role of inspectors from being something which the Minister did to something which the High Court does, in itself, would achieve very little and could even be a retrograde step unless it is well thought out and intended and equipped to be effective. Similarily we have an entirely new legal mechanism for ailing companies putting them under the protection of the court, allowing the court to appoint an examiner, and so on. I would like to know what steps will be taken in relation to the personnel of the courts, the administrative backup, expertise and so on, to ensure that the mechanism will work.

In broad terms I welcome the Bill. I have for long been among those who have called for reform of company law. I look forward to a more detailed opportunity to tease out some of these issues on Committee Stage. I commend the Minister for having given this House an opportunity to examine it on this stage. I hope that we will improve it and then pass it on the other House.

Mr. Lydon

Let me begin by saying that in general I welcome this Bill because I believe there is a need for fundamental reform of insolvency and related company legislation in Ireland. I believe it is essential to have a balance between the need to protect companies and their directors and the need to protect the interests of trade suppliers, employees and other unsecured creditors. There has been considerable debate over many years on the need for company law reform. There have been a number of attempts in recent years to bring this sort of legislation forward. As Senator Robinson said, it has been a long time in gestation.

The provisions of the Bill should interest an enormous number of people directors, employees, and so on. There are more than 80,000 limited companies, admittedly many of them non-trading and, while there are no official statistics of which I am aware on the number of individuals who are executive or non-executive directors, it is hard to see how this number could be less than 100,000, even allowing for the holding of multiple directorships.

There are about five main issues in the Bill. I will refer to them briefly. First, there are restrictions on and provisions for disqualification of company directors and other company officers in the event of being convicted of any indictable offence in relation to a company, or involving fraud or dishonesty whether in connection with a company or not. There is the introduction of the concept of reckless trading and the power of the court to consider the conduct of a person which would be such as to make him unfit to be concerned in the management of a company. There is the question of liabilities of related companies in the event of liquidation. There is the prohibition of insider dealing which makes it unlawful for a person connected with a public limited company to deal in its securities if he has any inside information relating to it, or to deal in the securities of any other company if he has inside information related to it based on his employment in the first company. The section also makes it unlawful to engage in tipping on the basis of inside information.

Finally there is a legal mechanism for the rescue of reconstruction of an ailing but potentially viable company. This provision is for a period of protection by the courts in order to allow the ailing company to consider the possibility of rescue or reconstruction. In other words, the Companies (No. 2) Bill is a very complex piece of draft legislation. Before discussing it and putting some questions to the Minister there are a number of preliminary comments in relation to company directors and to insolvency law that I should like to make.

In relation to company directors I fully support any move to impose appropriate penalties on those who seek to trade in a fraudulent manner. The existence of appropriate penalties will serve to protect bona fide business interests as well as to protect employees, creditors, customers and suppliers. It is essential, however, that any steps which are legitimately taken to protect the public from the actions of those who seek to trade fraudulently should not be such as to virtually undermine limited liability status which is the cornerstone of commercial enterprise and has been for more than a century.

It is important that, in any change relating to the position of directors, great care must be taken to distinguish between the various categories of directors in a company. I feel a distinction should be made between a director who is the entrepreneur or controlling director, the full time executive director, the non-executive director, the employee who is also a director, the director who is a nominee of a development agency of the State, the director who is a nominee of a financial institution and the director who is essentially a company doctor and who has been brought in to assist recovery operations of a company in difficulty.

If we attempt to deal with all of the various categories of director under a single generic heading of director the result could be most confusing and could be very inequitable for certain persons. A change in relation to the position of directors must also be such that it does not of itself force the directors of a company to cease business prematurely as soon as the company is incurring a loss rather than make an attempt to rescue the company. This pressure for premature closure of a business is obviously not in the interests of a company, or its employees, or its suppliers, and not in the interests of the general community.

The changes in relation to insolvency law should have regard to at least six basic principles. First, there is a need to ensure equity and justice for all parties who are affected by an insolvency. Secondly, there is a need to ensure that changes in insolvency law should not hinder the many types of credit transactions which are now an essential and integral part of the commercial life of the community and without which the volume of trade would diminish to the detriment of all members of the community. Thirdly there is a need to ensure that legislative change should not be of such a punitive nature for those business people who, while they might be commercially imprudent are not in any way fraudulent in a criminal sense. There is a need to ensure that every possible legislative measure should be designed to help the continued existence of a potentially viable company in the interests of all parties including employees, suppliers and customers.

In this context the suggested new legal mechanism for the rescue or reconstruction of ailing, but potentially viable companies, is very much welcomed. There is a need to ensure that legislative changes will not create any additional and unnecessary administrative burdens for the trading companies in circumstances where enterprise in Ireland is already grossly overburdened by administrative requirements. In a small country like this with an extraordinarily high level of unemployment and with the national output per head of population only 70 per cent that of the EC average, the main focus of our efforts should be to ensure the creation of a climate which will attract more people to establish enterprises. We should ensure that an appropriate balance is always maintained between the need to encourage enterprise and the need to protect the legitimate interests of all those upon whom the enterprise will in any way impact. The Bill goes some way to do this.

I should have read this Bill sooner but I have to confess that I did not really read it until this morning. I have made some notes along the sides of my pages. I trust, a Chathaoirligh, that you will bear with me as I refer to some of the sections which pose certain questions for me.

Part III deals with transactions involving directors. In section 28, I feel that the limit of £50,000 or 10 per cent of the company's relative assets, whichever is the lower, is too restrictive particularly for larger companies. I suggest that the limit of 10 per cent of net assets or £50,000, whichever is the greater, might be more realistic. In section 32 that figure of £2,500 in respect of loans is much too restrictive and should be at least £10,000, as should the sum in respect of quasi loans also be increased to £10,000.

Section 32 (8) deals with house loans. The figure there is a little impractical. Loans to directors for housing should be flexible and should be dictated by practical commercial criteria. A maximum of £50,000 is totally unrealistic in this day and age and should be at least £100,000. If you are to have a director or somebody who will make money for you, you have to reward him appropriately.

On section 36, the naming of directors in accounts should be limited as far as possible. I agree that the transaction should be reported in the accounts but I am not sure what can be achieved by including the actual director's name here. I do not know what is intended by that.

Looking at section 38, again the figure of £2,500 is very low and should be around £5,000 to £10,000. I welcome and agree with the statement in section 39 that the accounts should be made available for inspection by the members at the annual general meeting. I realise that providing those accounts may lead to some spurious questioning from the floor but, in all fairness, and in keeping with the philosophy of openness, freedom of information, and so on, they should be available to the people at the AGM.

In section 40 the figure of £5,000 is a little low and it could be raised to £10,000. I want to read into the record section 46 (9):

This section shall not require to be kept a copy of, or memorandum setting out the terms of, a contract or a copy of, or memorandum setting out the terms of a variation of, a contract at a time at which the unexpired portion of the term for which the contract is to be in force is less than twelve months or at a time at which the contract can, within the next ensuing twelve months, be terminated by the company without payment of compensation.

I would like to ask the Minister what exactly does that mean. Much of this legislation bears the imprint of a legalistic rather than a business mind. Surely it could be written in clearer terms. I do not know what it means, but I am sure it is very important.

Section 47 (1) reads:

Every company shall keep at its registered office a register of its directors and secretaries.

Under section 47 (2) (a) his name is required and under (b) his date of birth. If a director is over the age of 21 what do you want his or her date of birth for? I do not see the relevance of that. In section 47 (6) the 14 days could be extended to 21 days to give a little more time.

Part V deals with insider dealing. This is one of the most important parts of this legislation. I welcome the introduction of measures to prohibit insider dealing. I have some reservations concerning the confinement of the scope of insider trading being extended only to public limited companies. While it might be considered excessive to extend Part V of the Bill to small or medium sized companies, there are many large private companies where a shareholder, or a group of shareholders, could suffer from the activities of insider trading. Some consideration should be given to the extension of the measure to include large private limited companies.

Section 91 makes it unlawful for a person connected with the company to deal in its securities if he has any inside information related to it. Such a person is also precluded from dealing in the securities of any other company if he has information related to his employment in the first company. A person who receives inside information is also precluded from dealing. We can all recognise that there is a very close relationship in the Irish investment community and there may be difficulties in enforcing some of the subsections of section 91. In particular, difficulties could arise with regard to subsection (4). For example, what will be the position of a stockbroker who is advising a company and is expected by his clients to comment on that company? Even the larger stockbroking firms in Dublin do not distinguish between their company finance role and their purely agency stockbroking role. It is a pity that Senator Ross is not here. Perhaps he could advise me on this one. For the smaller stockbroking firms I think this would be impossible. I ask the Minister to look at this and perhaps there might be a need for some clarification.

Section 91 (5) confines the offence of insider trading to securities quoted on a recognised Stock Exchange. I underline the word recognised. I suggest that this might be extended to any public limited company whether quoted on a recognised Stock Exchange, an alternative investment market, or otherwise.

Section 92 (1) (a) seems to me — I am not a lawyer — to be a veritable minefield. It attempts to compensate for loss, but it will be well nigh impossible to determine the loss incurred and, indeed, to identify each and every individual shareholder who may be affected. I suggest that we either get rid of this section or nominate some State official to decide what loss is incurred and the amount of compensation due as a result of such loss.

Section 93 deals with exempt transactions. The provisions in the Bill for exempted transactions do not, I feel, provide for the exercising of share options under approved share option schemes. Perhaps the provisions should include under exempt transactions the holders of shares under approved share option schemes where they are required to take up their options within certain time limits.

Part VI of the Bill deals with winding-up and related matters. Section 94 (1) presents a major loophole in that in many companies the pension scheme is funded in the whole or in part by the company. Consequently the officer in possession of inside or price sensitive information could use employees' pensions schemes to reduce the company's liability to the scheme by trading in the shares at the expense of other or potential shareholders. If the object of Part V of the Bill, as I see it, is to protect the innocent shareholder, it seems to make little difference to him if the other parties to his loss are the company's pension scheme or an officer of the company benefiting on his own account. Subsection 1 (c) is also a little loose and I feel it needs to be tightened up to avoid the entering of underwriting agreements designed solely to circumvent the impact of Part V of the Bill.

Section 103 provides an opportunity, which should be taken, to amend section 285 of the Principal Act in a much more fundamental way so as to encourage all creditors to be more vigilant in the collection of debts due to them. Tardiness in debt collection tends to encourage, and thus result in, bad debts, trading under the appearance of solvency and ultimate fraudulent trading. In particular, the Revenue Commissioners and local authorities have a public duty to collect unpaid tax and other charges. They should carry out this duty without reliance on preferential status in the event of winding-up. Unpaid taxation does not justify any preference and, accordingly, income tax, corporation tax, capital gains tax, capital acquisition tax and rates should not receive preferential status. A bad debt owed to the State is likely to be insignificant in terms of total Government receipts. However, the loss of a similar sum to a supplier of an insolvent company could result in serious hardship and bring further insolvencies in its train.

Sections 109 and 110 make provision for the liquidator or any creditor of a company to make application to the court to have a related company in certain circumstances made responsible for some or all of the debts of the company being liquidated. These sections should not be used where the liquidation arises as a result of misfortune or bad judgment, rather than fraudulent or improper dealings. Some provision should be made for protection of the minority shareholder in the related company where the majority shareholder has been abusing his position, particularly if this involves improper or fraudulent activities in relation to the company being liquidated.

Some protection should also be provided for creditors in related companies who are made the subject of a section 109 order. Clarification of the ranking of amounts due under a section 109 order is needed also. Section 109 (1) to (4) gives very wide discretion to the courts making it difficult to know whether related companies are put at risk. With regard to section 109 (2) consideration should be given to requiring the court to have regard to other matters, in particular the benefits received by the related company being wound up. We need to take a look at section 110 and perhaps write it so that in the event of a joint liquidation the creditors of each company would not be in a worse position than if the liquidation had been carried out separately. That is not the case. If you look at that carefully and take some examples you will see that that is not the case.

Section 116 deals with the responsibility of directors of holding companies for subsidiary companies. There appears to be a danger of damage being done to the innocent directors of holding companies by the application of this section. This is especially relevant to the non executive director who, in many cases, would be unaware of actions within a particular subsidiary. Such damage is particularly likely if, as seems likely to be the case, any liquidator making application under section 298 of the Principal Act automatically applies to the court for an order extending that section to directors of the holding company under section 116 of the Bill.

Part IX deals with companies under court protection. Section 144 empowers the court to appoint an examiner. Senator Robinson referred to this earlier. The grounds for appointment of an examiner could be enlarged to enable an examiner to be appointed to a company in sufficient time to enable constructive salvage to take place. In section 147 the examiner's power could be extended. In particular he could be vested with the powers of a de facto chief executive of the company and give express power to carry on the business to continue trading, to borrow and if necessary to charge the property to the company. Section 166 deals with publicity. Information concerning the company's trading strategies or other confidential information should not be disclosed in the examiner's report. I do not think there is a need for that.

Part ten deals with accounts and audits. Section 171 provides for the resignation of auditors and appears to provide that an auditor may resign with immediate effect on a matter of disagreement. Under section 169 (b) the directors of the company have the discretion, but not the obligation, to fill the casual vacancy or to convene a meeting of members to fill such a vacancy. Should the directors not exercise this discretion, the Minister's power to appoint an auditor would not be exercisable until after the next AGM. The consequences of this may be that, first of all, should the directors not fulfil their responsibilities, the company may be left without an auditor during the period at least to the AGM and possibly until the Minister intervenes. Secondly, the resigning auditor has the right to convene an extraordinary general meeting to present his case to the members. This meeting need not be held until 56 days later, so it is unlikely that any other auditor could accept an appointment until such a meeting had taken place. There will be at least a 56 day period when the company does not have an auditor. The provision should try to ensure that the onus is clearly on the directors to appoint a new auditor immediately after the resignation of the auditor or, if he requests an extraordinary general meeeting, immediately after the meeting of members convened by the outgoing auditor. In the event that the directors do not do this, the Minister should have the power to intervene. This might be achieved by requesting the resigning auditor to notify the Registrar of Companies, once he has resigned, with a follow-up notification by the directors of the appointment of a new auditor. Provision should be made for the resigning auditor to remain in office until the conclusion of any EGM which he had requested. He would probably require protection from the penalties as laid out in sections 181 and 182 of the Bill during this period.

Section 172 deals with the "requisitioning of general meeting of company by resigning auditor", I love the way that is written. This section gives the right to the company or others to apply to the court to restrict a resigning auditor from circulating material to the members which the court judges defamatory and an abuse of the auditor's rights. I wonder could it be made clear that access to the courts for such a restriction should be available without undue cost or delay through application for notice of motion procedure. I was going to comment on section 173 but I think I will leave it.

Section 175 deals with the auditor's report and the right of access to books. This section brings the provision of the Seventh Schedule of the 1963 Act into the body of this Bill and makes some wording changes. While many of these changes clarify existing provisions, there are several difficulties which may arise from the proposed changes. First, in subsections (4) (b), (4) (c), (4) (e) and (4) (f) when referring to the auditor's report the phrase "they are satisfied that" has been substituted for "in their opinion that". This latter phrase has been retained in (4) (g). "In their opinion that" is a phrase the meaning and intention of which is known to all parties concerned and has been tested in court.

It is not clear that "they are satisfied that" means more or less than the accepted phrase and there does not appear to be any good reason for the change. In subsection (4) (b) the auditors are asked to report on the maintenance of proper books. In the 1963 Act the requirement is to report "as far as appears from their examination". This limitation on the requirement is omitted in this Bill. The omission of this limitation may require the auditor to conduct a 100 per cent test of the books in order to report as required. An unlimited examination would be impracticable and expensive. In subsection (4) (e) the auditor is required to report that the accounts have been properly prepared in accordance with the provisions of the Act. There is no indication given of the meaning of "properly prepared".

In common with other parts of the Bill the section refers to reports for the financial year. It is not uncommon for reporting periods to be longer or shorter than a year but the phrase "financial year" should be defined as a period for which the company is reporting. In addition to the difficulties arising from the rewording of the auditors reporting requirements the section retains the requirement introduced by section 40 of the Companies (Amendment) Act, 1983, to report on the maintenance of capital. The requirement to make such a report has been found in practice to give rise to difficulties, for example, the position of companies where the financial position was known to directors prior to the implementation of the Act, the position of companies who already convened the meeting required by the Act, and the difficulty of reporting where there is a qualification for uncertainty in the auditors opinion on the balance sheet. In the light of these difficulties the opportunity should be taken to reconsider the usefulness of the wording of the requirement.

In section 176 we are dealing with the duty of auditors if proper books are not kept. The potential effectiveness of this section must be questioned for the following reasons: first, it is unlikely that the Bill is intended to impose a requirement for a continuous audit and, in most cases, the auditors visit will be after the year end. In such circumstances the auditor will be reporting well after the failure to maintain proper books has occurred and the usefulness of such a report is highly questionable. Secondly, in the circumstances envisaged by the Bill the auditor will in any event be qualifying his report on the accounts. This report will be available to the members and through the Companies Registration Office to other interested parties. Thirdly, if the directors agree with the auditor's opinion they have only 21 days to remedy the situation which is too short. There is no requirement for the provisions which they put in train to be completed within any period so there is no assurance that they would be effective. It is unclear what will happen if the auditors and the directors disagree on whether proper books have been maintained. In the light of these difficulties and of the fact that the members and third parties will be informed of the auditor's opinion that proper books have not been maintained and through the audit report, the Minister might like to clarify this section and perhaps reconsider it both as to its usefulness and its construction.

The last section in Part X to which I should like to refer is section 180 which deals with the keeping of books of account. One of the principal changes introduced by this section is the requirement to maintain proper books of account on a consistent and continuous basis. Arising from this requirement there are several issues which I feel require clarification. First, in the case of a small business, will it be adequate to maintain prime books on a continuous basis from which a general ledger and set of accounts can be prepared? Secondly, is it necessary for a business to maintain continuous stock records or fixed asset registers in order to enable the financial position to be determined at any time? Thirdly, what does the requirement in section 180 (1) (b), "will at any time enable the financial position of the company to be determined with reasonable accuracy" imply? Does this requirement allow the directors a reasonable time to make such a determination? Fourthly, is there a limit on the time which may be taken in preparing the annual accounts?

There is a second issue addressed by this section and it is the definition of proper books of account. In connection with this definition the following points require clarification. Under subsection (2) (c) (i) detailed records of goods purchased or sold must be maintained except those sold for cash by way of ordinary retail trade. Does this definition of cash recognise such means of payment as credit or charge cards? Does the definition of "retail trade" encompass such businesses as wholesale cash and carry. A clearer guidance on what forms of business are relieved from the requirements to maintain detailed records of goods sold is required.

Under subsection (2) (d) companies providing services are required to maintain a record of the services provided. I can find no definition in the Bill of what constitutes a service and what type of company would be covered by this section. It is also unclear what form of records must be kept to record the nature of services provided. In essence it could include a lady of the night. This could be particularly significant when taken together with a requirement to maintain books. We should enable the financial position to be determined at any time. Clear guidance on these matters is required.

Subsection (8) requires that records should be maintained for six years. It does not specify which records should be maintained or guidance on which records require maintenance. These may seem small points but when a case reaches a court of law strange things can happen.

I would like to comment on one last section here. It is in Part XI headed "General". This section is a joke. It is hopelessly inadequate. The offence may relate to profits of several million pounds made from illegal activities. To fine a man these amounts of money on summary conviction — a fine not exceeding £1,000 — is not enough. However, those are the general points I want to make. I would welcome the Minister's comments on them. Depending on the Minister's reply I will consider putting down some amendments. I welcome the Bill as a whole.

Finally, the Explanatory and Financial Memorandum for the Companies Bill says:

The underlying aim is to create a climate of confidence for business activity in which genuine commercial endeavour will prosper and the prospects for economic development in general will be enhanced.

Naturally I welcome the statement on "underlying aim". I am in accord with the view that measures should be taken which are aimed so specifically at curbing certain identified abuses while, at the same time, introducing provisions which inspire more confidence among those directly affected by the activities of limited companies and encourage companies which get into difficulties to address those difficulties in a positive and constructive manner at a much earlier stage. In general I welcome the Bill. Subject to some of those questions I wish it well.

Mr. Kelleher

I also welcome the opportunity to speak on this very important Bill. I listened to many contributions from Senators over the past three weeks. each emphasising their own interest in the specific sections which they would like to see strengthened for the betterment of this Bill. One of the chief things that struck me was the number of comments made in relation to rogue directors and limited liability. One got the impression from listening to some of the contributions that some people set up in business to defraud creditors, to defraud colleagues, the State, the Revenue Commissioners and so on. This is not the case.

In my experience of business I have found that the vast majority of people involved in companies are straightforward and honest people. No matter what profession or organisation you get involved in you will always have rogues to some extent. It should be clearly understood from this debate that the vast majority of people in business today with limited companies are people who are giving employment and who have set out to comply with the rules and regulations.

The Minister said that when the Companies Act, 1963, was enacted there were about 11,500 registered companies. Today, there are well over 100,000 and company law is only beginning to respond to these changes. The changes incorporated in this Bill must be seen in the context of the need, which is well recognised by the Minister, to recreate a healthy business environment. Overly restrictive legislation with the intention of catching the few who abuse the privilege of limited liability has clearly been detrimental to business development. However, restrictions on company directors' freedom to cease operations, walk away from their debts and immediately restart a new company are prominent in the changes in this Bill and are to be welcomed.

The Bill specifically addresses the situation and a director of a company which goes into liquidation, which turns out to be insolvent leaving unpaid creditors behind, no longer will be able to set up a business the next day under a different name without meeting certain conditions. If such a director becomes involved in a new company the capital requirement will be £50,000 fully paid up in cash for a public limited liability company and £10,000 in the case of a private company. This type of safeguard is undoubtedly necessary because honest businessmen must be encouraged rather than discouraged to stay on a straight path. It is not unreasonable that directors of insolvent companies when starting up in business again should meet certain requirements in the interests of their future creditors.

Part V of this Bill deals with the unscrupulous practice of insider dealing. This is a malpractice which is contrary to the principle of maintaining an efficient and fair shares market involving equal access to information. This practice will, with the introduction of this Bill, become illegal. This will be widely welcomed as it is inexcusable to think that such abuses have up to the introduction of this Bill been perfectly legal in this country. Part V of the Bill, therefore, proposes to make it a civil offence to deal in securities on the basis of inside information. My main complaint about this section is that, while the Bill brings us into line with legislation in Britain, we are still treating insider trading simply as a civil and not as a criminal offence.

Part VI of the Bill deals with the winding-up of companies and is extremely important. The Minister stated that this is one of the most important parts of the Bill. This section deals with the problem of fraudulent and reckless trading. Section 107 has a twofold objective. First, the question of civil liability for fraudulent trading has been separated from criminal liability and it now forms this section in its own right. Secondly, the separate liability provision is being expanded to cover reckless trading. It will apply to the person who, while in office in the company, was knowingly a party to the contracting of a debt by the company which he did not honestly believe on reasonable grounds the company would be able to pay when it was due for payment, as well as all other debts, or was otherwise knowingly a party to the carrying on of any business of the company in a reckless manner.

If a company is wound up and unable to pay its debts a person in such a situation may be made personally liable for all or any part of its debts, or other liabilities. However, if the court considers that the person has acted honestly and responsibly it may well relieve him, either wholly or partly, from certain liabilities on whatever terms it thinks fit. Part VII of the Bill covers the area which has been the subject of most comment, which is the fly-by-night director who liquidates one company leaving a trail of unpaid creditors behind him and turns up in business again shortly afterwards under another name. I do not propose to say any more on this, as I dealt with it at the beginning of my speech, and I would hope to make further comment on Committee Stage.

Part VIII of the Bill deals with the appointment of receivers and the power given to receivers. Section 136 is a new section which states that a receiver of the property of a company who sells any other property shall exercise all reasonable care to obtain the best price obtainable for the property at the time of sale. For different reasons in the past, some people have suffered very severely at the hands of a receiver. While it might not always be possible to get the best possible result, I have no doubt that people have had very bad experiences at the hands of receivers and for that reason I welcome the introduction of section 135, whereby a creditor, or a person involved with the company, may apply to the courts for a direction in connection with the performance by the receiver or his functions.

Part IX of the Bill introduces a new legal mechanism for the rescue or reconstruction of ailing but potentially viable companies. This is one of the most important and constructive proposals contained in this Bill. Companies in difficulty can seek court protection under which the rights of all creditors are temporarily frozen. The court appoints an examiner to examine the affairs of the company and keep a supervisory role in its affairs while it is under court protection. The examiner reports to the court on the viability of the company and, if viable, prepares a rescue plan. The plan is submitted to the interested parties — for example, the creditors — for acceptance. When the plan comes into operation both the court protection and the examiner will see it. I will deal with Part IX in different sections because it is a novel piece of legislation and its implementation is to be encouraged. It takes its idea from chapter II of the bankruptcy equivalent in the United States. However, it suffers by comparison in that the period proposed in this Bill, three months, is considerably less than the United States equivalent, which is up to one year. Furthermore, there has been no move in the United States, in spite of the number of years that this legislation has been in force, to reduce the time span from one year. A number of Senators have commented on the space of three months. I agree with Senator Mooney and, indeed, with Senator Robinson who spoke today on the same issue. In my opinion, this legislation cannot be satisfactorily implemented unless a discretion of one year is vested in the court on the recommendation of the examiner.

There would also appear to be a practical problem in the implementation of the court's powers because, unlike the United States, or Holland, where there are specialist courts and specialist judges dealing solely with insolvencies and bankruptcy matters, there is no such arrangement in the Irish court, which deals with all types of cases. Accordingly, you have different texts laid down by the different judges and different views being taken by different judges, some of whom may have no experience in the insolvency or bankruptcy fields.

Section 143 (3) deals with companies under court protection. I can see no logical reason why the Industrial Development Authority, and possibly the ICC and ACC, should not be included under this section. Why is it limited to Fóir Teoranta? Perhaps the Minister, in his reply, might indicate what difference it would make to the Bill if the other three were to be included and why should it be just specific to Fóir Teo.

Section 144 (b) deals with the powers of the court to appoint an examiner. Surely section 144 (b) is putting the cart before the horse. Surely it is unreasonable to expect the company to approach its creditors to enter into a compromise before the appointment of a court examiner. If the creditors got wind of the fact that the company was in trouble there may not be time to appoint a court examiner. Surely it should be one of the functions of the examiner to see if there is a possibility of entering into a compromise or arrangement with the company's creditors. Again, I would like a comment from the Minister on that section.

Section 145, although fairly wide, does not appear to prevent creditors who are claiming retention of title on goods of the company from seizing these goods. In view of the fact that retention of title is now a fairly common commercial practice it would seem desirable that some clause be inserted to enable the examiner to properly freeze all assets. It would also appear that plant, machinery and equipment financed by a company, either by means of leasing or hire purchase, are not covered by this section; and, as these assets are in most cases fundamental to the continuance of the business, this section should be amended to give the examiner powers in this area. Again, I would ask the Minister to have a look at that area.

It would appear that section 146 may conflict with the remedies of the holder of a fixed charge who is appointed a receiver to realise only the assets the subject of that fixed charge.

In section 147 there appears to be one fundamental defect which goes to the root of the powers of the examiner and, that is, that he is given no powers himself to manage the company. In other words, you could have the anomaly of a company under the protection of the court over which an examiner has been appointed still carrying on business through its existing structures. Subsection (7) gives the power to change, and that is only by reference to the court, but no power to manage the company and run the business, which surely must be essential before the examiner can evaluate the viability or otherwise of the particular business in question. I propose that this section be amended to give the examiner powers to manage and carry on the business of the company.

Regarding section 158, in view of the known fact that the Revenue Commissioners will not compromise in a scheme of arrangement under the 1963 Companies Act, surely the proper way to deal with the creditors' arrangement/ compromise proposals would be for the unsecured creditors and the preferential creditors, and normally the Revenue Commissioners, to be treated as one particular class.

The hostility of the Revenue Commissioners to schemes of arrangement under which they can stand to do better than in a liquidation is hard to fathom. The courts have ruled that in schemes of arrangement the Revenue, because of its potential to be preferential, is entitled to be treated as a separate class to unsecured creditors. The distinction may satisfy the intellectual conceit of the legal profession. Its practical effect, however, is to make schemes of arrangement next to impossible to construct. As I have stated, the intentions expressed in the Bill and in particular Part IX, which deals with companies under court protection, while very laudable do not go far enough. For any country person I can see that there will be apparent difficulties and additional expense in the frequency with which the examiner has to seek court approval for any activity under the legislation as presently framed. For example, if the company to which the examiner was appointed was situated in my own area, namely, Macroom, it would still be necessary for the examiner to apply to the High Court in Dublin to get the approval of the court. These court appearances will be both costly and time consuming. I suggest that the examiner be given more autonomy.

Against the underlying factor of all this good legislation there is one particular matter that does not appear to have been dealt with, namely, who will pay the examiner? What priority will the examiner have for his fees? Clearly, there will be some need for consultation with creditors — for example, if companies wish to keep trading.

Part X of the Bill deals with the area of company accounts and audits. The Minister stated that many companies got into difficulties because of bad accounting procedures and bad management. Companies can keep on going for years believing that they are either making money or at least are in a break even situation.

Section 176 places a new duty on company auditors if it appears to them that the company is not keeping proper books of accounts. In such a situation the auditor will be required to notify the company immediately and to request it to rectify the situation. The directors must then take appropriate action or notify the auditor that they do not agree with his assessment of the situation. A meeting of the company must be convened to consider the matter. The Companies Registration Office must be notified of any action taken under this section. This is a welcome section in the Bill and I am sure nobody will disagree with it. It certainly puts the onus on the auditors to carry out their duties correctly and, in turn, puts the onus on the company to ensure that they have a proper control and management within the company by having their bookkeeping system and accounts in order. I have no doubt this section will cause some degree of hardship in some small businesses but, in the long term, they will gain enormously by having tighter and more strict control over their affairs. The duties of the auditors have been clarified in this part of the Bill and this is to be welcomed. I agree with the Minister that it is important to strike a right balance in this section so that auditors do not go overboard in interpretations and put restrictions on companies which are not required.

This is a good Bill and I thank the Minister for initiating it in the Seanad. Like many other important Bills brought before this House, I have no doubt it will be improved upon before it leaves the Seanad.

Mr. Fitzgerald

At the outset I congratulate the Minister for Industry and Commerce for bringing this very important Bill before the House. I welcome the Minister of State, Deputy Noel Treacy, to this Chamber. I hope that much legislation will pass through his hands in the future.

The amendments proposed in this Bill are long overdue. The updating of the Bill, had it been done earlier, could have saved many people, the State and companies, large amounts of money by not allowing fly-by-night companies to be formed with cowboy businessmen running them.

I know very little about company law. On one occasion I was on the receiving end when a company went bust. For the calendar year 1986 the source of this information was the Companies Registration Office — the number of court windings-up of companies was 49. These were companies who applied voluntarily to the courts for winding-up. Five hundred and sixty companies went into liquidation and 120 companies went into receivership. Of those 120 companies, most eventually went into liquidation. That gives a total of 729 companies in one year. To put it bluntly, they left a fair old mess behind them. I do not have a figure for the amount of money but I am sure it must have run into millions or billions of pounds owed to creditors, shareholders and the State. The people who got fat were the liquidators, receivers, accountants and financial consultants.

Financial consultants are employed to safeguard and remove assets for the benefit of directors before a company goes into liquidation. I cannot understand how an accountant can submit accounts on behalf of a company showing that it is in a good financial state and a month or two later that company goes into liquidation. A company does not go into liquidation overnight. It must surely be slipping, or on the way down, over a long period, long enough for the accountant to detect trouble and take remedial action, or report to the proper authorities that it is working on borrowed time.

In the calendar year 1986 — this information came from the Department of Labour — there were 22,790 redundancies. The bulk of these redundancies were the result of 729 companies going into liquidation, this had a disastrous effect on an already ailing economy through unemployment benefits, social welfare and a huge loss to the State by way of increased dependency. The failure by the State to provide new jobs led to emigration, mainly to the United States, most of which was illegal. The problem was never ending.

In my own county I know of at least three companies that had to go into liquidation because of arrears of taxes and VAT. The arrears of VAT in one case were in excess of £200,000 going back over three years. The blame rests with the Revenue Commissioners for allowing someone to go on for three years accumulating a VAT bill of over £200,000 without putting a stop to it on the first year. In that case an offer of a settlement of £100,000 was made to the Revenue Commissioners by the owners. The Revenue Commissioners would not accept £100,000 as a complete and absolute settlement. In the end the company went into liquidation with a loss of 35 jobs. The Revenue Commissioners got most of the money owed to them and a small town depending on this business was decimated. There were no winners in that case.

Where a reasonable offer is made to the Revenue Commissioners they should be empowered to accept it, thereby saving many jobs and many businesses. Many parts in this Bill are not severe enough. The penalties should be doubled for fraudulent trading. I am not saying every company in this country is trading fraudently or that those companies which have gone into liquidation or receivership over a number of years were all trading fraudulently. I am referring to those that are and that will, in the future, be accused of fraudulent trading. The penalty should be very severe on those companies.

In many cases the creditors are working hard to survive after getting nothing, or possibly lOp in the pound, and the cowboy directors are driving around in big cars living it up, or retiring to holiday villas somewhere in Spain or wherever these people go. They disappear in any case.

An Cathaoirleach

Not to Dingle?

Mr. Fitzgerald

No. They could be found too easily in Dingle.

An Cathaoirleach

I could not resist that one.

Mr. Fitzgerald

That would be a good place to go to. I could recommend it to Members. In many cases going into liquidation sees these cowboys right for the rest of their lives. I can only brand those people as leeches in our society. The actual formation of a company is much too easy. In many cases companies shirk their financial responsibilities and use their newly formed company for their own benefit. You see in newspapers from time to time that a company can be formed for £2. This is crazy. The actual documents cost £2 and legal fees cost more. There should be a big fee. It is far too easy to form a company for £2. I do not know what price I would put on it, but I would make it so expensive that people would think twice about losing what it cost to form a company.

I had an experience with a company in 1986 which I could ill-afford. I paid a deposit of £1,500 for a boat engine to be delivered in seven weeks. The engine had to be ordered from the manufacturers by the company. This was not done. At the end of 13 weeks when I rang the company I was informed that they had gone into liquidation. The new company had taken over and they would look after my order provided I sent on another deposit. This new company were in the same building, had the same telephone number and the people from the other company worked there. I knew them personally. The man who owned the company had flown and nobody has seen him since.

At a creditors meeting about a week after that — I was represented at the meeting by a solicitor — I found out that the company owed over £250,000 and their assets were valued at £46,000. The premises were leased, three cars were leased and a van and office equipment were leased. The only assets they had were a few bits and pieces of old engines thrown around the place. If I did anything to get my £1,500 back, my solicitor told me, it would cost me a substantial amount of money and at the end of the day the maximum I could get out of the company was 50p in the £.

The company are now trading under a different name and they got away free. I cannot understand how this could happen in this day and age. To some people £1,500 may not be a lot of money. You make a deal across the desk with a man. He looks you straight in the face as if he is telling the truth. He takes your money. He is robbing you. I do not care if it is £20, £20,000 or £20 million — once these people carry on like that, regardless of the size of the company I would deal severely with them.

I will not go into every detail of the Bill. I would like to refer to the part of the Bill dealing with the barring of directors of former liquidated companies when their dealings are found to be fraudulent. I would penalise them severely. I would never again allow them to become directors or managing directors of any company. I would bar them for life. In some cases where a company goes into liquidation the owner's wife, son or other relative takes over the newly formed company. Where the husband is the owner of a company found to be dealing fraudulently and the company goes into liquidation, I would not allow the wife, son or a near relative to become a director of a company. I would penalise them as well.

I would like to refer to the part of the Bill which allows three months to apply to the court and gives a breathing space of three months. Some Senators said the time is not long enough and others think it is too long. Three months is sufficient. I welcome the Bill and I hope some of the recommendations I mentioned will be included because companies are not my friends.

Mr. Ferris

I welcome the Minister of State, Deputy Treacy, to the Chamber. His presence deprives me of the opportunity to congratulate my colleague from my constituency who was here earlier. While I might often have disagreed with him politically in other fora in which we sit, today would have been my first opportunity to congratulate him in the House. I ask the Minister of State to give him my best wishes. It sounds better when it is said in this House. He will not believe it otherwise.

I welcome the fact that the Minister had the political initiative to bring forward the Bill. The fact that it was initiated in the Seanad means it is getting the thorough examination all legislation initiated in this House gets. An indication of the complexities of the Bill is that it stretches over 144 pages, 189 sections with 11 different Parts. The Minister said that it is one of the most radical Bills to overhaul the Companies Act introduced in the past 24 years.

It is no secret that the Labour Party have been involved in trying to ensure that legislation along these lines was brought before the Oireachtas for consideration and approval. It was initiated by John Horgan in the seventies, was pursued vigorously at all levels and in Cabinet was pressed by Deputy Cluskey. The heads of the Bill were agreed and it was continued actively up to the printing of the Bill at the end of the previous Government's term of office. There was a consensus across the political spectrum that something needed to be done in the area of company law. It was needed because of public disquiet, expressed to us as public representatives, about the various company problems.

I welcome the Minister's courage in bringing this Bill forward. I welcome the initiative he showed when he launched the Bill, when he publicly stated that he was open to suggestions from the various Members of the House and, indeed, the public at large about amendments to what is, in fact, a very complex Bill. That kind of openness in Government is to be welcomed. It allowed Senators today and over the past three weeks to speak from their experience in business. We all have the same interest — to see the economy developing and creating employment for people which will recompense them for their labour and give a return to investors in companies. We want to ensure that these people conform to the normal, acceptable standards we all expect from one another and, in particular, that we expect from people in business.

The tragedies outlined by Senator Fitzgerald heighten our awareness of what has been happening in the commercial world and the way people who trust one another when doing business exchange money in the belief that people are honest. Of course, nothing could be further from the truth in many areas in life today in Ireland and throughout the western world. There is an old saying that "a bird in the hand is worth two in the bush". It makes us aware that we should never trust anybody and that money should change hands only when the product has been delivered. In everyday life there is an element of trust and it is unfortunate that people tyring to do business find that the person they are doing it with cannot be trusted.

The Minister referred to fly-by-nights. Many of the public have become aware of the anomaly whereby people can set up a business, go into liquidation refusing to meet their commitments and restart with the same directors the same staff, the same premises, the same telephone number and a change of name which removes from them the responsibility to repay debts to the community, to suppliers and to the State.

Let us not forget that in the winding-up of many companies, voluntarily or otherwise, the State is quite a major loser. The State means everybody. It means in particular the PAYE sector who fund the State to a very large extent for most of its enterprises and pay their tax. Government assistance is available to the private sector industry by way of industrial grants, which most of us welcome as an incentive to stimulate employment. That also places a certain responsibility on the companies to deal honestly with people, to deal with their employees in an honest fashion and, in turn, to honour their statutory obligations to the State.

We are aware of the anomalies that arise when companies go into liquidation with money due to the State under the various headings of PAYE, PRSI, VAT and so on. It is appropriate that the State should have first charge on the assets of a company in that situation. As legislators we must be responsible for public money and if money is due to the public purse under these headings which, generally speaking, has been collected from the workers in the company, the least we should expect is that they would pay it. Because of that problem legislation became necessary in the area of employees' rights and the first charge on companies which went into liquidation.

When my colleague. Deputy Quinn, was Minister for Labour he brought forward legislation insisting that in the area of employer liabilities, particularly in the case of company loses and the collapse of companies, the State should be responsible for all the statutory entitlements of employees, whether it be holiday pay, pay in lieu of notice, pay due to them or other such areas. The tragedy is that we did not foresee the anomalies that arose in industries, particularly with pension funds.

Senator McKenna knows that we had companies in Nenagh which did not make pension funds available to employees, as was their right as they had contributed to them. That happened in many other companies as well. There is the possibility that in future the pension rights of employees will be included under the employer-employee insolvency Bill which was introduced to protect workers.

There are times when we make representations as public representatives to the Revenue Commissioners on behalf of companies which have run into difficulties through no fault of their own. I have not been slow to consult with the Revenue Commissioners in cases where genuine concern was expressed by the directors of a company at their inability to meet sudden debts they had incurred. I use the word "sudden" advisedly because I know of a certain set of directors who had two companies, one of which was up to date with all their commitments and the other which was up to date with all their commitments with the exception of VAT and discovered that through an accountancy error VAT contributions were left unpaid because it was presumed that the VAT from the other company had covered it.

The Revenue Commissioners proved that there was a figure outstanding and the company accepted that figure but pleaded inability to pay it all immediately. They offered a settlement to the Revenue Commissioners immediately and a commitment to continue payments over an agreed period to allow the company to stay in business and continue employing 29 people. The total amount of money offered up front in that instance was £100,000. The Revenue Commissioners refused to accept that offer and the company were put into liquidation and realised £60,000. The Revenue Commissioners lost £50,000; 29 men lost their jobs; the Government had to pick up the tab for all the redundancy and other entitlements of the employees and reason seemed to be the furthest from the minds of anybody. You can have sympathy for both sides.

Although the Bill is fairly detailed and will lead to a very interesting Committee Stage debate I believe it has the proper balance between what we accept as responsibilities in the commercial world and the responsibilities all of us have to the public purse. The State should not be immune from trying to facilitate people who are making a genuine offer. I have no time for people who refuse to pay their commitments, who have deliberately avoided them over a period in the knowledge that, if they could get away with it as long as possible, it would be the last bill they would pay.

Some interesting statistics were produced in the September 1986 edition of Business and Finance which outlined in detail the number of receiverships, liquidations and, most important of all, the total amount of money lost to the State by companies who refused to take on board their commitments. VAT, PRSI and PAYE are, to a large degree, collected from somebody else by the company. They collect it from the clients, from the customers in the VAT area and from the employees in the PAYE area. A large proportion of PRSI is also collected from employees.

There is no excuse for some companies who use Revenue Commission money as a cashflow basis for themselves. When that happens there is a disadvantage for the honest company who are meeting all their requirements and commitments and who find it impossible to compete with companies who are deliberately putting others out of business because they are undercutting in the knowledge that they are not paying their full commitment to the State.

Senator Fitzgerald mentioned some of the figures that were available to him in 1986. It is interesting that in a pattern of collapses itemised by the Irish Trade Protection Association from 1979 onwards the receiverships went from 15 in 1979 to 59 in 1980, 33 in 1981, 98 in 1982, 207 in 1983, 111 in 1984, 114 in 1985 and for the six months of 1986, 68, which is in line with what Senator Fitzgerald was talking about. The liquidations in the same periods stretched from 121 in 1979 to 213 in 1980, 434 in 1981, 626 in 1982, 502 in 1984, 460 in 1985 and in the six months of 1986 to 298.

These are startling figures. They are an indication also of the difficulties businesses have faced over the period from 1979 onwards. For those of us who are concerned about developing the economy and having a vibrant industrial section and manufacturing service industry, that kind of collapse of companies over that period is frightening. Apart from all the losses to suppliers, to employees, to the districts generally where these companies have collapsed, the actual loss to the State over those periods as follows was itemised. The total amount due to Revenue was £1.307 million. The amount lost to Revenue was £1.24 million. Those are the kinds of amounts lost by the State as a result of cowboy companies, inefficient companies, or companies who have just run into difficulties. The State should be the priority creditor, because simply to take a company director to court to prove that he was in breach of company law would cost the State about £50,000 or £60,000. Senator Fitzgerald is right. It is difficult to take these people to court because this is the kind of money required to try to make them meet their commitments. If we follow through the list of collapses in that particular document and if we follow through the amount of money due to the State, it is obvious that in any particular year of reckoning the amount of money due to the State by companies collapsing, particularly in the areas of PAYE, PRSI and VAT, runs into hundreds of millions of pounds.

That is an indication that State intervention at times is necessary. One would like to see total freedom in the private sector for people who want to operate in that sector; but, unfortunately, in the private sector you get quite a lot of people who ignore their commitments to the State. That is what has the economy as it is. That is why there is a shortage of finance available to the Government. That is why we have a collapse of our health services of all the other areas of social involvement by the Government. It is because of the refusal of the private sector to pay their debts to the State and this ensures that funds are available to enable us to care for the old, the sick, the unemployed and the disabled.

I do not intend to deal in detail with the various sections. There were some excellent contributions today, particularly from some Senators who talked about possible amendments and their inability to read some of the sections. We often criticise parliamentary draftsmen. In this instance I must compliment the draftsman, because to put the Bill into readable English was an achievement. Obviously, it is a consolidation of Companies Bills ranging back over more than 25 years and bringing all that legislation together in a new Companies Bill. It will now be easier to refer back to Companies Bills because they will all be consolidated in this Bill. I take it that the reason why it is so complicated is because it brings up to date some of the sections of previous Acts. I will not deal with the concept of insider trading because the expert on that. Senator Ross has arrived in the House and I would welcome his comments on this.

Mr. Ross

Might I clarify something? Is it in order for people to refer to one's absence?

Mr. Ferris

I did not.

Mr. Ross

It is the same thing.

Mr. Ferris

In my opinion it is not, because as far as I am concerned the Senator could have been here for the past hour but he is now admitting he has just arrived. I was welcoming the Senator's presence because he is an expert in the area of the Stock Exchange and I was being complimentary to the Senator. The only stockbroker rural Senators know of is Senator Ross.

An Cathaoirleach

I think, Senator Ross, that Senator Ferris was being very complimentary and he did welcome you. Senator Ferris to continue.

Mr. Ferris

I also conferred the honour on him of being an expert in the field of the Stock Exchange and as a broker. He is the only one who knows anything about this insider trading. I do not know anything about it. I hear Tony O'Reilly and other people, whom I should not mention in this House because they are not here to defend themselves, expressing concern about insider trading. If it is something that we should address legislatively speaking — and this Bill does so — then we must welcome it. If people can make quick money from insider information it means that knowledge that should normally be available publicly is confined to a certain group of people. If money can be made as a result of insider knowledge then other people can be damaged. Therefore, as legislators we will have to look at it because the Constitution indicate that we should treat everybody fairly. It is to be hoped that this Bill will tidy up that area — the ability of some people to make themselves very rich through the use of secret information. The problem in Ireland, which is a mixed economy, as between the public and the private sector, is that you can get people making a lot by moving money around but creating very little employment. I always admire the entrepreneur who starts a business, employs people and takes a risk. I would not like to see any legislation penalising somebody for taking a risk and doing the best he can. It is not a crime for a company to go bankrupt, but we would like to ensure that they would not do it deliberately and fraudently. This Bill addresses itself to that problem. I welcome that but let us not be seen to be penalising people who make a genuine effort to create employment and to create wealth. There is nothing wrong with that, provided it is all above board.

I would like to refer to one final point, which was touched on by Senator Robinson, that is, subscriptions to political parties, a most worthy cause. I am all in favour of it, but I would be very much in favour of the amount of money made available to political parties being publicly disclosed, because it is allowable for tax and it can be written off as an expenditure for tax purposes. Anything that can be written off as an expenditure for tax purposes should be disclosed publicly because it is in the taxpayers' interest.

I would welcome public disclosure of political contributions. In that way everybody will know where they stand with companies. Companies should contribute to all political parties. It is part of democracy. It is a welcome thing to see a good, viable political movement in any country. There is nothing wrong with companies contributing to that system by making payments available to people to contest elections. But let us be open and above board about it.

An Cathaoirleach

An excellent suggestion. Would the Senator move the Adjournment?

Mr. Ferris

Yes, I have completed my contribution and I congratulate the Minister on his initiative.

Debate adjourned.

Sitting suspended at 5.30 p.m. and resumed at 6.30 p.m.

Seanad Éireann debate - Wednesday, 17 Jun 1987

Companies (No. 2) Bill, 1987: Second Stage (Resumed).

Seanad Éireann debate -
Wednesday, 17 Jun 1987