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

NEW SECTIONS.

Amendment No. 146.

Can we take amendments Nos. 146 and 147 together?

I move amendment No. 146:

In page 91, before section 104, to insert a new section as follows:

"Section 285 (2) of the Companies Act, 1963 shall be amended by the addition of the following:

‘The unpaid purchase price or any outstanding balance thereof for any goods supplied to the company under a contract for sale and actually delivered to the company, its servants or agents during the three months next before the relevant date'.".

Basically we are trying to amend section 285 (2) of the Companies Act, 1963, by the addition of the following:

The unpaid purchase price or any outstanding balance thereof for any goods supplied to the company under a contract for sale and actually delivered to the company, its servants or agents during the three months next before the relevant date.

We put down this amendment to the Principal Act because, as we outlined yesterday, of the difficulties experienced by unsecured creditors in getting some payment for the goods they supplied to a company who have gone into liquidation. The liquidation of the H. Williams supermarket chain and Clover Meats Ltd. are two examples whereby the suppliers of goods were erroneously exposed under existing company law. Even though the Revenue Commissioners enjoy preferential status and the financial institutions can utilise their secured position to extract all of the available resources in the liquidated company, this is done to the detriment of the unsecured creditors. Often there is no money in the pool at the end of the day in order to give any recognition to the unsecured creditors, many of whom will end up going to the wall as a result.

The balance in liquidations has tilted against the smaller creditor and the producer of goods. I seek to redress the matter through the acceptance of amendments Nos. 146 and 147. Amendment No. 147 seeks to establish clear retention of title in the event of the supply of goods to a company. While there might be difficulties in so far as the goods supplied to a company are mixed in with other unsecured creditors' goods, nevertheless it is important to establish in law that the goods were supplied to the company involved, that there will be clear recognition of that in the books of the company in liquidation and that there will be payment in lieu of the goods supplied to the unsecured creditor.

Over the past 15 years retention of title clauses has become commonplace in cases where goods are supplied on credit. These have given rise to considerable litigation. Section 17 of the Sale of Goods Act, 1893, makes it clear that the title to goods which are sold passes on the delivery of goods unless the contract for the sale of the goods otherwise provides. Therefore, I believe it is legitimate for the parties to the sale to agree that the property in the goods sold will remain with the vendor until payment has been made. I am sure the Department are familiar with the efforts made in the Carbury case and many other cases to establish payment, through various High Court judges, to unsecured creditors. Many of these cases would have failed if there had not been clear registration of title, or clear evidence that the goods were supplied by the unsecured creditor.

The day has gone when we can overlook the significance of this matter and the inequity in the legislation which can cause many problems for the supplier of goods. The balance must come back in favour of the producer. The central approach should be that the producer of the goods has some recognition that he supplied the goods and payment, is some form, should be made to the supplier out of the liquidation of the company. If the goods have been sold, whether in their original state or mixed in with other goods, and the purchaser has paid the money into an overdrawn account in the bank, obviously there will be no fund because the purchaser will already have parted with the money and the bank will have obtained it bona fide in payment of moneys owing to them. However, there might have been very severe difficulties here. It is possible to put the bank on notice that any moneys paid into an overdrawn account should be paid to the vendor of the goods but, in reality, the bank will not allow a customer to trade in that manner. Banks do not work that way in relation to companies. This adds to the insecurity of a smaller supplier of goods or an unsecured creditor.

Another difficulty might arise because many dairy co-ops sell their dairy products into intervention. The EC have different systems of payment from national Governments or co-operatives in these cases. In the Carbury pig producers case, which I mentioned earlier, the purchasing company went into liquidation while stocks of pigs were still in varying degrees of processing. Even though the pigs were still in the factory no suppliers were paid in respect of the pigs supplied during that period. The same happened in relation to Clover Meats. Many farmers had supplied the goods in good faith to the meat processing company but the financial institution who were honouring their financial obligations to that company decided that the situation had become untenable and appointed a receiver, which eventually led to the liquidation of the company. Farmers came together and formed a group who lobbied the financial institution to recognise that they had supplied goods to the company. They had to lobby long and hard before they eventually got something of a nominal nature.

I do not think that type of thing should be tolerated. It is disgraceful that unsecured creditors should have to beg and crawl to any company, whether in receivership or liquidation, to get payment for the goods they had supplied. The fact is that they had supplied the goods. The cattle and pigs are not on the property of the farmer or the property of the supplier of the goods; they are on the property of the purchaser. I hope the Minister will take this opportunity to see the good sense of putting into law a clear recognition of the difficulties of unsecured creditors so that there will not be a repetition of what has happened in many cases.

The Minister is familar with the recent debacle in relation to H. Williams. I know many small suppliers of goods who went out of business following the collapse of that supermarket chain. They got their fingers burned to such an extent that they could not afford to continue in business. I know a third hand supplier of bacon products to H. Williams supermarket chain who had to cease trading because he was owed something in the region of £100,000 by an intermediary between him and the H. Williams group. We are not talking only about the direct suppliers who can be affected by a company collapse; we are talking also about small business people who have invested considerable financial resources in their businesses. They see their future and companies being whittled away because in company law recognition is not given to the fact that they have supplied goods. It is of significant importance that the Minister should give favourable consideration to inserting something of this nature into the Bill.

In many ways it is unfortunate that the two amendments are being taken together because, even though they are related, they are quite different.

I was taking them separately. Senator Hogan indicated that he would like them to be taken together.

On a point of clarification, I wanted to make the points together. Perhaps the Senator would like to discuss them separately.

I do not mind discussing them together. I just want to make the point that here are two quite separate ways of dealing with the same problem. I compliment the Senator on closing down all the angles on it very clearly.

What we are discussing is a situation where a company goes out of business, goes bust, or is being liquidated. A number of people supplied goods to that firm over a period of time. On the day the company is handed over to the liquidator, there are goodsin situ, or in the business, factory, or wherever it is, which were supplied that day, or the day before, by an unsuspecting small supplier. The two amendments are attempting to protect that small supplier — if the company is liquidated the small supplier is protected. The two amendments go about doing this in two ways. I support one and I oppose the other.

In amendment No. 146, the proposers are looking back at the Companies Act and, as it were, they are making this preferential. They are adding it to section 2 to make them the preferential people in dealing with creditors. I do not agree with that. That is not the way to do it. In discussing something similar, I said I thought it would be appropriate to bring in some form of legislation that would protect the small supplier. The idea put forward in amendment No. 147 certainly grapples with that fact. They are saying that, when the liquidator comes in, the company is liquidated, but this stuff which has been supplied, but which has not been paid for by the company, does not belong to the company. They are saying it is not the property of the company and is not appropriate to be liquidated. I go along with the thinking behind that, although I see some problems with the wording of it. I certainly think the idea is right. What is being said in amendment No. 147 is that this material, which is on the property of the company, or on the premises, does not in fact belong to the company. If that legal distinction could be built into the legislation in some way it would allow a very clear understanding of the fact that it does not belong to the company and that therefore, it will not be liquidated.

In effect, the two points I am making are that I do not agree with the idea of making it preferential but I do agree with the idea of some legal protection being built into it to protect the small supplier — in a very positive way this time — by saying that this material has been delivered to the company but in a sense does not belong to the company because they have not paid for it. Because they have not paid for it, it should not be liquidated on behalf of the company but it should remain the property of the supplier. It should be dealt with on the same lines as lost property. It is like a lost property syndrome; it is there on the company's premises and it does not belong to the company. I would maintain that what we might do here is to bring into it a protection that would say that this material still belongs to the supplier until such time as the supplier has been paid for it.

It raises a very neat question: when in fact does property change hands? I say to you that I want to sell you this pen, a Chathaoirligh, and I hand you the pen and we agree a price, say 50p. When I hand the property over to you and you say to me, "Thanks very much; I will pay you next week", is the property yours or mine? I have handed it over to you. What I would be saying, in the unlikely event that you were to be wound up and that your assets were to be disposed of in any way, is that it is still my pen and I would like to have it back. That example might be very useful. I think the Minister should look at that and perhaps take it on board.

I do not like the part about winding me up.

You will appreciate, a Chathaoirligh that it was not meant in any personal sense.

I do not think it would be possible to wind you up. With respect, I think you are holding your own there.

On amendment No. 147, perhaps the Minister would give us the legal definition of the situation where goods have been supplied on contract, meaning if somebody orders goods and they are delivered. Perhaps he could advise us then about the legality of the ownership, even if they are not paid for. This happens, of course, with hire purchase companies which sell goods on hire purchase and if one defaults on any or one of the payments the hire purchase company can actually retrieve the goods. I am almost certain that they have to go through a court procedure. That is the ideal situation. But if you are now in a winding-up or a liquidation situation can the normal course of law come into effect when in fact the owner of these goods — because they have not been paid for although they are on somebody else's premises — is the supplier? Can he still have recourse in law for the redemption of them? Or, do those goods, because of the liquidation, come into the overall reckoning by the liquidator?

All of us would agree with the sentiments of the amendment but I am not sure about how we can achieve in legislation what is desirable, particularly in regard to the smaller supplier of goods. This is one way of doing it but perhaps there is another way around this problem and we are looking to the Minister for guidance. I think Senator Hogan has not been unreasonable. He has requested the Minister to look at what we are trying to do, what we feel should be done or what the parliamentary draftsman feels could be done, possibly with better wording or otherwise, or in a different section in this or other legislation.

With regard to the supply of goods generally, there is a simple document that can be drawn up legally, a contract between the supplier and the people he is supplying goods to whereby the supplier can retain title to the goods. That is clear and straightforward: until such time as the goods are paid for, he still retains title to those goods. The problem is this. Let us take the example, say, of the construction industry where there is a Government contract. When suppliers are asked to tender for goods part of the contract is that they have to sign a vesting certificate stating that they relinquish all claims to those goods, having supplied them. The situation is such that if you take a manufacturer supplying to a subcontractor and the subcontractor is subsequently paid for the goods and if the subcontractor does not pay the manufacturer, the goods have been sold on to a third party and this title to ownership is lost, as far as I can see.

The point I want to make is this. I believe that Government Departments have a responsibility when they appoint a design team, architects, engineers, quantity surveyors that those quantity surveyors will be held responsible to nominate legitimate bona fide sub-contractors. If they appoint sub-contractors who are not solvent or have been trading fraudulently for a period of time, then the Department or somebody should be held responsible down the line for appointing a company that was not a legitimate company. This is a great problem in the construction industry for suppliers and manufacturers. They are supplying to sub-contractors who are really using the next job to pay for the last one. Prices have become so competitive that they just cannot be making money.

It is a known fact that many companies are tendering for Government projects at below cost. I believe that the design team appointed by the Department have a responsibility to ensure that in any contract they accept, there is a fair price and that contractors and sub-contractors are not going in at below cost and that they are not using the next contract down the line to pay for the last one. I am sure that if there was an investigation carried out with companies who went into liquidation in the construction industry it could be easily established that they were on the road to insolvency, if not insolvent 12 months previously.

The point I would like to make is that some protection should be given to manufacturers who are supplying to sub-contractors, particularly in Government contracts, so that they would retain, if not title to the goods, at least a claim to payment to payment for the goods supplied. They are nominated suppliers and they are supplying to sub-contractors who have been nominated by a design team which has been appointed by the Department. I would be glad if the Minister could give some consideration to this. I am not sure whether this is the relevant part of the Bill in which to do it but it is a very contentious area. I would ask the Minister to look at it and perhaps advise if something could be done.

I want to, at a somewhat late stage, rise to formally second the amendment put forward by my colleague, Senator Hogan.

An amendment does not require to be seconded.

I had to wait so long as a signatory to the——

That is your tough luck, Senator Connor, because I call the Senators in their order.

Without getting into an argument, a Chathaoirligh, while Senator Mulroy's point is very good, we brought forward this amendment because of the proliferation of cases throughout the whole country where many unfortunate suppliers and unfortunate individuals very often have found themselves supplying goods or services or moneys to companies that at the time of supply are insolvent or in the process of collapse or liquidation. I remember one case in Ballaghaderreen, County Roscommon, my own county, the famous Towey case where at the time of the collapse of that company there was approximately £1 million owing to hundreds of small farmers — I underline the word "small" in this particular instance — throughout western counties and indeed other counties outside of the west of Ireland. None of these unfortunate individuals had any recourse or any redress while people like the Revenue Commissioners and the secure creditors were able to get their full pound of flesh, to quote Shakespeare.

The resentment that kind of thing caused and the sense of injustice among people whose incomes had been ruined for a whole year, or possibly two years, because they and supplied £2,000, £5,000, £6,000 or £7,000 worth of animals or livestock to a particular firm was enormous. In some instances perhaps the value was less than that, but there are many extreme cases of smallholders doing that and doing it at a time of the year when these smallholders disposed of the majority of their animals, in the months of October and November. The resentment was felt by those people when they could look around and see secured creditors getting their full pound of flesh.

No attempt at all was being made — because the law did not make provision for it: this is where we would like the law now to make provision for it — to look at the make-up of the demands made by the secured creditors. For instance, the Revenue Commissioners, if they so wish — and no doubt they do these things; I am not making an anti-Revenue Commissioners speech here — can get their full interest etc. on the moneys due to them. Certainly, small individuals could find their incomes utterly ruined by being unsecured creditors. They deeply resented it and nobody can blame them in instances like this when they find that the secured creditors have so many privileges under the law. What we are doing here is proposing to give a little privilege or, rather, a little protection to people who find themselves in that situation, who have supplied goods and the goods have not been paid for.

I know of another instance where people supplied money to a management company and that management company in turn was to buy certain items for these people and put them to work. That management company went into liquidation and there were hundreds of thousands of pounds in a bank account of this particular management company that were not spent on buying the items which they traded in. Yet, all of these moneys that belonged to these unfortunate people were not deemed to be held in trust for them, even though the goods and services that were supposed to be purchased for them had not been negotiated. These moneys went into the general assets of the company. These poor unfortunate individuals were unsecured creditors and they literally lost all their money.

One could go on. There is another recent unfortunate case in the west of Ireland, also in the livestock-meat area. Again, we find small farmers are the people who are at the rough end of the stick. May I repeat that our purpose in introducing this amendment today is to try to give some level of legal protection to those defenceless individuals who usually are people with low incomes, bearing in mind the resentment that can be felt towards the secured creditors like the Revenue Commissioners, the banks, etc. Senator Ferris — and I do not wish to get at cross-purposes with him — talks about the difficulty of getting a legal way of bringing this in. This is a legislative House, as is the other House, and of course it is here we make the law and here we can enact a statute or part of a statute to give legal protection to these individuals we are talking about.

I thank Senators for their comments on these amendments. What amendment No. 146 is proposing is basically that certain ordinary trade creditors should be elevated to the status of preferential creditors. That is what I understand Senators to be saying. The trade creditors which the amendment proposes to elevate in this way are suppliers of goods. The wording in the amendment deals with "suppliers of goods" to a company. I note in passing that the amendment does not propose that suppliers of services should be treated in the same way and perhaps that is just a technical oversight. Under the amendment, therefore, such suppliers would remain ordinary trade creditors. I do not imagine the Senators mean to draw a distinction between goods and services in this context although that, in fact, is what the drafting of the amendment does. For example, the services of the contractor who cleaned a factory, or of a pension consultant, or people like that would not, in fact, be covered by this amendment.

The effect of the proposed amendment would be to change the existing order of priority for payment in the winding up of a company. Under the proposed provisions, suppliers of goods would rank ahead, not only of suppliers of services and other secured creditors, but also of holders of floating charges. The suppliers of goods would thus rank equally with all preferential creditors, in other words, the Revenue Commissioners, rating authorities and the employees. There seems to be no reason whatever why the supplier of goods should rank actually ahead of the holder of a floating charge in the winding up of a company. There is nothing to prevent — and this is an important point — the supplier of goods looking for a charge from the company in relation to the credit being advanced by him. It is reasonable, therefore, that a prudent creditor who has sought to safeguard his position by creating a floating charge over the assets of the company should, as a result of this amendment, for example, find himself actually further down the line in the order of priority than a supplier of goods who had taken no precaution in relation to securing his credit.

Similarly, a supplier of goods is free to agree with his purchaser to the inclusion of a retention of title clause in the contract for sale. The effect of such a clause would be that the supplier would retain title to the goods until the purchase price was paid. If the purchaser company goes into liquidation or receivership before the purchase price is paid, then the supplier would be entitled either to have the goods returned, if they are still in the possession of the purchaser, or to be refunded the purchase price in accordance with the terms of the contract. I think those points are important in regard to retention of title. Also, in regard to amendment No. 147, what is being suggested is that a reservation of title clause should be implied in every contract for the sale of goods.

Section 17 of the Sale of Goods Act, 1893, which is referred to in the amendment, provides that title to goods shall transfer to the buyer when the parties to the goods intend it to be transferred. I will quote that section 17. It says:

Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

That is a very well-respected piece of legislation. This provision reflects both legislative and common law trends in the area of contract law for a very long time, in other words, respect for the freedom of parties to decide the terms of their own contracts. The Legislature, in particular, has traditionally intervened only where the balance between the contracting parties is uneven and possibly unfair. This is particularly evident in the area of consumer protection law where the consumer may very often be in a weaker position than the supplier of goods or services, particularly where standard form contracts are in operation.

The amendment suggests that the Legislature should intervene by inserting a provision in company legislation to the effect that, where goods are sold to a company, title of the goods should never pass until the seller of the goods has been paid for them. The intention of the proposed provision seems to be to protect ordinary trade creditors in the event of the insolvency of the company. There seems to be no very good reason why such a clause should be deemed, by virtue of statute, to be implied in every single contract for the sale of goods to a company. Indeed, I think the amendment is proposing an unwarranted and unnecessary incursion in the area of contract law.

The reason for the proposed amendment is difficult to understand. The law has recognised for some 200 years the right of a seller to stipulate that the property in goods sold passes only on payment in full. This principle was, as I have mentioned, given statutory approval by section 17 of the 1893 Sale of Goods Act which I have quoted. Furthermore, reservation of title clauses were given specific judicial approval in a number of cases over the past 15 years. The most celebrated case is that which is known as the Romalpa case, a United Kingdom case in 1976. This case showed clearly that it is possible for a supplier to guard against the insolvency of his purchaser by creating an enforceable claim to recapture goods supplied and to be paid the proceeds of any sub-sale of them. Since this case, reservation of title clauses have commonly become known as the Romalpan clauses. Although the Romalpa case is regarded as the most important case on the question of retention of title clauses, the Irish courts, two years prior to Romalpa in 1974, had declared a retention of title clause to be enforceable. This was the case of Interviews Limited.

This makes the amendment a little surprising in that what is being suggested would essentially restate the common law position in relation to reservation of title clauses. Perhaps this is what the proposers have in mind. This may be in some cases of more concern because it could, in fact, introduce a restrictive element in this area of law which of its nature requires considerable flexibility.

There is another reason why the proposed amendment is undesirable. While the Government have no plans to introduce any restrictions on the use of retention of title clauses, we are not convinced that the proliferation of such clauses is a good thing even in itself. The UK Cork Committee on Insolvency suggested that such clauses could strike at the root of the system of credit. When banks lend without security they look to the assets in the balance sheet or, more frequently, in periodical statements of assets by the customers to the banker.

If a large portion of those assets such as stocks, work in progress and book debts were all effectively earmarked for one section of creditors — being the suppliers — or there was a risk that this was so, they would not be so ready to advance money in the first place. Equally, when banks lend on the security of floating charges, they look to the cover provided by the assets within their security. If, again, a substantial portion of stocks, work in progress and book debts were the property of supply creditors, or there was a possibility that they were, banks would be even less inclined to lend on that basis.

There is a further difficulty in that those concerned to facilitate the rehabilitation or reconstruction of companies in financial difficulties argued to the Cork committee that receivers would have difficulty in keeping businesses operating if stocks, work in progress and book debts, in whole or in part, belonged to or were claimed by supply creditors and could be seized by them. The receiver would not have the means to keep a business in action while attempts were made to sell it as a going concern or to reorganise it. While I would not want to enshrine something in the statute that would create difficulties of this kind for receivers, I would be even more worried about the effect it would have on the regime for company rescues, which we are coming to further on in this Bill, in Part IX, in which we are proposing some quite imaginative rescue schemes.

The House will already be aware what that Part of the Bill is trying to do and, indeed, our proposals there have been fairly widely welcomed. The amendment would, quite frankly, play ducks and drakes with the examiner under Part IX of the Bill. The examiner would not — indeed he could not — know where he stood from one day to the next and I do not think that would be a desirable situation to leave our companies in.

In conclusion, freedom of contract should not be curtailed by statute more than is absolutely necessary, given the many different trading circumstances that can arise. The problems in this area, if they exist, would be better resolved by ordinary market forces rather than by a modification of the law, a modification which would have universal application. In these circumstances and because of the general effect it would have on companies in receivership and under the protection of the court, by virtue of the upcoming Part IX of the Bill, I could not accept amendment No. 147 and, indeed, amendment No. 146, but amendment No. 146 in particular and consequentially No. 147.

I want to say to Senators that I think they will agree that all of these matters are very closely tied together, and closely tied together to the matter we discussed yesterday, that is, preferential creditors. I indicated yesterday that I was prepared to give some consideration to the arguments raised by the Senators who favour the removal of preferential status and I want to reiterate it again today. This I will do. I cannot accept the amendments, as they are presently phrased, and I ask those who propose them to consider not proceeding with them until I have had an opportunity to examine the whole question of preferential status for them. I am prepared to give an assurance to Senators again today that I will have the necessary examination carried out in time for a full discussion to take place on this whole subject on Report Stage.

On amendment No. 146, the Minister was gesturing with an olive branch of some description in relation to preferential status and if he is prepared to consider carefully the points we made yesterday and the points we have made today in relation to the position of unsecured creditors and the supply of goods to a firm that goes into liquidation, albeit of an unsecured nature, I will not proceed with amendment No. 146. However, on amendment No. 147, I am not at all happy that the Minister has grasped the reality of the situation in the market-place. He is certainly a tremendous proponent of free market forces and that is the very reason we have so many small proprietors going into liquidation. It is very fine in theory to say that the market will dictate who survives and who does not in the market-place at the moment, but the reality is that there are people, rightly or wrongly, who have a preferential status over others and who find that they are one step ahead in their security of payment in relation to goods supplied, over and above others.

Notwithstanding what the Minister said about section 17 of the Sale of Goods Act, I do not accept that goods sold to a particular firm could not be held in trust for the benefit of the vendor in a liquidation. I can only say that the Minister is supporting planned liquidations — the reality is that there can be and is scope for planned liquidations — on the part of the secured creditors whereby, if there is a sufficient amount of goods supplied to the company, that will help to discharge the liabilities that are outstanding to the secured creditors. Then there is a motive unfortunately built into this legislation that could help to even further secure the preferential status of some of the creditors in a company.

I do not accept that the suppliers of goods supplied in good faith to a company should be victimised in company law to such an extent that there is no recognition of the fact that those goods were supplied in the first place. The retention of title is not clearly established in the supply of goods to firms and, in order to copperfasten this arrangement and to ensure that the bona fide supply of goods by a supplier to a purchaser is enshrined in legislation, in order to ensure that recognition is given to them and that compensation is given to them in the event of a liquidation we put down this amendment. Rather than playing ducks and drakes with the examiner, in the reconstruction of an ailing company, it just gives the examiner a further element and a further player in the game, as it were, to continue it, in so far as the examiner has to take cognisance of the fact and recongise that there are unsecured creditors involved in this liquidation as well as secured creditors.

There are other ways in which the examiner's position will be difficult. Many of the cases of liquidation are brought about primarily by the failure of the company involved to tackle its problems early enough and the examiner will help in that regard. This mainly and chiefly arises out of the failure of the company — and the Revenue Commissioners, perhaps, in many instances — to get involved with the company in trouble with its financial arrangements with the Revenue Commissioners early enough to sort out the difficulties. That role will now be taken on by the examiner in bringing the situation to the attention of the company to help to reconstruct the company if possible, if it is in an ailing position, by treating all the players as equals. Unfortunately, the Minister has failed to recongnise that the unsecured creditors are entitled to equal treatment, the same as preferential creditors and secured creditors in the event of a liquidation, and the retention of title clause is certainly a major part of this process to ensure that payment is made to the supplier of goods in the event of a liquidation. I do not intend to withdraw amendment No. 147 for that reason.

Amendment, by leave, withdrawn.

I move amendment No. 147:

In page 91, before section 104, to insert a new section as follows:

"Notwithstanding the provisions of section 17 of the Sale of Goods Act, 1893 on a sale of goods to a company as between the liquidator or any creditor of such company and the vendor of the goods neither legal or equitable title to the goods shall be deemed to have passed to the company until the entire purchase money for such goods shall have been paid or discharged and if such goods have become intermixed with other goods whether of the same nature or otherwise the company or a liquidator of the company shall hold such mixed goods upon trust to discharge the outstanding balance of the purchase price out of such mixed goods and if the said goods have been sold whether in their original state or mixed with other goods the company or the liquidator shall hold the proceeds of such sale in trust to discharge the outstanding balance of the purchase price.".

To comment on that quickly, amendments Nos, 144, 145 and 146 are all to do with the preferential creditor debate and how they rank in the order of the Revenue and so on. Those three amendments are inextricably bound up and they have all been withdrawn on foot of my assurance to carry out an examination urgently as to what we can do further in that area. We will look at that on Report Stage.

Amendment No. 147 is not one of the amendments at which I am undertaking to look again because the retention of title clause seems to me to be a cut and dried situation. What the Senators are trying to do, in the retention of title clause, is to take the risk out of a commercial transaction. If that was a standard item in every transaction, that everybody who was given goods did not own them and that the person who supplied them had an automatic right to have them returned in the event of liquidation, it would make a nonsense of the whole business of credit and would certainly turn the idea of doing business on its head completely. The simple fact is that any creditor who feels this is necessary — there are different views as to whether it is healthy to take that line of business — all he has to do is enter on the invoice, contract of sale, or whatever arrangement is made to sell the goods, that he is reserving title to the goods. The legal cases I have mentioned here indicate that this has been upheld. Any creditor who wishes to retain title to his goods can simply enter a reservation of title clause in the sale contract and then he reserves title. Why impose it on every single sale for the sake of some kind of neatness? That would be trying to take the risk out of business, which is something beyond the capacity of this House.

I am certainly not trying to take the risk out of business. There are always risks in business and there will continue to be. I hope that we will always continue to have risk takers in order to create employment. It is to protect the people who take the risk and to protect some of the people who are unsecured at the moment in taking risks that we want to give them some recognition of the fact that they have supplied goods to a firm. I want to bring home to the Minister that a small amount of money can topple many small suppliers of goods. We have many examples of people who have supplied goods to a particular company that goes into liquidation, and who failed to get any recognition of the fact that those goods were supplied in the first place.

We can talk about free market forces, we can talk about the theory of the situation; but the practical realities are that people are not able to get any recognition or any compensation for the fact that those goods were supplied. I reluctantly say that situations can be brought about where there are planned liquidations while there are sufficient amounts of goods in the possession of a purchaser. The financial institutions involved that are holding the security for that particular purchaser can bring about a situation where there are planned liquidations to the detriment of the unsecured creditor.

I appeal to the Minister to think again about what we are trying to achieve. We are trying to hold in trust the goods that were supplied to the particular company in order to ensure that compensation is given out of the liquidation to the unsecured creditors in order to ensure that we retain employment in the smaller firms that have been supplying goods and services to the company that has gone into liquidation.

I said from the beginning that I considered the earlier amendments were lumped together and this one was separate. That is why I found it strange that they were taken together. I believe that an issue of major substance has been raised. We have all grown up with thecaveat emptor advice ringing in our ears. Here we are talking about caveat vendor as well. It is not just enough to say that they are protected by the existing legislation because they can tie into it a reservation of title clause. It does not work that way.

I agree completely with Senator Hogan that there are planned receiverships. There are people who quite cynically wait until property has amassed in the company's premises or has been received by the company, and then go into receivership at that point. We are attempting here to take on board the fact that there are certain goods with high liquidity value. Let us take the situation of a company which is trading this morning but people are aware that the company will not be trading this afternoon. If a supplier supplies thousands of pounds worth of goods to that firm this morning and they are received by somebody, the Minister may say that sections 106 or 107 might interpret that as being fraudulent trading. But the fact of the matter is that somebody who has delivered to that company's premises perhaps £100,000 worth of goods is dependent on that money to keep his or her business running. While the operation of section 106 might allow some satisfaction against the person who traded recklessly or fraudulently, it does not meet the cases that has been very correctly raised by Senator Hogan. Perhaps not all cases can be dealt with. It is almost like the lost property syndrome. It is between two people. I intend supporting this amendment. Perhaps the Minister would agree that there is a difficulty here which might be addressed, without implications for the other legislation dealing with the sale of goods, in particular the area of the liquidity of certain goods arriving late at the company's premises.

I am seriously worried about the Minister's commitment to have a look at the earlier sections of the Principal Act, which I thought we had disposed of yesterday. I know that my colleagues in Fine Gael are pleased about it, but I am worried about it. Like theSkibbereen Eagle, I will defend the State to the end and I will be watching with an eagle eye to see what comes up with section 285 of the 1963 Act. I like it the way it is.

(Interruptions.)

As I understand it, the instance that Senator O'Toole has just given is that, if a company supply goods to another company and get a legal document or a contract in retaining title to the goods, even if the goods are sold to a third party the supplier still retains title to the goods. It is a very complicated area to try to find out how the supplier can get paid for the goods when they pass on to the third party. Are we confusing company law and contract law? A contract can be entered into which will give the supplier protection on the title of goods. An astute supplier of goods has certain safeguards that he can avail of.

For example, he can insist on a confirmed letter of credit which will guarantee him payment for the goods regardless of what happens to them after that or he can insist on a bill of exchange. Failing that, if the person buying the goods will not enter into that type of contract there are further safeguards for the supplier. For instance, he can take out insurance on the goods. There are safeguards for an astute supplier.

On a point of order, I think we are approaching this from different perspectives. The example given by Senator Mulroy is not really one of the areas looked at in this one. A supplier could be supplying blocks to a builder and the astute supplier can have all the reservation of title clauses built into it and a week later the blocks might be a house. In that case the Senator is saying he could still insist on payment through the terms of it.

This amendment talks about goods which are actually on the premises of the company, which have a liquidity value like the blocks in a house which are no longer blocks but are part of a house. We are talking about a very specific area here. We are talking about property in the possession of a company. I am not taking from the points being made by Senator Mulroy. I want to make the distinction that there are two separate issues here.

The point I am making on that issue is that, if the goods are still in the company going into liquidation and if the supplier has taken the safeguard to get his solicitor to draw up a very simple contract or retention of title clause, he will get the goods back as I understand it. If that is the case there is no need for this amendment.

The retention of title thing is still very clear from our point of view in that there is no real case for putting it into statute in the way it has been suggested. The example Senator O'Toole gave was about someone dumping £100,000 worth of materials in the morning and then the company going bust in the afternoon. There are two things about that. First of all, if that company are doing that level of business they probably have a retention of title clause in their standard terms of sale, in which case they could get the stuff back as quickly as possible.

Companies doing business at that level should consider a retention of title clause. That is not the very heavy legal instrument which it might sound like. It means that the company have standard terms of sale, which include a reservation of title clause, and ensuring, of course, that the person they are dealing with knows that that clause is there. There is no question of sitting down and signing major documents to get the thing together between the supplier and the receiver of goods. Companies, financial controllers, legal advisers, and so on, should certainly consider that.

It is arguable whether it is healthy in trading terms overall. I would not be encouraging it all over the place because it interferes unduly with trade. Nevertheless, if a company feel they want that protection they certainly can get it quite easily and quite simply. In the example the Senator gave I assume the management of that company supplying the goods would have considered that option and could have taken it quite simply and quite easily.

On the second point, the Senator quite rightly did part of my job for me in saying that section 106 and section 107 would, of course, come into play. If the company deliberately received the goods knowing that the company were closing down in the afternoon in the example the Senator gave, there is now both criminal and civil redress. There is criminal redress under section 106 and civil redress under 107. There is quite an amount of law ready to protect the person who supplies the goods. All we are asking is that they should keep their heads about them also and not expect the State to protect them totally and to underwrite their business activity, which was unreasonable. People in business do not expect that.

There was the case of the recent supermarket situation mentioned by a number of Senators earlier. In that liquidation I understand many of the suppliers had a reservation of title clause. The picture of all these small suppliers left hanging — I use that term advisedly — is not totally accurate. There was a reservation of title clause with many of them. It seems to me that there is no need to go down this road and doing this could interfere unduly with normal risk taking and normal trading practices. Any creditor who wants to protect himself can also look for a floating charge on the assets of the company overall. There are manys ways a creditor can protect himself, short of putting into company law a retention of title clause to be automatic in every single supply of goods.

That is an unreasonable incursion into normal trading practice and it is totally unnecessary. I cannot really proceed on the basis that suppliers of goods will not look at how they can protect themselves. If you proceeded on that basis, you would have to rewrite a lot of law. You have got to proceed on the basis that people doing business will look at what options they have and behave reasonably sensibly.

Question put: "That the new section be there inserted."
The Committee divided: Tá, 16; Níl, 21.

  • Bradford, Paul.
  • Bulbulia, Katharine.
  • Connor, John.
  • Doyle, Joe.
  • Fennell, Nuala.
  • Ferris, Michael.
  • Harte, John.
  • Hogan, Philip.
  • Kelleher, Peter.
  • McDonald, Charlie.
  • McMahon, Larry.
  • Manning, Maurice.
  • O'Shea, Brian.
  • O'Toole, Joe.
  • Reynolds, Gerry.
  • Ross, Shane P.N.

Níl

  • Bohan, Edward Joseph.
  • Byrne, Seán.
  • Cullimore, Séamus.
  • Eogan, George.
  • Farrell, Willie.
  • Fitzgerald, Tom.
  • Haughey, Seán F.
  • Hillery, Brian.
  • Lanigan, Mick.
  • Lydon, Donal.
  • McEllistrim, Tom.
  • McGowan, Patrick.
  • McKenna, Tony.
  • Mooney, Paschal.
  • Mullooly, Brian.
  • Mulroy, Jimmy.
  • O'Callaghan, Vivian.
  • O'Connell, John.
  • Ó Conchubhair, Nioclás.
  • O'Toole, Martin J.
  • Ryan, William.
Tellers: Tá, Senators Connor and Bradford; Níl, Senators W. Ryan and S. Haughey.
Question declared lost.
SECTION 104.

An Leas-Chathaoirleach

May I point out that amendments Nos. 148 and 151 are related and may be discussed together?

Could the Chair tell me how far we intend going today?

An Leas-Chathaoirleach

The Order of the House this morning was that this business would continue until 12.30 p.m. and I do not think there has been any change since.

There is a change to that. It is proposed that we adjourn at 12.15 p.m.

Government amendment No. 148:
In page 91, to delete lines 18 to 27 and substitute the following:
"‘286.—(1) Subject to the provisions of this section, any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which is unable to pay its debts as they become due in favour of any creditor, or of any person on trust for any creditor, with a view to giving such creditor, or any surety or guarantor for the debt due to such creditor, a preference over the other creditors, shall, if a winding-up of the company commences within 6 months of the making or doing the same and the company is at the time of the commencement of the winding-up unable to pay its debts (taking into account the contingent and prospective liabilities), be deemed a fraudulent preference of its creditors and be invalid accordingly."

These two related amendments, Government amendments Nos. 148 and 151, look quite complicated but the reason for them is fairly straightforward. It has been strongly represented to me that the company law treatment of fraudulent preference is unnecessarily convoluted, involving cross-references to bankruptcy law, the Eleventh Schedule to the 1963 Act, and so on, and that it would be very useful and desirable to consolidate the statutory provisions involved in the Companies Acts. Having looked at the law involved, I have to agree. The purpose of amendment No. 148, therefore, is to consolidate company law relating to fraudulent preference into one section. This is a very significant advance in tidying up company law on fraudulent preference. Basically, we are tidying up procedures.

At present, under the 1963 Act, fraudulent preference is defined in the context of bankruptcy law. The relevant provisions contained in section 53 of the Bankruptcy Ireland (Amendment) Act, 1872, was amended by the Eleventh Schedule to the Companies Act, 1963. Section 104 of this Bill, as presently drafted, re-enacts section 286 (1) without change and the present amendment proposes to incorporate into the body of section 286, with necessary modification, the relevant provisions of section 53 of the 1872 bankruptcy Act. Basically, amendments Nos. 148 and 151 are there to tidy up and consolidate existing law in the area of fraudulent preference.

We believe the Minister.

Amendment agreed to.

An Leas-Chathaoirleach

I now call on Senator Joe O'Toole. Might I point out that amendment No. 149 is related to amendment No. 150 and perhaps we could discuss them together, with the agreement of Senator O'Toole? Is that agreed? Agreed.

I move amendment No. 149:

In page 91, line 36, to delete "(i)" and substitute "(a)".

People get a certain view of structures. I am a highly structured and disciplined person and I find it easy on my eye that there is a certain set model for outlining the sections of the legislation. There are examples of this in the Companies (No. 2) Bill, as initiated. For instance, in section 55, Senators will see the normal run. Normally we use the bold numbering for a section; the faded numbering for the subsection; a lower case letter for a paragraph and lower case Roman numerals for the sub-paragraph. If Senators look at section 55 they will see the normal run, the heavy type 55, the light type (1), the lower case (a) and (b) beneath that, and after that the numbers (i), (ii) and (iii). In another example, on page 47, it is even easier to see. This convention goes right through the legislation as it is presented nowadays. One can see immediately whether it is a section, a subsection, a paragraph, or a sub-paragraph.

I recognise that we are looking at legislation which was drafted in 1963. Perhaps that convention was not operative at that time in all cases. In order to have a certain consistency — I would not always attempt to find refuge in consistency as an argument — we should replace the numerals by letters; paragraph (i) with (a) and paragraph (ii) with (b). I hope the Minister will be able to take this on board without doing any serious damage to the legislation.

An Leas-Chathaoirleach

People will be delighted to learn of the very close scrutiny of legislation here.

I have no doubt that the Minister's argument against this case would be untenable. For that reason, I think he has no case to answer against Senator O'Toole's very eloquent interpretation of the conventions of legislation.

I do not want to delay the House for more than about another half hour. This Companies (No. 2) Bill has been before the House for over a year and I have waited all that time for this amendment. I congratulate Senator O'Toole on the amount of research he has done. I am glad he has the time to do it. He missed his vocation. He ought to have been a member of the public service.

I am a member of the public service.

I shall be voting for this as well.

In view of the very weighty arguments and the substantial research, I have great pleasure in accepting the amendment.

Before we leave that issue, I thank the Minister for accepting the amendment. By that one acceptance we have seen an Independent Senator having more effect on legislation than the total Progressive Democrat Party have ever had in another House.

Amendment agreed to.

I move amendment No. 150:

In page 91, line 38, to delete "(ii)" and substitute "(b)".

Amendment agreed to.
Government amendment No. 151:
In page 91, between lines 39 and 40, to insert the following new subsection:
"(4) Subsections (1) and (3) shall not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the company.".
Amendment agreed to.
Section 104, as amended, agreed to.
Section 105 agreed to.
SECTION 106.

An Leas-Chathaoirleach

Amendments Nos. 152 and 153 are related and may be discussed together.

I move amendment No. 152:

In page 92, lines 42 and 43, to delete "or to a fine not exceeding £1,000 or to both, or".

The ordinary person in the street, if such exists, would respond to these amendments. Public response to descriptions and illustrations, radio and television programmes on companies going out of business and the directors fraudulently trading or otherwise, really capture the imagination.

I know it is not appropriate to raise a question on the section but I would like to hear the Minister give a fairly detailed run-down of the term "fraudulent trading". He referred to the Cork report time and again. I know the Cork report used the term "wrongful trading". On three occasions in the past two days the Minister has referred to the interpretation of similar legislation in the British courts. That is a good thing. We all know, no matter what we may say to the contrary, that both systems of justice grew together along the way. One of the great regrets must be that much of the legislation went in different directions in the past 20 or 30 years. We are now going to be in a situation where the British courts will interpret "wrongful trading" and the Irish courts will interpret "fraudulent trading". It is important that we should hear the reasons for the different terms. I have no doubt there is a good reason but I would like to have it explained.

Regarding the two amendments, almost all our discussion on protection applies to this section. We could repeat the debate and everything would be relevant to section 106. Everything Senator Hogan and other Senators said this morning about protecting the small supplier is relevant to this section. When I first read the Bill, I put down these two amendments. The section, as it is written at present, allows the person who is found guilty of an offence of fraudulent trading to be either imprisoned or fined. I disagree with that. I think it should be imprisonment. I have many reasons for saying that. I noted the Minister's comments yesterday when we were discussing the Revenue Commissioners attempting to collect for the State their due entitlement. The Minister used very careful language and referred to sheriffs threatening jail. I noted the words very carefully because they are the traditional words of Governments in this area. In all fairness, nobody to my knowledge has ever been imprisoned in this State for the non-payment of income tax due even though the power is there in the legislation.

I want to put this case in context. The Minister has proposed a fine and imprisonment with, perhaps, the best will in the world and in the Government amendment it is proposed to increase the fine from £10,000 to £50,000. May I ask a simple question that deserves a straight answer? If the Guinness affair were to happen in Ireland and in one aspect of fraudulent trading, one decision on one day could fraudulently dispose of £7 million — this is the kind of thing that can happen; I know it is not a direct analogy; I know it happened in a different set of circumstances and it did not apply to company law——

An Leas-Chathaoirleach

The Chair would prefer if you did not mention individual companies, even in a hypothetical situation.

Let us say a major brewery. Where is the point in taking somebody who has defrauded somebody else of £7 million and fining him or her £10,000 or £50,000? It becomes irrelevant. If we do an inversion of the economies of scale, it does not make any sense at all. Let us take the example of a company which ran up debts of £? million. They did it quite fraudulently. Everybody was quite aware of the fact. They shut down shop in County Dublin putting a large number of people out of work and leaving debts of £? million. Under existing legislation they set up again the following week in Tyrone in the same concrete supply business and were supplying the same people in the South. The reason I refer to that case is that the workers staged a sit-in in order to try to emphasise their right to work and they finished up in jail for contempt of court while, at the same time, the directors were in the Grey Door restaurant celebrating their coup of £? million. That is a true story.

That is the reason this legislation is before us. I know the Minister would be as concerened about that as I would be. The legislation seeks to stop that kind of thing happening. We have the example where somebody fraudulently traded a company into £? million debt, and we are now saying the maximum fine is £50,000. I know the Minister can come back to me and say: "It is imprisonment or a fine of £50,000, or both," I do not think that is appropriate. I also think that it should be criminal liability rather than civil liability. Money in this area lets people off the hook. It should be a mandatory jail sentence for somebody who is found guilty under this section.

I looked very carefully at my own amendments and I think that my first amendment No. 152 which arises on summary conviction is wrong. I hereby withdraw amendment No. 152.

Amendment, by leave, withdrawn.

I move amendment No. 153:

In page 92, lines 45 and 46, to delete "or to a fine not exceeding £10,000, or to both".

An Leas-Chathaoirleach

Is it agreed that we include amendment No. 154 in the discussion? Agreed.

I see the case for having something like that here. Amendment No. 153 deals with the case where somebody has been indicted and convicted of this kind of fraudulent activity. I think he deserves a jail sentence. We know that a mandatory jail sentence does not mean that somebody has to go to jail. There are all sorts of ways of getting round the legal system but I think it lacks proportion to have simply a fine of up to £50,000 for offences which could cost millions of pounds. In the supermarket store which crashed — which shall be nameless — we were talking about debts of £25 million at one stage.

Progress reported; Committee to sit again.
Sitting suspended at 12.15 p.m. and resumed at 2 p.m.