I move amendment No. 4 :
In subsection (1) to delete " subsections (2), (3) and (4) " and substitute " the provisions of this section ".
This is merely a drafting amendment. It arises out of the insertion of a number of new subsections lower down in the section. I do not think there is any objection to the amendment.
O.K.
Amendment No. 5 is consequential on amendment No 8 and the two could be taken together.
Notes on these amendments have been circulated so members of the Committee will know what is involved.
Yes.
Consequential on No. 6 and No. 8, is that not right ?
I move amendment No. 5:
In subsection (3), to delete all words from " but, subject to subsection (2) " to the end of the subsection.
There is one point in relation to all these amendments and it comes particularly under amendment No. 9. I think it means that the register of a company is not going to be conclusive any more because if, under amendment No. 9 this section shall apply in relation to a nominee for a body corporate, how can you tell by examining the register that a person is a nominee for a body corporate which is or is not a subsidiary? Does the Minister see my difficulty ?
The position is that the section says that any allotment or transfer of shares which would be contrary to this provision will be void. I do not think there is anything which would prevent a company from presuming to allot shares to a subsidiary and having it entered in the register.
I have not made myself clear. As I understand it, it is a cardinal principle of the Companies Acts as existing, and of this Bill, that the register of the members of a company is a conclusive document and that the company itself is not bound with notice of any trust. At the same time, the effect of amendment No. 9 which is to bring in a new subsection (5) is that a company is bound by notice of trust, the trust being implied in the word " nominee ". If, for example, A. B. Limited is a subsidiary of C.D. Limited and I apply for a holding in A.B. Limited and it is allotted to me and it subsequently transpired that I was a nominee of C.D., the effect of this amendment makes the register incorrect and makes the allotment void and the register of members is, therefore, not a conclusive document. That, as I understand it, strikes at the cardinal principle of the Companies Acts.
I think the cardinal principle referred to is stated in Section 123 of the Bill and the purpose of that largely is to protect the company itself. They need not go inquiring into the rights of the members or anything like that and need not go beyond the names in the register. I do not see how that is upset by the subsection. This subsection is not new. It has been in the law since 1959.
It is in the 1959 Act ?
It is. We are just making a slight change in the introductory words : " Subject to subsection (2) . . ." It is in the law at the moment since 1959.
There is no obligation to declare whether the nominee——
No. The fact is that the nominee is not permitted to take these shares and the allotment is void. The only persons who can suffer are the companies and I do not think outsiders could become involved at all. It could hardly happen without the knowledge of the parent company.
I think there is more in Section 32 than there is in Section 5 of the 1959 Act.
Section 4 of the 1959 Act.
Section 4. Are we not bringing in more now ?
We are changing the reference to the subsection and only making consequential changes arising out of that. We have new subsections now that were not in the 1959 Act. They do not alter in any way the purpose or the effect of Section 4 of the 1959 Act.
For clarity sake may I say that we are discussing amendments Nos. 5, 6, 7, 8, 9 and 10 together.
Subsection (4) not merely extends this to a company before 1959 but allows other concessions to other companies.
Is Deputy Cosgrave referring to the new subsection (4) as in the amendment ?
Yes—the new one. Is that not right ?
I do not see what is the great objection to a subsidiary company being a member of a holding company so long as it has no power to vote. Of course, if it had the power to vote, you could play a wonderful game, under which thimble the pea is, but, so long as it has no power to vote at all, I do not see the objection to it.
This is based on the Jenkins Report, is it not—the change, I mean ?
And our own Company Law Reform Committee Report.
Yes. The 1959 Act was based on our own Company Law Reform Committee's Report.
Yes, and the point being raised by Deputy Sweetman is in fact existing law now.
The 1959 Act.
And the reason for it is that there is no point in prohibiting any entity from holding shares if you do not also deal with its nominee. It is a fairly common thing in drafting these provisions to refer to the person's nominee as well as the person himself and that is really all that is done by that subsection referred to, that is, the new subsection that is dealt with my amendment No. 9.
I should like, frankly, to do it in some other way, to arrive at the same solution in some way without infringing the principle that the register is conclusive. I should like to make it an offence, if you like, to put it into the register.
I do not get that point.
Make it an offence, if you like, for directors to register a nominee but once a person is registered in the register, I think he is a member of the company and the fact that he is a nominee of a subsidiary company is infringing the principle that he should not recognise the trust.
But I think you would still have the difficulty, if they ignored the penalty and nevertheless went ahead with the allotment and registered it in the register, they still would be misleading people. I do not think there is any solution for that problem——
No.
People looking at the register are going to be misled into thinking there is a certain allotment of shares when, in fact, it is void.
If I understand Deputy Sweetman aright, he wishes to maintain the situation, first of all, that the register on its face is conclusive as far as the company is concerned—I would subscribe to that from the point of view of protecting the companies themselves—that as far as the company is concerned, one goes behind the register. Well then, where are you going to draw the line at declaring trusts or nominees ? Is that not your point ? I was not here for the beginning. I may be driving on a cross rail.
I was referred to Section 123 which says you are not to recognise trusts and this section says you are.
At what precise point does it say you are ?
Amendment No. 9, for example.
" This section shall apply in relation to a nominee for a body corporate. . . ."
Is that not a trust ?
Yes, that is a trust. I agree.
Can anyone tell me what is the objection to a subsidiary having shares in the holding company once there is no vote in respect of those shares ?
The view that has been expressed by the various committees that dealt with the subject, including the Jenkins Committee, is that by permitting holding companies and subsidiaries to buy each other's shares, you allow a loophole for the depletion of the capital of the holding company. You could, for instance, have a situation where a cheque for £1,000 is given by a holding company to a subsidiary in purchase of the subsidiary's shares and that cheque used by the subsidiary to buy shares in the holding company and in this way you could have the one cheque going around, building up a whole misleading facade of share capital in the two companies. I believe that was the principal reason behind this provision when it was originally introduced in Britain, to prevent that sort of misleading facade being created.
Could we get at it this way—have we defined a " subsidiary company " anywhere ?
Yes, in Section 155.
Let us work back from there.
Do you remember the paragraph reference to this in our own Company Law Reform Committee Report ? Our own Committee did a very good job. It was a terrible pity that when they were doing it they did not complete that job by adding an index.
That is right. It would be paragraph 73 onwards. Paragraph 74, I think, is the relevant one.
That is correct.
I would suggest to Deputy de Valera that we leave Section 155 because, if we get involved in that——
I understand the Minister's difficulty here but, unfortunately, it is rather inextricably tied up with Section 32 because of the very definition of the words, you see. I do not want now to cause difficulty in this but it comes right down—" subject to subsection (2), this section shall apply in relation to a nominee for a body corporate which is a subsidiary. . . ." The point I am concerned about is breaking in on the point that the register is conclusive. This thing of itself opens up the whole question of inquiring into title. It brings up investigation of title, does it not?
I would not say.
The allotment is void but supposing, notwithstanding the voidness of the allotment, the name is registered—is entered on the register. This is intended to prevent fraud. We must conceive, therefore, there may be fraud. Everything that is done in relation to voting by that company thereafter can be made up in the air without anybody, any outsider, having any opportunity of knowing that it is done because nobody outside can tell that X is the nominee for the subsidiary. That is my difficulty.
The same difficulty arises almost in any other case. If a company decides to register unjustifiably someone as the owner of a share, whether as a nominee or in any other capacity, it is just a void allotment and that fact alone does not prevent the company entering it in the register.
It depends. How do you mean it is void ? If he is entered as a nominee, on the face of it, yes, but supposing he is in fact a nominee ? Every day of the week there are bank nominees entered in registers, are there not, in effect ?
Oh, there are.
But it is stated that they are bank nominees then.
Not always.
Can we get over it by at least including some saver ?
Would section 123 or a similar section apply ?
Oh, yes. It is the cardinal principle of company law.
That is why I thought there was no change.
I am not advocating that the present section should be altered but I am suggesting—I may have misread it—that this subsection (9) may possibly involve, shall I say, an investigation of the title of a holder.
That is subsection (7)—amendment No. 9.
"To delete subsection (5) and substitute. . ."
That would be subsection (7).
" this section shall apply in relation to a nominee for a body corporate which is a subsidiary. . . ." You see, it nearly raises the principle that you have to go behind the face of the nominee, whoever is the holder there, if you are dealing with him.
If you omit it, you are not going to help the situation.
You will have the situation as you have it at the moment.
It is in the law at the moment and if you did not have it in, the company could get round the section. It would take the teeth out of the section completely. It would be meaningless. If a company wants to sell shares to its subsidiary and, instead of doing that they have a secret nominee and sell them to him, the whole section falls down.
I see the difficulties on both sides. I do not see a solution.
The difficulty comes in, I am afraid—that is why I do not want to upset the discussion here—the difficulty comes in when you drive it back on that basis to the definition of "subsidiary".
It does not really affect the issue, I am advised.
We will have it later.
May I put it this way, that the defence the Minister puts forward to the breach of the principle of not recognising trusts is that it would not be possible for the section to be effective in any other way. Is that it ?
It does not breach the principle, I think.
Surely, it is a trust.
It does not require the company to take notice of a trust. Section 123 was really intended to be a protection for companies more than anything else. The company could look at the register and take the entries at their face value and could not be put on notice that a person behind the scenes was interested in the shares. A company could be in real difficulty if it had to go inquiring behind the scenes about the ownership of shares. That provision in Section 123 does not affect Section 32 because anything done in Section 32 would be done by the company itself.
There is also the question of whether it was originally intended or not—in other words, to have a document that was, on the face of it, as nearly as possible conclusive. You have the register and the register speaks for itself with conclusiveness.
If anybody wants to falsify the register——
Then you come to the criminal side of it. We have here the question of people holding as trustees. Take a simple case. Supposing somebody deals with a large holding in a large company like Guinness and that in his will he leaves it to the executor, in trust. That would probably mean it would have to be registered in the name of the trustee. As far as the company is concerned, it is the trustee who deals with it and the question of breach of trust on the part of a defaulting trustee is another matter.
That will not be upset by this section.
What is the difficulty about being a trustee, which is what the nominee would be ? What you are trying to do is bar one particular form of trust.
No. The whole purpose of the section is to avoid this business.
We are not controverting that.
The fact is that shares pass from the holding company to the subsidiary company and back again, setting up a completely false capital holding picture. Other parts of the section try to get over the difficulties about the subsidiary. For example, if there is a rights issue, there is the matter of compensation; if there are bonus shares they can be accepted as such. That is the whole purpose of it and, at the same time, to avoid the possibility of building a false picture as to the capital structure. This subsection is intended to copper-fasten that situation. I am afraid we can offer no more elucidation on this side of the table and perhaps the Committee would agree that we would accept the amendments proposed here and any member of the Committee may come back again if this matter is affected subsequently.
Is it possible to bridge the gap between the two points of view? When a company passes money to a trustee or to a holding company, an offence is committed unless the purpose for which the money so passes is made known to the registrar. It may not be possible to do that here but if it were done, the person concerned would know he was lending himself to something which was against the law and he might be more reluctant to lend himself to that sort of thing under different circumstances. I think, though, it is taking life in a strictly purist fashion to think that will not happen.
The question of penalties as far as Section 32 is concerned was never considered because penalties do not enter into it. The allotment is void from the very beginning. There can be no contravention of the section. There is no such thing as a contravention because the allotment of shares never took place.
I come back to the question of the broad construction of a nominee in relation to a subsidiary company. I can think of various types of cases where that kind of thing might operate. The definition here seems to be broad enough to include the type of case where one individual controls two companies. What is the position there? If the one individual has control of two companies, it is very difficult to determine whether he is within that definition or outside it. What makes a company a subsidiary ? That is why I am harping on Section 155 in that connection.
I think we had better wait until we come to the section and any member of the Committee who wishes may bring the matter up again.
I would be completely with the Minister, were it not for this amendment referring to the definition of a nominee.
It has never been defined and I think it has not been found necessary.
If I take up shares in the holding company, say, £100 worth of shares, and at the same time, I am given that £100 by the subsidiary company as a loan or as security for the loan and I draft a blank transfer which is not operative until such time as it is dated, stamped and so forth, am I a nominee or not ?
Supposing I control a company and the articles of association and memorandum permit me, and there is a new company to be formed and I get a loan or an advance from one company which I may get, possibly, through quite legitimate channels——
Are you a director ?
I am making a hypothetical case. There are ways of getting money in that manner for investing in another company. Is the other company a subsidiary of the first? Ipso facto, I am afraid it is, under the definition. Am I a nominee? Therefore the thing is void. I know these are hypothetical cases but there is no principle of law where you can get such legal ingenuities as you will in company law.
Oh, there is—taxation law.
They are about level.
This subsection has been law since 1948. We are not doing anything new here.
With all respect, you have asked us to consider a Bill and perhaps you will not mind if we query even the existing law.
Nobody has found a loophole in Britain since 1948 and they are fairly good at it over there.
Can I put the case of two companies, of which B is the subsidiary ? Let us say company A is a finance company. In fact, companies closely associated with the banking line have been involved. Company A proposes to invest or to advance to somebody starting an industry. The industry is established, the method adopted being that company A advances money to a nominee who takes up the shares in company B and is duly registered as a shareholder. Is company B a subsidiary of company A in that case ?
Is that the sole investment ?
Not the sole investment. I wonder if I have made my point clear. The case I am putting is that a finance company of some sort advances money to a speculator and the speculator invests that money in a new company, company B. Is company B, within the legal definitions, a subsidiary of company A ?
Surely it depends on the contract made between company A and the speculator. The speculator does not have to form a company but if he decides in fact to form a company to do what he wants to do with the money, the company he founds cannot be described as a subsidiary of company A.
Even though company A advances the money for the specific purpose ?
It would not be because in considering this question of the relationship between a holding company and a subsidiary company, you must automatically think of shares instead of loan capital.
Then I am back to the wording of the same section. I do not want to be difficult with the Minister who has made a request that we might deal with Section 32 now and raise any questions later. Would the Minister prefer if I left this over and raised it again on Section 153 ?
It is perfectly clear, I think, that in relation to any section we deal with, if any member of the Committee finds that amendments accepted are affected by subsequent amendments or sections, he has a perfect right to come back to the original section.
Could you say whether there has been any expansion of the meanings of " holding " and " subsidiary " in section 155 as compared with present law ?
No. There is no difference. It is all in the 1959 Act.
I understand that subsection (4) of Section 32 permits a subsidiary company to accept bonus shares. Under amendment No. 10, it is proposed that a subsidiary may not take a rights issue but can have the money instead. It is purely a question of drafting. If that is the idea, we are up against this difficulty that so frequently arises in regard to the word " may ". The way amendment No. 10 is drafted is that where a holding company makes an offer of shares, it " may " sell. Reading this whole section together, you come to this new subsection and it might appear as if this is just a permissive part, giving power to the holding company that it " may " sell. It does not make it mandatory on the holding company and it might be interpreted that it could still, notwithstanding this, give the right of issue——
Under the law as it stands at present, they cannot do it at all. This is in relief of the subsidiary so that it can get some advantage.
Where is that made clear ?
In subsection (1) of Section 32 of the existing law.
Subsection (1) of Section 32 ?
Yes.
The transfer of shares shall be void.
I see. Again, from a drafting point of view, would there be any immediate advantage to say " notwithstanding the provisions of this section. . ." and then go on to say where the holding company makes an offer of shares ?
Subsection (1) has that saver. If it serves Deputy Costello's purpose better to have the saver to the other subsections, it can be done.
It is purely a matter of whether the thing is clear.
Are you putting this new subsection into the saver clause ?
I shall consider it. It seems to be rather a repetition, even though it is a different term.
I move amendment No. 6 :
Before subsection (4) to insert a new subsection as follows :
"() This section shall not prevent a company which at the date on which it becomes a subsidiary of another company is a member of that other company, from continuing to be a member."
I move amendment No. 7 :
In subsection (4) to delete " on the 5th day of May, 1959, was " and insert " is ".
I move amendment No. 8 :
Before subsection (5) to insert a new subsection as follows :
"() Subject to subsection (2), a subsidiary which is a member of its holding company shall have no right to vote at meetings of the holding company or any class of members thereof."
I move amendment No. 9 :
To delete subsection (5) and substitute :
"() Subject to subsection (2), this section shall apply in relation to a nominee for a body corporate which is a subsidiary, as if references therein to such a body corporate included references to a nominee for it."
I move amendment No. 10 :
Before subsection (6) to insert a new subsection as follows :
"() Where a holding company makes an offer of shares to its members it may sell, on behalf of a subsidiary, any such shares which the subsidiary could, but for this section, have taken by virtue of shares already held by it in the holding company, and pay the proceeds of sale to the subsidiary."
