Is it intended to proceed with the Bill today?
SECTION 24.
Chairman
Item 3 relates to the consideration of the Bill. It is intended that we get down to business this evening.
I wonder if, in regard to Part III, I might make a short general statement which would be of assistance to members of the committee.
On a point of order, and not to interrupt the Minister, but there is a point I want to make and this is the stage to make it rather than after the Minister makes his statement. Looking at the documentation with which we have been supplied, and the welter of amendments, as far as I can see this is tantamount to a new Bill. It is extraordinary at this stage to have this number of amendments from the Minister. It would make the functioning of this committee a great deal more expeditious and more comprehensible if they were included in a new Bill. I have not counted how many of the 275 amendments come from the office of the Minister, but the over-whelming proportion of them do. It makes the task now extremely difficult.
I do not think that suggestion has any merit at all. I would suggest that we progress as the Minister has suggested. This issue is an issue that everybody accepts is vitally necessary. If we go back to the original company legislation that was passed in this House some two and a half decades ago, it is very clear that this was the procedure that was adopted then. If committees of the House are to mean anything, this is precisely the kind of work we should be doing, so I suggest we progress as the Minister has suggested.
Chairman
Is that agreed?
It is not a question of impeding the work of the committee. The reason I raise the point is precisely the opposite. There are so many amendments in the name of the Minister that it changes the situation substantially. Even in terms of facilitating the expeditious functioning of the committee it would be much better if we had a new Bill and start de novo.
With all due respect to Deputy Rabbitte, the Minister might be able to help him in his dilemma. We all appreciate that there are many amendments, but I feel it is very reasonable for the Minister to begin by making an initial statement and I presume he will refer to the fact that there are so many amendments. We have to start somewhere, but to complain about the number of amendments is not a very constructive way to start our first meeting.
I am not going to push the point further, except to say it is a perfectly reasonable point to make that if the Minister's office suddenly considers that this number of amendments have to be put in, it is a sensible and reasonable question to ask why they were not put in initially. It was the Department that brought this legislation before us in the first place.
First of all, I am sorry for being late but the Order of Business is just over. Could you tell us what you are discussing? I must say I am somewhat disappointed that you decided to start without any representative of this party being present. It was not that we failed to attend the meeting, but we cannot be in two places at one time.
If you want co-operation in this committee I suggest you could have waited five minutes until the Order of Business was completed so that those of us who had to gather papers could get here. Could you outline to us what you are talking about so that we can try to be constructive rather than destructive? After all, we are the main Opposition party.
Chairman
The meeting began on the basis that there was a quorum present. The clerk of the committee opened the meeting. I did not open the meeting. The election of chairman has gone ahead and I think it was agreed beforehand——
It was not agreed.
Chairman
It was not agreed?
(Interruptions.)
I object to that. The facts are that there was a quorum present. I was actually in possession on the Nursing Homes Bill but I thought this legislation was of sufficient significance to make me conclude my remarks on the Nursing Homes Bill and come across here to the meeting which was scheduled to start at 4 o'clock. If we are going to make any progress I suggest that we should continue.
Chairman
I do not wish us to start on an acrimonous note. That is a matter outside the committee's brief. The situation was that the meeting started in order. There was a quorum of six. The point now is that the procedure generally has been discussed and I will repeat it, for the benefit of those Deputies who were unavoidably late, and take it from there.
The procedure generally is as follows: First, Standing Orders provide that rules for procedure in the Dáil shall apply to procedures in Special Committees except that, as in Committee of the whole Dáil, a member may speak more than once on the same subject. Secondly, divisions shall be taken by the clerk of the committee calling the names of the members and, in the event of there being an equality of votes, the question shall be decided in the negative. The Chairman shall have only one vote and shall not have a casting vote. Thirdly, there is provision for substitutes. In the event of a member being unable to attend, he or she can nominate a substitute to attend and that substitute will have the same voting rights as members here today. Fourthly, in relation to the press and visitors, meetings of the committee are held in public unless the committee decide otherwise. Private meetings may be held for discussion purposes. That is a matter for the committee to decide.
The third item on the agenda is consideration of the Bill. Before we proceed to consideration of the Bill, I have asked if it would be worth while, in view of the considerable number of amendments tabled, to take a little time to consider how we should conduct business, for example, to decide on the frequency of meetings and whether we should structure our meetings to take different parts of the Bill on different days or whatever. It has been suggested and agreed that meetings should be held at 4 p.m. every Tuesday. If there is any objection to that subsequently, I will take any considerations of that point. If that is agreed we can proceed from there?
Deputies
Agreed.
Could I ask, Chairman, how long would the meetings last each Tuesday?
Chairman, as you will recall, I suggested that a possible timetable might be that we would try to deal with one Part of the Bill per day. When we get on further, when the Parts get shorter and less complicated, we might take two per day and in that way, assuming that we meet once a week, we could complete the Committee Stage by Christmas. I had hoped that the Bill as a whole might have been passed by Christmas but that might be pushing the matter too far due to its length and complexity. The Government and I would be reasonably satisfied if we could achieve an end of the Committee Stage by Christmas.
The Bill is of importance and urgency and I am anxious, without curtailing debate in any way, to try and make progress on it because through nobody's fault, it has been held up for quite a lengthy time now.
I appreciate that the Minister has no intention of imposing any curtailment on the debate. He is being extremely optimistic if he thinks it is going to be possible to take one Part of this Bill per day in a two hour sitting. I had the experience of dealing with the first two Parts of this Bill in the Dáil and it took a great deal more time than that. That was without wasting any time. The Minister and his colleague, Minister Brennan, who was dealing with this, will verify for him that the debate in the Dáil Chamber was one which was not a time wasting debate but simply by the nature of the material, required a lot more time than the Minister seems to have in mind.
One thing that I had in mind tentatively to suggest to the committee was that rather than a two hour session we might think perhaps in terms of a four hour session. It is only when you get into the thick of a Bill like this that you will make progress. It takes a while to set the scene and get the feel of it.
On this point, Chairman, while we are trying to establish the ground rules, is it entirely impossible to have a second meeting? Is it entirely impossible to meet on Friday, for example? Is that so difficult for people from outside Dublin since the committee allows for substitutes? Is that entirely unacceptable? Otherwise I think the objective of the Christmas deadline will be very difficult to meet.
Chairman
Any other views?
To be quite honest the Christmas deadline is na�ve. After all, this legislation has been coming for quite some time and we are now more than half way through the month of November. It is important, as this is going to stand on the Statute Book, probably substantially unamended for the next 30 years or so, if the last Companies Bill of 1963 is anything to go by. We should not be dictated to by a deadline of Christmas, however well intentioned. I think perhaps time might be saved if, rather than spending all our meetings going line by line through amendments, taking amendment by amendment and making decisions on them, we allowed half an hour at the beginning of each meeting for the Minister to outline, broadly speaking, the purpose of his amendments and for others to say, broadly speaking, what they are after in regard to their amendments. Some of the misunderstandings that might be there could possibly be cleared away in that.
My experience of the previous Committee Stage was that a lot of the time was actually used up simply exchanging information as to what one was after in amendments that were being put down. That is the sort of thing that could have been more readily sorted out informally. I do not know whether that can be done, but it might be a way of saving time rather than waiting until we actually reach the amendment before getting any explanation one way or the other.
Chairman
Might I suggest, therefore, from the views that have been expressed that we proceed on the basis of one meeting per week for the moment, on Tuesday at 4 p.m., not restricted to two hours but four hours maximum, and that the Minister, as he has indicated in his first section, would outline and set in context the amendments that he has in each particular section? This would be of assistance to Deputies in making their contributions and dealing with their amendments, if any, and I suggest that we have one meeting per week from 4 p.m. to 8 p.m. and see how we are progressing.
The point made by Deputy John Bruton is a very good one, as inevitably there is a learning process for those of us who were not involved in the last Dáil debate on this Bill. People like Deputy John Bruton clearly have put a great deal of time and effort into this. A lot of these amendments have come from that debate. I think it would be a mistake to either set a cut-off time of two hours or four hours because if you go away, think yourself back into the process and come back here, there is going to be a lot of time wasted. I suggest that we try and meet the Minister's suggestion that we get through a Part per day and we can get on with it that way.
I think Deputy J. Bruton's point is right, it is an ambitious target to set ourselves, but it is a good idea to set ourselves an ambitious target, otherwise God only knows what would intervene between now and the time we conclude our discussions.
Could I say, first, some of us may be involved in Private Members' Time on a Tuesday and 4 p.m. to 8 p.m. is not practical, 4 p.m. to 7 p.m. might be. From our experience on the Judicial Separation Bill, it is good to have a time limit so you know what we are trying to achieve. What I would suggest to the Minister, if I may, is that when we meet each day we set ourselves a target to finish on that day and if we do not, if there are justifiable reasons, then let us have a proper debate. There are some sections in some Parts of this Bill which will need longer time to discuss and to say that you are going to do a Part in a particular day is just not satisfactory. We could end up with important amendments never being reached because we had a time limit. I would suggest 4 p.m. to 7 p.m. because we have Private Members' Time and that we do the best we can, as distinct from putting a guillotine on the debate at 7 o'clock.
I will be glad to go along with any reasonable suggestion of the committee. I am a little nervous about fixing, or proposing the fixing of, a finishing time, because it may encourage people to aim at a particular place on the clock and if it is open-ended it might be possible to get more business done. Nonetheless, I agree it is not possible to sit indefinitely. I would be glad to take up the suggestion made that I make an introductory statement of a general nature in relation to the Part. I had, as you recall, actually started to do that when some Deputies came in.
Before I get on to that, could I just advert to the point made by Deputy Rabbitte? He said there are a great many amendments in my name, which there are, and would we not consider withdrawing the Bill altogether and introducing a new Bill incorporating the amendments. I do not think that that would be wise. This Bill has already gone through the Seanad; a large number of amendments were made there and a feature of the way it was handled there — as in the Dáil earlier — was that a large number of suggestions were taken up and if they were reasonable they were agreed to, and that would continue to be the process. Even though the number of amendments may seem very big, the Bill is very long and complex so that proportionately they are not perhaps as bad as they seem. Many of them will be grouped together for the purpose of discussion.
The committee will be aware, from looking at the number of amendments that I have now tabled to Part III of this Bill, that since the subject was last debated a considerable amount of further thought has gone into this particular Part. In considering what our attitude ought to be on this whole question of companies lending to their directors and connected persons, I have reflected on what was said in the House previously and what has been said outside the House by various interested parties. In doing so I was conscious of four main objectives: First, the greatest mischief which we are trying to tackle here is the situation where a company lends money to its directors or to their connections, as they are colloquially called, and the company subsequently goes into liquidation leading to a loss for the trade creditors. Second, we do not, at the same time, want to restrict unduly the flexibility of companies to remunerate their directors in situations where the company can well afford it. Third, we want to ensure that the various provisions in this Part of the Bill cover as wide a range of companies as possible, consistent with ease of enforcement. Fourth, we want to make the provisions concerned less complex and easier to understand and operate, than they are in the Bill as originally drafted and as passed by the Seanad.
Bearing in mind what many Deputies have said on the subject, I am not, on reflection, satisfied that these overall objectives are adequately served by the present policy of sections 31 to 40 of Part III in particular. The objectives involved would be better served through the amendments which I have now tabled. These new amendments would make significant changes to the present structure and thrust of Part III. In general terms, they will have the following effect: to begin with, the various prohibitions and restrictions on quasi-loans and credit transactions would now apply to all companies regardless of size and this would dispense with the need to distinguish between relvant companies and other companies. Furthermore, instead of having absolute money limits to the amount a company could lend to its directors and to others who stand in the position of directors, we would allow companies in general to lend up to 10 per cent of their net assets to their directors or to persons connected with them. However, to make sure that this greater flexibility was not abused it would be my proposal that we should provide that if the loans to directors contributed materially to a company's subsequent insolvency, the directors concerned would face the possibility of personal liability for the company's debts.
Finally, we would, I suggest, simplify the rules for determining other exemptions from the restrictions concerned. Indeed, we have tried hard to simplify most of the provisions involved here, in other words, sections 24 to 40, to make them more clear-cut and so that companies and their directors will see more clearly what the law will be and where they stand in relation to it.
Of course, we will debate the amendments, which I have tabled, as they arise, but I thought it would be useful if I gave an overall indication of their general thrust. Taken together as a package they represent my response to the previous debate in the House on the subject, as well as the many submissions which were received in the Department from various interested parties.
Chairman
In relation to section 24, amendment 21, the suggested grouping for debate is as follows: amendments Nos. 21, 23, 25, 26, 27, 28, 36, 44, 45, 47, 48 and 49 form a composite proposal and 24 is an alternative to 23. Have we agreement that we take those together?
I take it this is covered by the last part of what the Minister said, that this is really cutting out fat and it makes it clearer. If we could run through each of these to tell us why the various parts are being deleted. From my reading it would seem that it takes away a degree of verbiage and makes it very much clearer to anybody reading the Bill what the intention is.
I do not want to disagree with my colleague, Deputy Roche, but by the deletion of certain lines in the original Bill, in section 24, the Minister is making a major change to the Bill that was originally before the Seanad and before Dáil Éireann. Amendments Nos. 21, 23, 25, 26 and 24 would make major changes, particularly as the Minister has outlined that he is proposing to change the Bill radically. Perhaps it is making the Bill more simple in the sense that it is going to apply to all limited companies irrespective of size. That is a major change because the original Bill, under section 24 (1) (e), where the definition of a relevant company is, line 27, defines what a relevant company is. Under paragraph (e) of that section it says the size of company to which the Bill will apply. The effect of the Minister's amendments will be that there will not be exemptions for any small, private limited company at all; it will apply to all limited companies. That is a major change. So the Minister's amendment is not just getting rid of the verbiage but is proposing a fundamental change to the Bill.
Chairman
Before we go any further, have we agreement on the grouping?
Having regard to what Deputy McCreevy said, which is my understanding of the situation, is there any particular reason why amendment No. 24 is not grouped?
Chairman
If amendment No. 23 is agreed then No. 24 cannot be taken. For the purposes of proceeding, I need, first, agreement on the suggested grouping I have outlined. Is that agreed? Agreed. Can I ask the Minister to formally move the amendment.
I move amendment No. 21:
In page 24, subsection (1), to delete lines 16 to 19.
I would like to make a few remarks about this and the related amendments. Initially, in reply to Deputy McCreevy that the Bill as passed in the Seanad and as read a Second Time by the Dáil envisaged restrictions being placed on loans to directors, the amendments I am now proposing envisage restrictions being placed but the nature of the restrictions would be somewhat different and less complex. There would not be any fundamental change in the Bill as read a Second Time, it would simply be a change in the nature of the restriction on loans. As I have already mentioned, one of the major changes we have proposed making to Part III of the Bill, if the committee agree, is to abolish the distinction between relevant companies as defined in section 24 as it stands and all other companies. Under section 31 as it currently stands the position is that all companies are prohibited from making straightforward loans to their directors. However, there are further prohibitions in the Bill which only apply to what we call "relevant companies". As currently defined in section 24 a relevant company essentially means a public limited company or a member of a group of companies which include a public limited company, or a large or medium sized private company.
The prohibitions which under the current text only apply to these relevant companies are, first, quasi-loans to, and credit transactions for, the benefit of the directors of the company and, secondly, loans and quasi-loans to and credit transactions for persons connected with the directors. When these provisions were framed originally the reason for distinguishing between different types of companies was to avoid creating an unenforceable piece of legislation. In other words the aim was to end up with something workable. However, the earlier debate in the House on the subject and indeed the many representations made to the Department on it led us to look again at the distinction we are drawing here to see if it was indeed as valid as it was when it was originally conceived. My conclusion is that in all the circumstances the distinction is not a sufficiently valid one to maintain, particularly since I propose by way of later amendments to increase the flexibility of companies in general to make loans to their directors. What I propose, therefore, is that all the prohibitions in section 31 ought to be extended to all companies without distinction as to the size of the company or whether it is a public limited company or a private company and so on. The result will be that subject to the more flexible exemptions I will be proposing later, all companies would be put on the same footing here. In other words loans, quasi-loans and credit transactions in the case of directors would be equally restricted in the case of all companies as would similar transactions in favour of persons connected with the directors.
Turning to the amendments themselves the main amendment in this group of amendments is amendment No. 36 which would replace section 31 of the Bill. In the current text of the Bill subsection 1 (a) applies to all companies and prohibits straightforward loans to directors as well as guarantees or security in connection with them. Subsection (1) (b) currently applies only to relevant companies and prohibits such companies from making quasi-loans to a director, making loans or quasi-loans to persons connected with their directors or entering into any guarantee or security therewith.
Subsection (2) also applies only to relevant companies and prohibits such companies from entering into credit transactions as defined in section 24 (3) as creditor for a director. Since I now propose to apply all of the prohibitions equally to all companies amendment No. 36 combines the existing subsections (1) and (2) into a new simplified subsection (1), subsections (2) and (3) of the new section are the same as the current subsections (3) and (4) respectively with the internal cross references changed. Some consequential amendments arise from the new section 31. First, since we would no longer be referring to relevant companies amendments Nos. 44 and 45 would remove the word "relevant" in two places in section 35 of the Bill, secondly amendments Nos. 26 to 28 and 47 to 49 would make some necessary consequential changes to the internal section references in sections 24, 37 and 38.
Finally, since I propose to abolish the distinction between relevant companies and other companies we would need to remove three particular definitions from section 24 of the Bill, the terms concerned being "average number of persons employed", "relevant company", "relevant annual number." That is what amendments Nos. 21, 23 and 25 would do.
Turning to amendment No. 24 in the name of Deputy Rabbitte, this amendment was first tabled before I tabled my own proposals for the revision of Part 3 generally. As I have already explained, the directors' loans provisions will now apply to all companies, public or private, and in these circumstances I am satisfied that the objective of the Deputy's amendment has been taken care of and has in fact been achieved. This group of amendments is really the first element of my considered response to the collective points that have already been made in the House on the whole question of loans to directors and as such I commend them to the committee.
I thank the Minister for his explanation. Perhaps he could clarify a few general points. Amendment No. 37 which we are not taking at the moment outlines where loans may be made in the future. You talk about 10 per cent of the company's relevant assets. Will this not lead to massive complications? Would you have to have various valuations carried out from time to time to find out what a company's assets were. Secondly, may I ask what happens in the service company. What would be regarded as a relevant asset in a service company? Do you talk about fees or do you talk about fees plus property that the company may own? What do you refer to?
I will be able to go into that matter more fully on the next group of amendments. The amendment Deputy Barrett is referring to is in the next group. I would say to him in general terms now and in more detail later, that what is in question here are the net assets of a company as defined in its balance sheet. It will not be necessary to look at separate parts of it individually. Its gross assets less its liabilities will be its net assets. The limit on the accumulated loans will be 10 per cent of the net assets. It will vary greatly from company to company. It seems that this is a more satisfactory way to approach the problem than the way in the Bill as it stands where it is confined to £2,500 per director which may be unnecessarily small in relation to larger companies. Small and all as it is, it may actually be too big in relation to small companies. For that reason, the new proposal is a more simplified and, I hope, more equitable approach to the whole question. It puts a restriction that hopefully could be seen as reasonable in the context of any company, whether it is large or small.
My understanding of the purpose of this entire Part of the Bill is to prevent the situation arising where a company would go into liquidation and it would be found that a large part of the money that was properly belonging to the company had been lent to the directors and was not recoverable from the directors and that the company had been in this fashion stripped of its assets that should have been available to meet creditors by means of loans. Rather than setting a cash limit, a proportion of the assets is a better system in so far as if the total amount of loans can be no more than 10 per cent that means that 90 per cent of the assets of the company are protected and therefore available for the creditors.
My worry, which I share with Deputy Barrett, is one of measurement. Obviously there is going to be quite an amount of subjective opinion as to what are the value of particular assets. We see how quickly the share values in a company can change on the basis of the latest pieces of information over the teletext. A loan that was legal today could be illegal tomorrow, depending on what has happened to the value of the shares of the company overnight. We could have a situation in which people would suddenly find that because the company's valuation had fallen they would be obliged to repay the loans.
This may not be as fanciful a situation as all that. I am well aware, and I am sure the Minister is even more aware than I am of this, that in regard to many multinational companies who come into this country, because our tax system is so onerous, one of the ways they have of what they call executive compensation is to give them a very generous house loan at very good terms. These loans can be for very large sums of money. One would not want to find a situation in which this sort of loan would suddenly become an illegal activity just because something had happened in the valuation of the company.
The Minister would want to give some thought to how he is going to police and enforce this new, improved provision. It is still a difficult provision to enforce. I would also ask the Minister if he could elaborate on the purpose of amendment No. 22. This amendment now no longer makes any special provision for money lending companies. Money lending companies, I presume, are banks.
Chairman
Perhaps if we could try to keep strictly within what we have before us we will make progress.
I would like to ask the Minister a question in relation to companies making loans to directors or members of the family. We know from past experience that this loan situation has been very badly abused and, in many cases, responsible for company closures, with loss of employment. Surely the question of loans is one for banks and not for companies. Is there any reason a company should be empowered to give any loan at all, because effectively it is robbing the company of money that should be used in the interest of employment and for the benefit of those who work in it?
In reply to those points, could I point out that the debate has so far largely confined itself to the second group of amendments which we have not reached. Deputy Bruton asked about amendment No. 22, which is the first amendment in the next group. It would be easier for me, if he does not mind, if I dealt with that more fully when we come to that group, as I hope we will, today.
In response to Deputy Bell I would say that at the moment, as I understand the position under the Companies Act of 1963, there is no effective restriction at all on companies lending money to their own directors. That is undesirable. There is a requirement, in the case of public companies and certain others, to publish the fact to the shareholders that there are loans to directors, but there is no prohibition on it. This provision will introduce restrictions for the first time. It will not have a blanket prohibition of loans but it will confine loans to 10 per cent of the net assets of the company. In that way it is hoped to avoid a company being dragged down by the volume of loans that it might make to its own directors.
There is recognition in this group of amendments that even 10 per cent could, in certain circumstances, conceivably lead to the insolvency of the company. If it were demonstrable that it did lead to the insolvency of a company then, in those circumstances, the directors could acquire a personal liability for the debts of the company if it could be shown by or on behalf of the creditors that this had led to the insolvency.
We are trying to strike a balance between the legitimate right of directors to obtain some kind of finance from a company, which is usually essentially their own, but at the same time put restrictions on the extent to which they can have resort to a company for finance, which may be of a personal nature. At the moment the restrictions are negligible and, in my view, insufficient. There will be very definite restrictions now, but at the same time the right to obtain loans from your own company will not be entirely done away with.
As the Minister will be aware, the vast majority of Irish limited companies are private limited companies, perhaps family businesses, or whatever. Secondly, they give the purpose for people starting off in business to get the protection of limited liability without putting at risk their other assets. That limited liability concept is often put at naught by the activities of certain banks who look for personal director guarantees, and so on. I notice an amendment in the name of Deputy Bruton which might restrict the powers of banks to do that. While I welcome that the Minister is recognising the fact that most limited companies are small, family operations, or small operations, and is giving greater flexibility regarding the running of a company, I do not know how, not alone in this section but in other parts of the Bill this is going to be policed and how it is going to be operated.
The Minister, as he said in his initial statement, is going to limit the amount of a director's loan to 10 per cent of the net assets and if that limit was too great, if it was proved afterwards — afterwards meaning presumably when the company would go into liquidation — that the giving of that money put the company at risk, then the directors would be personally liable. As the Minister and his Department will also know, under the 1963 Act there are various sections regarding the question of fraudulent trading etc. and under that Act — as far as I can recall — there has not been one successful prosecution and, if I remember rightly, only one was ever even contemplated. Maybe two were contemplated but it is going to be an extremely difficult thing to prove.
The policing of this section will be able to be got over in a number of ways. We could put all the Acts we like on the books and they would be got over if people were to go to the trouble of getting over them. If people draw out more money or give themselves loans, we must remember that a small private limited company usually is made up of a husband and wife or a man and his family. Let us take the case of a husband and wife, they do not sit down and have board meetings every day of the week and say, "we are going to vote a motion to give £10,000 or £20,000 loans from the company to Mr. A. and Mrs. A." What usually happens is that during the course of the year people write cheques or draw money from the company to pay for personal transactions or to invest in other ideas they have but which are not activities of the company, so that it ends up at the end of the year that they have drawn out far more money than they originally intended to vote in directors salaries.
Usually how the problem is simply got over is that when the company accounts are done, they will vote directors' salaries to cover the amount of the loan, because if you reach a situation, since the Corporation Tax Act, 1975, that shown on the balance sheet is a loan to a director, that means he has overdrawn more than he was entitled to and that attracts a corporation tax charge as a result of the taxes Acts. To overcome that problem he usually back votes directors' fees which goes as credit and which is wiped out so the liability is left to the Revenue Commissioners if the director really wants to go out of business. That is what can be done. That is what is done and that is what will continue to be done.
In the original Bill the question of a relevant company was defined under section 24 (1) (e) and they are the definitions which apply to the last Companies Act that we put through the Dáil in Deputy John Bruton's time as Minister for Industry and Commerce, or whoever the Minister for Industry and Commerce was at some period between 1983 and 1987, and it was to be extended only to certain companies. I am for giving more flexibility because I recognise the fact that the bulk, 80 per cent or more, are small private limited companies. Maybe the whole question should be raised of whether we should go on extending the protection of limited liability to the people who are setting up like that at all. I think we are — I said this previously — trying to restrict transactions involving directors of companies, knowing that we will not be able to do a damn thing about it when it comes to the end of the day. That is my honest opinion of it.
Just very briefly on the same point, if I understand the scope of the cumulative effects of the Minister's amendments, it ought to meet the points I was seeking to cover under amendment No. 24. It was precisely, if you like, for the reasons that Deputy McCreevy has advanced except that I draw a different conclusion, that I advanced that amendment. If you draw Deputy McCreevy's conclusion, there is a serious question to be raised about whether limited liability should have been afforded in the first place and if that privilege is afforded, a price accompanies it. I appreciate him elucidating how it might be circumvented. Having spent a lot of time on the other side of the table I sometimes wondered how things like that could happen. I should have consulted Deputy McCreevy but notwithstanding——
A Deputy
How is it appropriate?
——that, there will always be the possibility of circumventing a term like this. My attitude to the Bill would be formed by the belief that people other than the directors also contribute to the welfare of the company and to the status and profitability of the company and so on and that their interests also have to be taken into account. It is a fact, as I understand it, that as the Bill stands, the definition which section 24 (e) would impose would actually not be applicable to a great many private companies in the country, it simply would have no application at all. We already have experience of a number of EC directives that lay down terms of reference not entirely dissimilar from that, the effect of which means that they have very little application to a lot of companies.
Chairman
Is the amendment agreed? In relation to amendment No. 22, for the benefit of members, the suggested grouping for debate are amendments Nos. 22——
Are you taking amendment No. 21 or the whole group?
The subsequent ones in that group will be decided separately.
If that is the case, will it be discussed.
Chairman
They are being grouped together and they are being discussed, the Minister having moved amendment No. 21. I am asking if it is agreed and if we are in a position to proceed?
Should we not go on to amendment No. 23?
Chairman
No, amendment No. 22 is the next one for discussion.
Could I ask a question on amendment No. 36, what does the Minister think about whether there should be loans to the directors at all? Should they not be banned outright, is it not creating a situation that is going to be too sophisticated for the average director to implement and follow and to know whether he is breaking the law? Will it not be too difficult for the enforcement authorities to determine whether the law has been broken?
There are no restrictions effectively at the moment. This proposes to introduce a very definite restriction. It is a different restriction to the type of restriction envisaged originally in the Bill. I think it is one that is easier to enforce and it is more equitable as between different sizes of companies. At this stage in our development to do away entirely with the right of directors and connected persons to obtain loans would be too draconian and would have a very serious effect on commercial enterprise in the country. The balance that is sought to be achieved here is perhaps the right one, that the right is not done away with but that it is curtailed very definitely by way of amount.
In reply to Deputy McCreevy's point, about his fear that the restrictions and so on might be unenforceable and that people will borrow away regardless — I think this summarises his view — I draw his attention to section 41. This section puts a clear duty on auditors in regard to this matter to see that things do not go out of hand and also to section 34, which has the effect of giving civil remedies for breaches of section 31. In order words, in cases where loans have been obtained, in cases where they should not have been or where the amount of the loan has been too great. In addition to the right of the company, under section 34, to get back these loans, or the excess of these loans, the most effective enforcement aspect of what is now proposed is that in certain circumstances if directors over-borrow they will acquire a personal liability for the debts of the company if it goes into liquidation.
That is an enormous sanction against the abuse by directors of their borrowing powers because if they were to become liable, not just to repay the loans they obtained but also to pay all the trade debts of the company, or even a proportion of them, they would certainly think twice or three times about exceeding their borrowing powers as granted to them in this Bill, as now proposed to be amended.
The Minister did say publicly that he was talking in terms of a degree of liability. Can I take it that that is defined in the Bill? What does he mean by a degree of liability? How is that determined?
It is defined in amendment No. 43 which is in the next group, and we can go into that in more detail when dealing with that group. That would be a new section, 35, which would set out the degree of personal liability of a director where he had been in breach of the borrowing powers, or had exceeded the borrowing powers. He would be personally liable, without any limitation of liability, for all or such part as may be specified by the court of the debts and other liabilities of the company. It would arise on a liquidation and it would be at the discretion of the court. It would not be a fixed liability. The court would have discretion if it thought fit to impose that personal liability without limitation. Of course, in practice, liquidators under the new system would be looking for that, because if it happens in a number of early liquidations, shall we say, under the new Bill, it will frighten directors into making very sure that they do not exceed the borrowing limits set out in the Bill.
The Minister has clarified the question I was going to raise, that was of directors over-borrowing from their company, thereby rendering themselves liable for the total liabilities or debts of the company and not rendering themselves solely liable for the extent to which they have over-borrowed. My understanding of what the Minister has said is that their liability would be for the total debts of the company as opposed to the extent by which they had, without authorisation, over-borrowed.
Potentially they are liable for all the debts if their over-borrowing led to the liquidation. That is not to say that in every case they will be made liable for all the debts. It will be a matter for the court, taking all the circumstances into account, on a report from the liquidator, to decide that. To clarify it from the other end of that spectrum for the Deputy, I would make it clear to him that the liability of a director in these circumstances is not confined simply to the amount of money by which he over-borrowed from the company. Even if he only over-borrowed, let us say, by £100, and the company went down for £100,000 potentially, at the discretion of the court, he could be liable for the deficiency of £100,000, if the court were satisfied that his act of over-borrowing, had contributed in a significant way to the resulting insolvency.
As I see it, and I think we could talk about this all day, what this Bill is trying to achieve is that people are not putting themselves in a position where, through borrowings from a company of which they are directors, they are going to put the company into difficulty and ultimately lead to liquidation of that company, with resulting problems for creditors, etc. I will go along with that principle. To suggest that people should not borrow is quite ridiculous in business terms, because the world would not go around if that was not permitted. It is quite legitimate that people should borrow provided that they are not endangering the company and ultimately endangering the future of creditors.
I know we are not taking amendment No. 37 in conjunction with this, but if we were to replace section 24 with something else, I think we want to know what we are doing. The thing that bothers me is that if you accept the principle that directors may borrow from a company and that it is not going to damage the company in any way, if you want to penalise the director for getting cheap money by using this method, the Finance Acts can deal with that situation. We have to accept the principle, first of all, that directors should be able to borrow for legitimate reasons and if they are looking for cheap money or abusing the tax code, then it is up to the Finance Act to deal with that situation. As I see it, what we are doing here is amending section 24 and replacing it, through amendment No. 37. What bothers me in that area is if we are being reasonable? Are we talking about ten per cent of relevant net assets which in one case, because it is the type of businesss that somebody is in, can lead to a situation where a director can borrow much more money than a director of another type of company, who, because of the type of business he is in finds that the same principle does not apply?
In both cases it may be that we are not damaging the company at all, if you accept the principle of a director being able to borrow. Let us be frank and honest about this. We are looking for expansion in the economy; we are looking for people who have business expertise to use that ability to create jobs for those who do not have them. There are instances where it is a wise business decision to be able to borrow to expand in a different area.
What I am trying to get at here is that while we are not debating amendment No. 37 it is very relevant to the discussion because we have been asked to delete a part of section 24 without being really able to debate what is coming in its place. I would like the Minister to consider if the substitution for what he is deleting is going to be relatively fair across the board for different types of companies. I mean that in a positive, constructive way as distinct from being niggley about whether it is 10 per cent of assets or whether it is 20 per cent. You either accept the principle where people can legitimately borrow for positive, constructive purposes and if you want to penalise them for getting cheap money, or for any other reason, then use the Finance Act for it. If we as a committee can agree that that in principle is a good thing — which I happen to think it is — then can we just discuss what is going to come in its place if we agree to the amendment deleting parts of section 24?
As the Deputy rightly says, amendment No. 37 which he has spoken on is in the next group. I am anxious that we get to that as soon as possible when we can deal with it in much more detail but, Chairman, may I be forgiven for replying briefly to the point he made. I believe it is fair. Not alone is it fair, but it is fairer than the old proposal that is contained in the Bill as it stands, that people should be able to borrow a percentage of net assets rather than borrow a fixed sum that may not bear any relation to the real value of a company.
Net assets are what is available for creditors in the last resort. If Deputy Barrett has in mind some kind of service company which has relatively limited assets as compared to, say, a manufacturing company, that is not necessarily unfair because a company that has limited assets other than the drive, enthusiasm and hard work of its proprietor, is not in a position by and large to borrow as much money as a company which has substantial fixed assets or more readily identifiable assets, that are not necessarily related solely to the goodwill that goes with the proprietor, his name and his willingness to work. Not alone is it equitable that we should agree to this amendment but it is more equitable than what was originally proposed in the Bill and would be seen by most people as that. If necessary, we can deal with that more fully in the next group which we may come to shortly.
As I see it, the effect of the group of amendments which we are taking now will lead to the new section 31. Section 31 states that a company shall not be allowed to make a loan subject to the "outs" in sections 32 to 36. That is basically the purpose of what we are dealing with now.
That is correct.
We are taking out the definition about relevant companies and so on and I agree that there should be flexibility in the Companies Act. I do not agree with the gobbledygook restrictions that politicians go on with about companies as a result of which civil servants have to dream up daft Acts to try to get us out of situations we get into because of some ridiculous speeches we may have made in the past. I am not referring to the Minister in that regard but we all do it at times.
In relation to the sections which state that a company should only get a net loan of 10 per cent of the value of the company, first, it is not possible to restrict directors loans. It will not be possible to police that irrespective of all the good intentions of auditors and so on. Secondly, we may by picking up the 10 per cent net value rule run ourselves into considerable difficulties. Section 25 defines what connected persons are and, while I sympathise with the Minister in his effort to make that more flexible, I must point out to him that we may end up in an inflexible situation.
I have come across a company which has been in operation for many years that has decided for a number of reasons to cease operations. That company, which will not trade, will have a very large cash reserve. For other reasons it will not distribute the cash at this stage, and maybe not for some years to come. There may be family reasons connected with that. However, some of the directors of that company will be anxious to go into other businesses — all the creditors have been paid off and the company is only trading on a small scale. Let us, for example, say that the value of the company will be £1 million and that it will all be in cash. Under section 25 loans to individual directors or to companies set up privately will be restricted. In my view that will be ridiculous. We should not run ourselves into such problems.
Under section 25 connected persons are defined as also a body corporate which shall be deemed to be connected with a director or company if it is controlled by that director. We may run into all types of problems. Not all companies in Ireland set up in business, despite what some people might think, with the intention of going into liquidation and ripping off the creditors, the Revenue or anybody else. Most people who set up private limited companies, 99.9 per cent of them, do so with the intention of continuing in business and making a good living or making a fortune. It is not like some commentators or people of a different political persuasion would have us believe, that everybody who sets up a limited company does so with the intention of ripping off the creditors, not paying anybody and ripping off the Revenue before going out of business. The vast majority of them are anxious to stay in business. The rule of 10 per cent of net assets which the Minister will introduce later, will lead to considerable difficulties for the vast majority of limited companies. Deputy Barrett posed the question as to whether we should or should not give loans to directors. I am in favour of giving loans to directors and if it is a laissez-faire economy, which I am all for, then let the best horse jump the ditch.
The trouble is that a company may go bust because another company went bust which owed it money and the other company may have owed it money at a time when it was lending money to its own directors. Frequently, the biggest victims of corporate misfeasance are other businesses.
Amendment agreed to.
Chairman
Are we agreed we should conclude the debate on the groupings that we have dealt with? May we formally move amendment No. 22? In doing so the suggested groupings for debate are amendments Nos. 22, 37 to 41, inclusive, the proposal to delete section 33 and amendment 43 which form a composite proposal and amendment No. 42 which is an alternative. Is that agreed? Agreed.
Amendment No. 42, in my name and that of Deputy Barrett, is one that was put down when the Bill was in its original form because at that time in the last Dáil I was very unhappy with the complicated distinctions that existed between relevant companies and other companies. To the best of my knowledge the points which led me to want to oppose——
Chairman
Will the Minister formally move the amendment?
I move amendment No. 22:
In page 24, subsection (1), to delete lines 22 to 24.
I want to make some remarks about amendment No. 22 and those grouped with it. For alleviation of the suffering of the committee, these are the two biggest groups by far and once these two groups are out of the way the subsequent amendments by and large will be discussed in ones and twos and there will be a more precise net point involved. Therefore, it will not be necessary to try to comprehend so much together at the same time.
We come now to the second main group of amendments in the package of amendments to Part III of the Bill which I am putting forward today. I hope the committee will bear with me on this since the nature of the amendments is such that it requires a slightly lengthy explanation but it is better that the explanation be given in order to try and clarify the matter for members. This second group of amendments deals essentially with the basis on which exemptions to the basic prohibitions on loans and so on, should be provided for in the Bill.
The first of these amendments, that is to section 24, is in fact consequential on the proposed amendments to section 32. This gives rise for the need to group these amendments for discussion purposes at this stage. Having said that, the structure of the present text is that section 31 sets out the various prohibitions, restrictions and so on, while sections 32 and 33 set out a series of complex exemptions to these basic rules.
At present the list of exemptions in section 32 includes, firstly, pragmatic exemptions to allow for normal intragroup lending in a situation where you have a group of companies, that is, subsections (1) (5) (a) and (5) (b) of the present section 32; secondly, financial limits on the amount which may be lent to any one director and so on, in other words, subsections (2), (3) and (4) (a) of section 32; and thirdly, what we would call "arms length transactions", in other words, transactions made on normal commercial terms. These exemptions are currently in subsections (4) (b) and (7) (b) of section 32; fourthly, advances to meet directors' legitimate expenses in subsections (5) (c) and (6) and, finally, specific exemptions for banks and other money lending companies in subsections (5) (d), (7) and (8).
This range of exemptions creates a number of problems in itself, as has been pointed out in the House and elsewhere. First of all, it makes for very complex rules. For example, the existence of the financial limits on an individual director basis in section 32 requires complicated rules, set out at present in section 33, to determine whether a loan, or whatever, is allowable in any given case. These rules have been criticised on account of this complexity and I must say that I can see merit in that view. I am confident in this context that the amendments I am putting forward today will simplify considerably the text of the Bill in this respect. As well as the problems of complexity, however, having a system of absolute money limits per director takes no account of the size of the company and of its state of solvency or otherwise.
When we get right down to it, the abuse we really want to catch here is the one where directors, or people connected with them, grant themselves substantial loans from their company, in a situation where the company cannot afford it, having regard to its financial situation. In such cases, it is the very giving of loans to directors which may precipitate, or at least contribute, to its downfall. I think these are the cases we really have to concern ourselves primarily with.
What I am proposing, therefore, is to delete section 32 of the Bill entirely and replace it with five short sections which would give more flexibility to companies generally so that they could lend to their directors, where the company can well afford it, as well as to repeat some necessary and pragmatic exemptions to reflect commercial reality. At the same time, there is a price to be paid for increased flexibility and that is a much stronger anti-abuse clause.
I propose that where a company is insolvent on its liquidation and loans to directors have contributed materially to the insolvency, and perhaps even caused it, the directors concerned should face the possibility of personal liability for the debts of the company. That should prove a powerful deterrent against abuse in this area and it is one of the reasons I am proposing to be more flexible as regards the scope for exemptions, to begin with.
Turning to the amendments, I should mention first, amendments Nos. 37 to 41, inclusive, which would replace the present section 32 with five short sections each dealing with one particular type of exemption and which would also make considerable changes along the way. The new section 32, the subject of amendment No. 37, would alter the present series of financial limit exemptions so that rather than allow up to a certain absolute money level to be lent to any one director, a company would be able to lend money to any of its directors, their connected persons and so on, up to a total of 10 per cent of the net asset value of the company. This approach would, of course, allow increased flexibility to companies which could afford to make loans of this kind.
I am conscious that having a more relaxed régime like this involves the possibility of abuse, but I think this is more than offset by amendment No. 43 which should severely deter any such abuse. Amendment No. 43 is the amendment relating to potential personal liability.
Coming back to the main group of amendments here, however, amendment No. 38 would simply replace the present section 32 (1) by a new section 33 with the reference to "relevant" omitted from the first line. Amendment No. 39, inserting a new section 34, would simply replace section 32 (5) (a) and (b) without amendment. The new section 35, which is the subject of amendment No. 40, would replace subsections (5) (c) and (6) of the present section 32 and make considerable amendment to it.
I am satisfied, following earlier debates in both Houses on this, that the need in the present section 32 (6) to get shareholder approval for directors' expenses up to £10,000 would make business life unnecessarily complicated and, further, that a top limit of £10,000 on such expenses in any event is unwarranted. I propose, therefore, to dispense with the references to shareholder approval and the £10,000 limit which appears in the current version of the Bill. At the same time, I propose to strengthen subsection (1) of the new section 35 by speaking of "vouched expenditure properly incurred". I also propose in the new subsection (2) to insert a straightforward obligation on directors to discharge any balance of advanced expenses within six months of the advance being made and make it a criminal offence to fail to do so.
Amendment No. 41 would insert a new section 36 and would bring together what are currently subsections (4) (b), (5) (d), (7) and (8) of section 32. First of all, the new section 36 would more or less mirror what is currently section 32 (4) (b) subject to the insertion of a reference to the company "ordinary offering"' similar terms to outsiders. Secondly, I think the sense of the present subsections (5) (d), (7) and (8) of section 32 can be adequately catered for in this new section without making specific reference to banks or other money lending companies.
Speaking of moneylending companies, of course, the fact that we would no longer refer specifically in the text to such companies means that we can dispense with the definition of moneylending company in section 24, and that is what amendment No. 22 would do. Next I should say that the removal of references to absolute financial limits from section 32 means that section 33 can now be deleted since all that section currently does is to provide a series of complex rules for determining whether such monetary exemptions should be availed of. I would, therefore, propose the deletion of section 33 from the Bill.
Turning now to the amendment opposing existing section 32, tabled by Deputies Bruton and Barrett, the effect of this would be to prohibit the making of loans, quasi-loans and so on, outright. This is something Deputy Bruton mentioned in his Second Stage contribution and again today. Indeed, I would be the first to admit that it has a certain merit. As the then Minister mentioned in his response to the Second Stage debate, it would have the obvious advantage of simplifying this part of the Bill. However, what we must be clear about here is that Part III of the Bill is intended to tackle the abuses which exist in relation to companies lending money to their directors. The principle we are aiming at is to avoid directors using their company as their own private bank. We must be pragmatic enough to realise that situations will undoubtedly arise where small loans may be made to directors without the danger of abuse creeping in. This is why it is proposed to continue the right of a company to make loans and such like to directors within clearly defined limits. I am satisfied that my revised proposals strike the right balance. The committee will gather that I would be opposed to any outright prohibition on the making of loans.
Amendment No. 42 in the name of Deputy Rabbitte was first tabled before I circulated my revised proposals for dealing with loans to directors. In the light of these and in particular in the new sections 32 and 36 no differences will now exist in the treatment of banks and moneylending companies which was what the Deputy's amendment sought to address. In the circumstances the necessity for this amendment does not now arise.
Chairman, I am sorry that my introduction to this group of amendments has been a lengthy one but I hope the committee will appreciate that the amendments I am proposing here are important ones in the context of Part III of the Bill and that I wanted to give the fullest possible explanation as to their background and content.
Chairman
Have we formally agreed to the grouping as suggested? Is that agreed? Agreed.
The nub of the issue is the two contrary points that we take. The Minister can, as he proposes here, address abuses in the loan-giving or alternatively the suggestion, which I think was positive, by John Bruton that maybe we should ban loan-giving outright. These would seem to be the two possibilities. In spite of the fact that Deputy Barrett actually gives very good reasons why loans should not be banned outright, it still strikes me that the question is in the air as to whether it would be wiser to go that route.
As far as amendment No. 42 is concerned, that was put forward in the context of this extremely complicated system of relevant amounts and companies and so forth that stood in the original Bill. I compliment the Minister for having simplified the legislation to a considerable extent.
However, in the context of the amendments we have before us for the moment, I do not want to talk about amendment No. 42 which goes at the very principle of whether these loans should exist. I confess not to fully understand why, given that there are so many people offering "what can we do for you" at the moment in terms of offering loans, people have to find credit from their own company. However, that seems to be a well established commercial reality and is something we can discuss later. For the moment I would like to concentrate my attention on what the Minister is proposing.
My big concern is how it is going to be possible to know what is 10 per cent of one's assets at any given time. Indeed, is the 10 per cent of a company's assets at the time the loan is granted the relevant consideration, or is it 10 per cent at any time? If a person gets a loan of £10,000 from his company and that is 8 per cent of the company's assets and then, because the company's assets deteriorate in value and that £10,000 becomes 12 per cent of the company's assets, is the director obliged there and then to repay the loan or is he covered by the fact that it was less than 10 per cent at the time the loan was granted in the first instance? That is the first point I would like to make.
There should be some reporting requirement placed on auditors requiring them to draw to the attention of either the Companies Office or the directors or both on a regular basis what is the relevant limit at any given time and the proportion of that limit that is being used up by loans outstanding. It is something of which a running tally needs to be kept, otherwise people will drift into illegality unintentionally. Perhaps the Minister could address himself to that for the moment.
The definition of what the net assets are for the purpose of this calculation is contained in paragraphs (a) and (b) of subsection (2) of section 28 of the Bill which says that the value of a company's net assets are determined by reference to the accounts prepared and laid in accordance with the requirements of section 148 of the Principal Act in respect of the last preceding financial year in respect of which such accounts were so laid. Secondly, where no accounts have been prepared and laid under that section before that time the relevant amount is the amount of its called up share capital. In other words, if the company did not have accounts, it could lend 10 per cent of its called up share capital and not its nominal capital. On the point Deputy Bruton raised as to whether a loan would be covered if it were within the percentage at the time that it was granted, the answer is yes. It remains covered even though the financial circumstances of the company might change subsequently and might push it above the 10 per cent limit at a subsequent point. The loan does not become as it were ultra vires the company for that reason. It would remain a valid loan.
If at the end of a year the accounts are prepared it is discovered that loans given to directors are greater than 10 per cent of the net value, what is going to happen to that information? The Minister mentioned earlier that there is another section about the auditors making some report. The Companies Acts some three or four years ago said accounts had now to be filed. Whom does the auditor inform about this apart from the directors and shareholders of the company? Who is going to take any action? Presumably the company is in no immediate danger of financial collapse. The giving of these loans has not put the company out of business and, as the auditor would be certifying, is able to continue its business and everything else. What is going to be done about it if it does exceed the 10 per cent?
The position as I understand it is that if the auditor discovers that this has happened, his duty is to report that fact to the shareholders. If it is a company which has to publish its accounts, of course, it becomes a public fact then because that notice of the auditor will have to be lodged with the Registrar of Companies. It would then be the duty of the directors to regularise the position and they are answerable to the shareholders. Their duty would be to regularise it, I presume, with all reasonable haste. They may not be able to do it overnight, but they should certainly be expected to do it within a short period.
To take a normal example: two people are directors and shareholders of a company — a husband and wife holding two £1 shares, which is the case in the vast majority of private limited companies — and you send in the accounts at the end of the year and point out this great sin they have committed, that they have exceed the amount, it comes out at 15 per cent, for example. You are also obliged now under the last Companies Act to file the accounts, in some form or other, of all private limited companies, as a result of an EC Directive which we had to adhere to. All accounts now have to be filed with the Companies Office in some form or other. What is going to happen about this? There is no danger of anything happening to this particular company. The directors, who are the same as the shareholders, meet one day as directors and the next day they tell each other they are shareholders. What is going to be done about it?
That, of course, could arise with any provisions of the Companies Acts. There is a certain assumption that people will operate a company in accordance with law. They are expected to regularise the position as soon as can reasonably be done in all the circumstances. With the greater publication of accounts now than was the case heretofore, it will become public knowledge much more readily than might have been the case formerly. If it were to influence their creditors, or those who trade with them, then obviously the directors or shareholders will have a commercial incentive to get the position in order as quickly as they can.
But there is no penalty in this Bill for that. There is no penalty to be imposed as a civil penalty in any part of the Bill, or is there? That is what I want to clarify.
If there is a breach of section 31 there are civil remedies set out in section 34 of the Bill as it now stands, and there are criminal penalties for a breach or breaches of section 31 set out in section 35, where an officer of a relevant company who authorises or permits the company to enter into a transaction or arrangement knowing or having reasonable cause to believe that the company was thereby contravening section 31, shall be guilty of an offence. An offence under section 31 is lending too much money to a director or a connected person. A person who procures a relevant company, and I think that would now read "a company", not just a relevant company but any company, to enter into a transaction or arrangement knowing or having reasonable cause to believe that the company was thereby contravening section 31, shall be guilty of an offence. There is one general penalties clause at the end of the Bill and my recollection is that the penalties are a fine of £1,000 and/or imprisonment for a term not exceeding 12 months on summary conviction and £10,000 or up to three years' imprisonment on indictment. I think officers will not lightly allow an offence to be committed because of the quite severe civil and criminal penalties that would attach to them.
Chairman
A final supplementary, Deputy McCreevy.
Later we are putting in a new section 35, under amendment No. 43. The section 35 that is referred to now is the one that is in the Bill but under amendment No. 43 we are putting in a new section 35.
The example I have given has occurred and the company is still trading and there is no danger to anybody, creditors, revenue or anybody else. If the company goes into liquidation eventually these kind of criminal proceedings can be taken. However, in the normal course of events, the company is successfully trading and continues to trade but it has been in breach of this 10 per cent net value rule. Is it the Companies Registration Office, when you file the accounts, who will then fine the company, or, who is going to fine the company? There would be no one to bring them to court for summary indictment or anything else, because there is no danger to anybody. I am asking if this section is breached — and I can see it being more breached than observed — will the Companies Registration Office and the Department of Industry and Commerce impose fines for technical breaches of this section, or is it all going to arise only when and if a company goes into liquidation? I am talking about the normal course of events where this has been breached, no damage has been done to the company, it does not go into liquidation and it continues. What penalties are to be imposed on that company? What penalties will be imposed, if any, on that company or who is going to impose them?
The fact that there is a new section 35 proposed does not affect the existing section 35, it is only a question of numbers. There is no question of the existing section 35 being removed, it just gets pushed down the Bill a bit further, because there are now more sections in it. It will be called some new number — section 38 or section 39. It is not affected by any of the proposed amendments. It is not dependent, for its enforcement, on a liquidation, as the Deputy seems to think. Section 35, as it now is, can be utilised whether there is a liquidation or not, even if there is an ongoing situation where the company continues to trade.
The Companies Registration Office or the Department of Industry and Commerce will not, of course, impose the penalties. The penalties are imposed by the courts as a result of a prosecution which is brought by the Minister for Industry and Commerce. I think in certain circumstances it can also be brought by the Director of Public Prosecutions if he wants to, but it is either the Minister or the director who would bring the prosecution to the appropriate court and the court would impose the penalties. They can be imposed on an ongoing company, a company that is continuing to trade.
I appreciate fully what the Minister is trying to achieve and I admire what he is attempting to do. He still, in my mind, has not convinced me that directors should have any right whatever to borrow from a company, because they are jeopardising the employment of the people who work in the company. I have not heard one reason yet to justify that. For example, the question of the net assets of a company can be juggled around. I have had many experiences, and I am sure my colleague, Deputy Rabbitte, has had more recent ones than I, where a company can juggle the stock of a company to increase it by 100 per cent, or whatever per cent, and decrease it virtually within months of an annual stocktaking. They can actually juggle with the net assets in that way and it is done quite frequently. It would, in my opinion, be much neater and would require considerably less legislation if the Bill actually said that neither company directors nor anybody in a company was entitled to borrow from the company. Could the Minister give me a reason they should? I cannot get one.
I will try to do that, although really the point Deputy Bell is making is more fundamental than just this Bill, It is normal, commercial practice in this country and has been for a very long time. As Deputy McCreevy pointed out earlier, the great majority of limited companies in this country are small, private limited companies, which are essentially established for the purpose of running a family business. It is usually one single business of whatever nature. In my view, and perhaps in the view of the great majority of people who are involved commercially; it would be an entirely inappropriate restriction to abolish the right of a director to borrow from what is essentially his own family business. If he were not incorporated there would be no problem in removing some part of the assets or in borrowing money from the bank on the strength of some part of the assets, but it would be an undue penalisation of him to remove that right simply because he is incorporated.
Deputy Bell should bear in mind that under our existing law as it has been from the earliest of the companies Acts — early in the 19th century right up to and including our latest major Act in 1963 — there is no restriction on borrowing by directors. They can borrow 110 per cent of the net assets of the company if they can get away with it. They are not committing an offence, either civil or criminal. This Bill, for the first time, introduces a restriction. Some people would see it as a very severe restriction. It is severe enough but it is equitable. It would be an untoward interference with people's right of enterprise to prohibit entirely the whole idea of borrowing by directors.
If somebody in a private company — say, a family business — wanted to try to start something new which might be outside the scope of his existing company as drawn up, it would be wrong to deprive him of the right to borrow, say, £10,000 or £20,000 for that purpose. He might be engaging in an enterprise which in the long run would be very helpful to the original family business. Therefore, it is reasonable to allow that right to borrow to be maintained. What we are talking about here is the abuse of this right. It is abused from time to time and it can be seriously abused because it can bring down companies with consequential losses for other directors and for employees. We are trying to prevent the occasional abuses involving only perhaps 1 or 2 per cent of companies. It would be quite wrong, therefore, to remove the right to borrow. We should seek to restrict it in a way that will prevent its abuse. I think the Bill, as now proposed to be amended, seeks to do that.
In the past 7 or 8 years there have been a good number of examples of the kind of thing Deputy Bell refers to. It would greatly simplify things here if we could simply prohibit the making of loans entirely. I do agree that whether that is realistic is a question that has to be faced up to. Deputy Bruton posed the question as to why there should be any necessity for company borrowing of this kind if banks are anxious to lend money now to any company director they can get to take it up. The necessity I presume is that the kind of loans we are talking about here are usually interest free. They are loans that are taken out by the directors on a fairly informal basis and which, therefore, do not attract the kind of interest rates that are attracted by the banks. I am not so sure how practical it is to try and eliminate that entirely and I am not certain about whether it is possible to police the kind of abuses that can happen. It would be very tempting in a situation of a reasonably substantial private company to exceed that limit if, in the opinion of the director, or of directors as often could be the case, just a little more could keep them afloat. It would be quite difficult. By and large it is a neater and more reasonable approach to the question than was contained in the Bill up to now. I tend to agree that it would be unreasonable to try and eliminate the facility entirely. I do not know if the Minister considered whether it would be practical to require directors in that circumstance to have regard to some rate of interest being paid. The interest aspect is presumably the attraction.
One of the difficulties is that if you were to consider a total prohibition and make a provision accordingly, in practical terms you would have to have a lot of exemptions because you would have to make arrangements as between companies of the same group, those who would be directly connected with one another.
I am glad Deputy Rabbitte feels that what is now proposed is neater and more enforceable than what was originally proposed. I think it will give greater satisfaction all round both to those who want to avail of loans and to those who are fearful of the abuse of such loans.
I wonder if the Minister would comment on the point about the insertion of an interest requirement, perhaps at preferential rates or whatever. Is that practicable at all?
I do not believe one could put in a provision of that kind in a companies Bill. It would be very hard to enforce. I do not feel that where the transaction takes place between a company and one of its own directors you could enforce such provision properly. Even if you did there is nothing to stop the company in some way giving back some of the interest paid or purported to be paid either directly or in some other form.
Just on that point, it could nonetheless be shown as interest at a notional rate. I am just following the specific point on interest at a notional rate. Could it be shown in the books as drawings?
Perhaps the best way to catch that particular abuse — if such it is — or concession, is through the revenue law. Let it be taxed as a benefit in kind if it is given at a less than arm's length rate.
I would like to suggest two possible additions to the Minister's amendments for the purpose of discussion. In amendment No. 37 he refers to the section not prohibiting the company from entering into an arrangement with a director where the arrangement does not exceed 10 per cent of the assets of the company. I wonder if it would be an improvement if the words "entering into" were dropped and replaced by the word "maintaining". It seems to me that a point has been made by Deputy McCreevy which is very valid and that is that a loan may be made which does not exceed the 10 per cent limit at the time it is made but subsequently reaches a point at which it is in excess of that. There is no requirement to repay the loan at all. The company could be going steadily down the tubes and so long as the loan was valid at the time it was made there is no problem for the person who has the loan. If the exemption was only related to a continuing situation rather than to a particular situation at the time the loan was made as I think the re-wording I am putting forward would achieve, that might be a better arrangement and it would get away from the situation where once the law was complied with in the first case it would no longer have any effect if subsequently the situation had changed.
The Minister has made something of the provisions of amendment No. 43 which is a penalty provision in regard to civil liability where these limits have been breached. Frankly, I think that section 43 is both draconian and uncertain and I think those are two characteristics that are undesirable in legislation. It is draconian in so far as it is open to a court to declare a person, as the Minister said, liable without any limitation of liability, if the court thinks that a loan, even though the loan itself may have been extremely small, and the example given by the Minister was one which was extremely small, proportionate to the liability of the company. It is open to the court to declare personal liability far beyond the extent of the loan. I wonder if it would be more appropriate to drop the words "without any limitation of liability" and say instead "it shall be personally liable to a limit of no more than twice the amount of any loan received" or whatever the appropriate word may be.
It seems to me that people should not be thrown open to unlimited liability in respect of something that happened in regard to a transaction which itself was for a limited amount. I think this legislation — and I have seen it go through so many different mutations over many years, long before it ever appeared in the House — increasingly has taken the shape of saying the legislature cannot make law which is absolutely clear and precise so we are going to let the courts decide what is wrong in a particular case. That may seem to be a great idea in some ways because we all think judges are great people etc. but, frankly, I am not sure that it is such a great idea.
If we want business to succeed it must proceed on the basis of certainty and an idea in which, depending on what mood the judge is in when it comes to look at your case, you could find that you are in for unlimited liability or, alternatively, that you get off scot-free. Essentially that is what this means because it is going to be a question of the court deciding whether this thing has contributed materially to the company's inability to pay its debt or has substantially impeded the orderly winding-up thereof.
The court may, if it thinks proper to do so, declare unlimited liability. In other words, essentially to some extent, we the Legislature are washing our hands of the whole thing and saying, "It is over to you in the courts. If you think the thing was wrong you can determine unlimited liability, or, if you do not, you need not". It seems to me, therefore, that the suggestion of limiting the thing to twice the amount would be more precise, more particular and would be a better reflection of our responsibilities. I think that might be an improvement and I ask the Minister if he agrees.
I was listening very carefully to what Deputy McCreevy said some time ago about this legislation. The reason we have this legislation is because we are talking about a relatively small percentage of rogues who abuse any law, no matter what you produce, and none of us would want to stand over such activities. I get the feeling from the debate that some people tend to think that people in business who are directors of limited companies, whether they are private or otherwise, use money from the company for their own personal purposes, to go off on a holiday to Spain, or to do whatever. In normal business you do not do things like that. You are not allowed to do them. You should not be allowed to do them. If you do them, the Finance Act is there to remedy that situation.
I would be afraid that we would create a situation where we will stop people forming companies or, if they do, they will not form them in this country, they can go to the Isle of Man or some place else to do it. They will go to another EC country that has more liberal laws in this whole area and with the advent of 1992 they would be able to trade here without having to adhere to all these sorts of restrictions on what I would regard as, in a lot of cases, normal good business.
We should get the whole thing into perspective, that we are not talking about people taking money from a company for their own personal use. In the vast majority of cases money taken is used for another venture which would create employment, which we badly need in this country. I suggest that many of the abuses that have occurred in the past have resulted from companies not doing annual accounts. Instead of restricting loans of 10 per cent, or 5 per cent, or 15 per cent, why do we not have the situation where people are obliged to produce accounts on time? You could require them biannually, if you thought that would prevent these rogues from operating.
We should have another look at this whole matter because quite honestly I suggest that 10 per cent is an arbitrary figure. I could argue that it should be 20 per cent, somebody else could argue it should be 30 per cent, somebody else could argue it should be 5 per cent. There is no sound business base for saying it should be 10 per cent. People should be allowed to set up businesses, to create them themselves to give employment. They want to operate within the law and they do not want politicians or anybody else restricting them in progressing, creating employment and creating more wealth.
I read what Deputy Bruton said on Second Stage. I think he has an amendment in relation to this point. We should be encouraging outsiders to get involved in private limited companies. To help those companies to expand and develop and give more employment the company itself should be able to buy back those shares when some outside investor feels that he or she wants to get the money back.
What I am afraid of is that because of 1 per cent we are going to make a law (a) that would be practically impossible to police, (b) that after a couple of years in operation would be seen to be totally ridiculous, (c) that could encourage people to set up business outside this country, or register outside this country and (d) that could encourage people to become sole traders to avoid the sort of restriction we are talking about. I do not have any immediate solution for the Minister, but I would ask him to consider, perhaps, other ways of dealing with rogue directors than putting in the 10 per cent restriction. Can we look at the obligation to produce accounts on time, or should we consider more frequent auditing of accounts and should we perhaps consider greater obligations being put on the auditors to put something into the accounts to warn shareholders of activities that they do not think are normal business practice. Rather than go off on this tangent of talking about 10 per cent or whatever per cent you wish to pick, I am afraid that when all this is completed and people want to trade they are going to look for angles around this legislation because it may be too restrictive.
I am not making a case for any rogue directors or people who abuse the law. There are ways and means of dealing with these people but in the process we should not tie others who are legitimately trading into knots that they will find it very difficult to get out of. It struck me, and not having being involved in the earlier discussions on this Bill but from reading the debates, that people who did contribute expressed genuine concern but they all related to a very small percentage of people who abused the system in the past. There would be all party agreement to find real solutions to dealing with these people rather than have this business of whether you carry forward the 10 per cent to the following year, if it is lower or higher, if you can borrow more money the following year or if you can fiddle around with your business to make certain that figures can appear that would not otherwise, or whatever. I do not have the answer but I would like to hear the Minister's view. Is there another way of dealing with these people rather than this sort of restriction on the genuine person who wants to set up another business — his company is viable — and wants to borrow £20,000 or £30,000 to start that business. It might be commercially better that they borrow from within that company rather than go to a bank which perhaps will charge 16 per cent or 18 per cent, and they might shy away from starting up that second business because of what the banks might insist upon or the rate of interest at the time. We are living in a time where interest rates are beginning to rise again and people have second thoughts about expansion when that occurs. It could be that if you get 7 per cent or 8 per cent on deposit and you are charged 16 per cent or 17 per cent on borrowings, it might be a good practical, viable proposition to borrow money from a company that is capable of starting up another business. Before this is put to the vote, or the Minister might consider it for Report Stage, we might have a second look at this because I am not convinced that it is the right way of going about things. It is a vast improvement on what was there before — I have to hand that to the Minister — but I am still not convinced there is a sound logical basis for selecting 10 per cent of a company's relevant assets as their limit.
Maybe the Minister would confirm that a business can loan to another business, even though they are associated but not actually connected in commercial terms without the 10 per cent net asset coming into play. Does that draw down the penalty on the borrowing?
A company can lend in such circumstances to another company with whom it is associated without that limitation. The limitation in section 31 as it stands relates to directors.
It seems from the point being made quite strongly by Deputy Barrett that genuine entrepreneurs would not be inhibited by this 10 per cent ceiling obtaining a loan. That is answered because if the entrepreneur is genuine——
I could help the Deputy by referring him to amendment No. 38 before us and a new section 33. He will see that there is an exemption there for inter-company loans of the same group.
If they are totally commercially separate, divorced, from each other they might have common directors but they would not be commercially connected beyond that.
Unless there was some connection between them you would not find an ordinary trading company lending money to another trading company it had no connection with. It would need a money lending licence to do that. There is provision to enable companies that are within the same group of companies, and that is usually because they have common directors and common shareholders to lend to one another and there is not that restriction there. That exemption meets the case Deputy Barrett has argued at some length. What would normally happen in the instance Deputy Barrett is talking about of someone trying to start up a second or alternative business is that he would probably form another company and there would not be the restriction on the first company lending more than 10 per cent if that was appropriate to the other company. It is personal borrowing that it is thought necessary to restrict because that could give rise to abuses.
That is the point I wanted to make is that the person who is borrowing for genuine purposes would probably go along the line and form that company and do it properly and above reproach. It is the rogue borrowers, the rogue directors, Deputy Barrett mentioned, who even though they may be small in number, are the ones we have to get at. Unfortunately there is not any other way except through setting penalties but I am to some extent intrigued as to how this 10 per cent was fixed. In certain cases that might make a lot of sense but there are many other cases where it is a very arbitrary figure and I wonder why it was pitched so low in the first place.
I would not regard it as unduly low. I think 10 per cent of net assets for lending to a director or connected person is probably a sufficient percentage. If you go above that you are getting into the danger area. It is an overall figure, not individually. The directorship or the board cumulatively could only borrow the 10 per cent, because otherwise it would be regarded as too much.
I do not think the Minister made reference to the suggestion from Deputy Bruton about an amendment to section 32.
I am coming to that.
Then I will not comment on it.
Deputy Bruton made two suggestions: one was that we could possibly amend amendment 37 which would insert a new section 32. He suggests that in the first line of that new section 32 instead of having the words "entering into an arrangement with a director" we should have the words "maintaining an arrangement with a director" or with a person connected because he was afraid it could continue for an indefinite length if it was all right on the day on which it started. It is necessary to maintain the words "entering into". What one might consider is adding, after the words, "entering into," the insertion of the words "or maintaining." That would meet the point Deputy Bruton is making. If he does not mind, I would prefer, in order that we could think it through fully, if we could perhaps put down an amendment to that effect on Report Stage rather than actually accept it now, so that any possible complications from it could be thought out.
It was on that point I was going to suggest as a possible alternative to the excision of "entering into" by the insertion of the word "permitting". That might meet the situation. In regard to the 10 per cent and so forth, it would be my view, if I were to agree to that and I think it is unrealistic to try to ensure that there is no such facility, it would be because there was a commensurate penalty for abusing that. That is very important.
In the section to which Deputies Bruton and Barrett are taking exception as being draconian and so on, it seems to me that the problem of rogue directors is not being dealt with, unless that section stays. Rogue directors do exist. I am sorry Deputy Bell has left. He referred to this. We all have had experience of that, it is a fact. The point raised by Deputy Flood clarifies that. The bona fide case that Deputy Barrett is apprehensive about is clearly met where inter-company loans are perfectly allowable. If somebody wants to expand his business and cause a subsidiary company to be set, or an associate company or whatever, the facility is there.
I am convinced that the whole area of subsidiary companies, which are arranged for various reasons that are not always in accordance with the high-minded objectives Deputy Barrett mentioned, needs to be looked at separately. That is a separate area in the Bill. In terms of the genuine fears raised by Deputy Barrett, the facility for inter-company arrangements not being prohibited meets that situation and you are not seriously dealing with the question of rogue directors.
If we were talking about a situation here of husband and wife directors, as instanced by Deputy McCreevy, and only they were concerned, so far as I am concerned, I do not want to become involved. It is a matter for them whether it is 10 per cent, or 70 per cent, or whatever. However, in the more normal situation where there are more than the shareholders involved, Deputy Barrett said let us put in some provision that warns the shareholders. What about employees of that company? They have to be taken into consideration also.
In my view, we are not seriously setting out to deal with the problem of rogue directors unless there is a commensurate penalty and that penalty is set out in amendment No. 43 to section 35. I certainly would be in favour of that standing.
I want to cover much of the same ground as covered by Deputy Rabbitte. A couple of points were made by Deputy Bruton that a judgment on this issue can really only appropriately be registered at the end: if the consequences of the borrowing are catastrophic, then it is at the end of that process that a judgment has to be registered. It seems to me that the court is the only appropriate body. I agree with the point made in relation to inter-group transactions. The amendment referred to by Deputy Flood seems to take account of the problems Deputy Barrett had. I would disagree with the idea that he should in fact have a multiple of two, or twice the amount of the borrowing being the limitation. It should be an unlimited liability, because the whole point and purpose of the new section 35, that comes in under amendment No. 43, is to visit wrath upon the head of anybody who has actually threatened the company because of their misbehaviour and because of their excessive borrowing. I would make the point Deputy Rabbitte made, that it is not just the directors and their families who have lost patrimony, it is workers who have lost a future and their future can never be calculated; it is the creditors who have lost a whole lot and the workers of the creditor firms.
As you are dealing here with people who have clearly been judged at the end of the day to have taken decisions which put at threat not just their own companies but the lives of their workers, the welfare of their creditors and the welfare of anybody who had any connections with the firm, it is entirely appropriate that the Minister, as he has done, should have provided that there is no limitation on the liability. I would not like to see a multiple of two. If I borrow £20,000, I can perhaps survive, if I am a director, if I have to simply pay £40,000 back. But if the borrowing of that £20,000 has destroyed a perfectly viable company, it should go beyond simply a multiple of two. It is in those circumstances I see that what is suggested here is prudent. It makes it very clear to somebody who behaves in a way which is imprudent, and who does not care, that the consequences of their actions would be very grave indeed.
I am satisfied with the Minister's approach to the first suggested re-wording in regard to putting in "maintaining", if that deals with the problem I adverted to as something that was legitimate at one time can be capable of being continued even though it is no longer legitimate subsequently. That is all right with me. I am not quite sure, if I may say so, that section 41 actually requires the auditor to report if the loans have gone through the 10 per cent limit. I do not think that that is the meaning of section 41. So far as I can see, section 41 only refers to the provisions of sections 36 and 38 which concern breach of disclosure. I am not so sure that it relates back to a breach of the principal section, section 31.
Perhaps the Minister could confirm or otherwise whether a technical breach of the 10 per cent limit which arises subsequently as a result of the change in the valuation of the company, is something that would fall to be disclosed under section 41. I would like if the Minister would confirm that. If that is not the case, perhaps that should be included because, as Deputy Barrett pointed out, the best way of all of preventing this sort of problem becoming serious is to require its closure in good time so that creditors can take evasive action.
However, I have to say that I do not agree with Deputy Roche in his criticism of my suggestion of putting some limitation on the liability. Let us look closely at the provisions of amendment No. 43. It says that if the transaction referred to, which could be a loan for £5,000 to a director, "has contributed materially to the company's inability to pay its debts . . ." If a company is in debt to the tune of £100,000, and the director has a loan of £5,000 which he has not repaid, that is a 5 per cent contribution to the company's inability to pay its debts. Five per cent is very little, but it is material and would, therefore, come within the purview of this section. A loan of £5,000 received by a director from a company would materially contribute to its demise even if that company was going down for a total of £100,000. That loan could, therefore, mean that the director could be liable for the entire £100,000 at the discretion of a judge. That is something that nobody knows until the end of the process. In other words, nobody knows what the judge is going to do.
I would, therefore, suggest to the Minister that there should be some proportionality between the liability to which the director is subject and the size of the loan. I am not tied on a multiple of two; I am not even tied on a multiple at all. Some requirement placed on the judge to require him in assessing liability under section 32 to assess it in a form that is proportionate to the benefit that is being received from the loan by the director is required to avoid unpredictable situations. Everybody agrees we should not place directors in a situation where their fate is unpredictable. The whole idea of legislation is that people will know where they stand. That is why I was arguing earlier for having no allowance of these loans because if there was no allowance for these loans people would know where they stood.
What we have at the moment is a very unpredictable situation. The Chair knows only too well that judges are highly unpredictable individuals. It depends entirely on the day, the time of the day and the court what sort of a line they are going to take and that is not a good way in which to decide such issues. It should be more clearly stated here in the committee rather than leave it to judges afterwards to make subjective decisions. I hope the Minister can see his way to do something along the lines I am suggesting.
Whereas one may argue with Deputy Roche or Deputy Bruton regarding the company being wound up and what the level of personal liability should be — should half be from the director if he has contributed to the financial bankruptcy of that company? — what I am worried about is this: are we going to impose sections in this Bill that will limit the scope of people to carry out normal business transactions? When a company is wound up one can argue whether it should be double the liability or let the judge decide and so on. Some of the sections we are putting into this Bill are going to make it more and more difficult for people to operate normal business transactions. Under section 25 (2) a connected person is going to be a body corporate, and should also be deemed to be connected with the director of a company, if it is controlled by that director. This 10 per cent limit in the majority of cases is going to restrict people unduly from giving a loan to that particular company because one of the directors would also be a director of the other company and would control that company.
I agree with everything Deputy Barrett said earlier and I repeated those sentiments when I was speaking on the Companies Act, 1986, when Deputy Bruton was Minister. We inserted into Irish law in the Companies Act, 1986, as a result of an EC directive provisions which caught all types of Irish companies and which are not relevant to the vast majority of Irish companies. It is not the multinational companies that come here and go that give the vast bulk of employment in this country. It is the myriad of smaller companies all around the country and most of those companies are small private limited companies with four, five or 10 people. That is where the bulk of employment lies. The reason this legislation is before us is that successive Governments and politicians have complained for years. Companies have gone into liquidation with the result that the creditors, Revenue Commissioners, etc. had to suffer. The Government of the day are compelled to bring in legislation to try and control that but in cutting out the rogue directors we are likely to throw out the baby with the bath water. That is the danger of this Bill. The Revenue Commissioners over the years have succeeded in getting various Finance Acts and corporation tax Acts to catch people in a tax situation who have taken more out of a company than they are entitled to. Consequently many directors are very conscious of that fact.
I sympathise with the Minister who has inherited this Bill. I do not know whether he has personal views about it. I do not know whether the Minister would have proceeded with it in the way it has come before the House, if things were different. Now we are going to stop people investing, and we are going to stop people taking chances. One of the great reasons for the industrial revolution in Britain 100 years ago was the formation of limited liability. We have been consistently trying over a number of years to limit the effect of limited liability. If we retain this 10 per cent of the net relevant value of the company impossible situations will arise for some companies. In section 43 of the original Bill there is provision where a Minister can by order of the Houses of the Oireachtas change the financial limits that apply to this Part. Perhaps the Minister could clarify if that applies to the 10 per cent net relevant value. By making it more and more difficult, by using the rogue directors as an example for making changes in the law proposed in this Bill, we may affect the vast majority of private limited companies.
To put on the record in case anybody misunderstood what I said, the point I was making is not covered by amendment No. 38. That amendment specifically refers to inter-company loans in the same group. It does not apply to the normal family business. In case anybody is under any illusion that what I was talking about is covered under this section, it is not. It refers specifically to groups of companies whereas the case of a holding company lending to subsidiaries does not apply to the vast majority of family businesses in this country.
May I ask the Minister when he is replying if he could give the committee some information on the purposes for which loans to directors are normally advanced at present. Deputies Barrett and McCreevy have both drawn attention to the fact that in many cases loans to directors may be granted by a company in order to allow the director in his personal capacity to undertake some new business venture. Does the Minister know how frequent that is? Is that a normal process? I speak, I confess, as somebody who has not been a director of a company at any stage, as I have spent my life in politics, which is an enterprise in itself.
I am anxious to know if the situation adverted to by Deputies Barrett and McCreevy is common. If, for instance, a director of a company wanted to diversify and if he was a substantial shareholder in the company and had most of the benefit coming from the company, I do not understand why the company could not carry out the diversification rather than lend money to him so that he may carry out diversification, given that the objects of a company usually are drawn pretty widely and any normal diversification would probably come within the objects of the company. That may not be a normal way of doing it, but obviously there is no limit on that at the moment. I would be interested to know what are the particular types of problem that require the director of a company who wants to get into a new line of business, to take a loan from the company and invest it in something else rather than get the company to do it or set up an associate company, which is covered by amendment No. 38? Perhaps Deputy Barrett or Deputy McCreevy could explain that.
We have got into a very wide-ranging debate about a lot of basic principles which, perhaps, are appropriate to Second Stage rather than to individual amendments. Nonetheless, I will try to deal with some of the specific points made. I was in the process of dealing with Deputy Bruton's second proposed amendment relating to amendment No. 43. I have been looking at it since in the light of what he said. I find it difficult to go along with him. He suggests that we are, as a Legislature, somewhat washing our hands of setting precise limits and leaving it open to the court to decide in particular circumstances what the level of personal liability should be in this instance.
If Deputy Bruton reflects on the matter he will agree that it is preferable that the court should make a decision of that kind, rather than that the Legislature should try to lay down specific limits that are going to cover every case, because no two cases are the same. It would be unwise, in my view, to try to lay down particular multiples of over-borrowing or particular multiples of loans and say that the liability shall be confined to that.
I accept that the example I gave earlier on this point was, perhaps, rather extreme and would not normally arise. As amendment No. 43 in the new section 35 (1) sets out, the court has to be satisfied that the particular excessive loan has either contributed materially to the company's inability to pay its debts — that is something of some significance, that the court has to be satisfied about — or it has to be satisfied that it has substantially impeded the orderly winding-up of the company. The application must be made by the liquidator or a creditor or contributory. It is only then that the court, if it is so satisfied, can order that the person for whose benefit the arrangement was made — that is to whom the loan was given — could be personally liable for all or such part as may be specified by the court, of the debts and other liabilities of the company. You have to give a court that flexibility. If we were going to write into the law precise figures as to what somebody's liability was going to be, then we would not need a court at all. All you would need would be an administrator in the Department of Industry and Commerce to say: "You got a loan of £20,000, therefore your liability is £40,000, be on your way".
The circumstances have to be considered. There may be instances where there was an excessive loan but the court is not satisfied that it contributed materially to ultimate liquidation of the company and therefore it does not order any personal liability. If you are going to have a multiple it is going to apply whether it is just that it apply or not. That is why I do not think, with respect, that Deputy Bruton's suggestion is wise, even though it had not materially contributed to the downfall or liquidation of the company, the director would nonetheless be liable. Therefore, I think it is better to allow the court discretion.
The point Deputy Bruton is making is quite at variance with that made by several other members of the committee, which shows there is not agreement about it. Other people have different ways of looking at it. Deputy McCreevy is concerned about the cash-rich companies of Kildare; what you do with companies that have £1 million in cash and the difficulties that they face now in disbursing their money. Unfortunately, perhaps, it is not a common phenomenon throughout the country and is not an underlying difficulty of our company law, either present or proposed.
Deputy Bruton made the point that he thought it was wrong that, as he put it, under amendment No. 43 the fate of the directors was unpredicable, that it was better that things would be predictable for people — obviously he had in mind company directors particularly. I do not see the fate of directors unpredictable if one can avoid it. At the moment in these areas I can name two groups of people whose fate is regularly unpredictable and they are trade creditors and employees. At the moment it is often the case, and this is one of the abuses that this Bill seeks to get over, that the one group of people whose fate is perfectly predictable are the directors because they can trade it into the ground and still nothing will happen to them. They have no potential liability even. The trade creditors and the employees have severe difficulties and their fate is quite unpredictable and to a great extent they are thrown to the wind. I think it is no harm that this legislation should introduce into our company law a degree of unpredictability for directors, which up to now has been missing, and that degree, and it is a very limited degree of unpredictability, might make the fate of others who work for or trade with that company less unpredictable.
Deputy Bruton asked the purpose of loans from companies to directors. Like himself, I never traded as a limited company. I was not allowed to enjoy that privilege, where I was. I am advised, however, that reports of liquidators indicate that the purpose of loans taken by directors are usually personal and not trade related. When I say that reports of liquidators suggest that, it will be obvious that these were companies who got into trouble and probably it is resort to loans for personal purposes that helps to get companies into trouble. If we have some restriction for the first time on that I think it will be no harm.
The personal purposes are sometimes to do with housing, holidays or, dare I say, even racehorses or family emergencies, illness, death or whatever, which is understandable. But where somebody wants money for a genuine trade or business investment purpose, if the memorandum and articles of his company do not allow him to engage in the other trade, perhaps he could expand them, or alternatively he can form a new company, a separate company, which will be connected to him in the sense that it will be in the same group and under amendment No. 38, new section 33, inter-company loans in the same group are exempt.
One of the Deputies made the complaint that it was not enough to exempt inter-company loans in the same group, that all loans between one company and another should be exempt. I do not at all agree. Why should company A lend money to company B if it has no connection with it? In fact, it is prohibited from doing it unless it lends it interest-free because it has to have a licence under the Moneylenders Act to do so. Anyway, why should company A lend a large sum of money without restriction to company B if by doing that it is putting the creditors of company A at risk? I would have thought that its first obligation is to them.
The exemption of inter-company loans in the same group is quite adequate in my view because in business practice that is the only place where a company would lend money to another company.
I hope I have dealt with the main points that have been made. If there are individual remaining points, I would be glad to deal with them.
There are a few points that should be clarified. One is, would the Minister consider that the purpose for which loans should be given could be included in the Bill if there was some restriction as to the amount that could be given for personal use as distinct from normal business practices? Would that not be more acceptable, or else exclude the giving of loans for certain personal usage. Maybe that might be accepted? I was interested to hear the Minister say that from what he is told companies who have got themselves into trouble and have been liquidated it is normally as a result of people buying racehorses, going on holidays or whatever. Those are the people we are trying to stamp out.
What I am talking about is the genuine business person who wants to trade and use money wisely. If he is worried about personal use, why do we not specify that in the Bill, that a company is prohibited from giving a director moneys for personal use up to a certain limit, be it £1,000 if it is medical expenses or something of that nature. If it is normal trading practices, why should we restrict it if it is a sensible business transaction?
I think the Minister misunderstood the point I was making in regard to amendment No. 43. I did not say that the judge would be required to impose a liability of a multiple of the amount of the loan. What I was proposing was the substitution of a multiple as a limit, in other words, the judge could order a personal liability up to a multiple of the loan. He could decide to have a liability that was less than that, but he could not go above a specified multiple of the loan. To my mind, that is only fair.
If a loan to a director has only had a minimal contribution to the problems of the company and if, in every other respect, the director has behaved reasonably and he is not going to suffer personal liability from any of the other many areas in the Bill where personal liability might arise, I do not think personal liability should arise simply because of a technicality, that there was an outstanding personal loan of a small amount of money, which could be determined to be material, but material in a small way. That is why I would suggest, instead of having the words "without any limitation of liability for all or such part as may be specified by the courts debts of the company" that should be related either up to a multiple of say two of the amount of the loan or alternatively the other wording, "that he shall be personally liable, in proportion to the contribution of the transaction to the company's inability to repay its debts, for the debts and other liabilities of the company". What I am trying to get at is that there should be some degree of proportionality in the penalty the director will suffer and it should not be open to the judge to declare unlimited personal liability for what was a very limited contribution to the problems of the company.
Chairman
Is the amendment agreed?
I would share Deputy Barrett's concern about this difference between the personal involvement and the business in that I think the controls are self-policing, I support the thrust of this Bill but I see the need to distinguish between this personal dimension and the business. The Minister did relate the different type of borrowings that could be made for personal reasons. Would I be right in asking the Minister if that is covered in other elements of the Bill? I think it is proper that we should lay down very specific guidelines in that area and as Deputy Bruton says, we should know where we stand. I would agree with that. The distinction should be drawn between the personal involvement of the director and the business interests because it is very much self-policing. We want to protect small business, as Deputy McCreevy said, but we also want to eliminate the abuses and nail down those abuses if there is a personal involvement.
On this point of specifying what the loans are for and prohibiting personal loans but allowing business related loans — or shall we say investment type loans — I think that point is covered already by the total exemption of loans to another company in the same group, and in practice that is where it would arise, that is, under amendment No. 38, new section 33, and amendment No. 39, new section 34, because people would not be lending for business purposes other than to related companies, either their holding company or an associated company in the same group. You do not lend money to somebody who has no connection with you whatever and therefore there should be a restriction on it. There is a restriction anyway under the Moneylenders Act because unless you lend it free of interest, you are actually committing an offence. The business type loan which we all want to encourage is clearly exempted here — clearly exempted by those two proposed new sections 33 and 34, and that gets over that difficulty. So far as specifying that you cannot borrow for personal needs is concerned, I think that that would be unreasonable restriction to write in because there could be family emergencies, etc. If somebody wants to borrow for essentially a private or personal purpose that is not investment or business related he can still get round it. For example, if he wants to buy a racehorse, by lending the money to another company and letting that company buy the horse. It may mean that you have a slight change of colours and you do not know who leads it in if it wins, but it makes no material difference whether the horse is owned by an individual or by a company under his control. In fact, I see on race-cards increasingly now the names of companies rather than the names of individuals listed as owners, but it would be possible to circumvent that. I would not be terribly disposed to put in a blanket prohibition for personal purposes. It would be very hard to enforce it because you could lend it for ostensibly investment purposes to another company and find that it was used ultimately for a different purpose.
On the other point Deputy Bruton made with regard to amendment No. 43, new section 35, I can see his point and I will certainly consider it between now and Report Stage, as to whether something could be done to have something less than unlimited liability which, in some circumstances I agree, would be unfair. Perhaps we can devise some wording that would retain this new concept of potential liability for directors who abuse their borrowing powers but, at the same time, not make it so draconian that it would potentially have a serious effect on enterprise. Like so much else in this Bill, it is a delicate balance that you have to try to achieve and the amendments to the Bill make a reasonable effort to achieve that balance. I would ask the committee for that reason to accept the amendment.
Chairman
Is amendment No. 22 agreed?
Does section 43, which allows the Minister to alter the financial limits in this part of the Bill, now apply to the 10 per cent rule?
I would say, Deputy, on the face of it that it does not because a financial limit is a monetary limit as I would understand it, so to get over that difficulty I will introduce an amendment the next day to add the words "financial or percentage limits specified in this Part" and that will get over the problem.
When a company that is continuing trading goes above its 10 per cent relevant value and the accounts go to the Companies Office, is there going to be a section in the Companies Office which will study this and then decide to impose fines on the company, or who is going to do it?
The answer is no, nobody in the Companies Office imposes fines on anybody.
Send it to the Director of Public Prosecution's Office and let them institute proceedings, is that going to happen?
If their attention is drawn to it. Most of these provisions are self-policing in the sense that the creditors or other people will force the directors to rectify the abuses and, of course, the auditors will also, it will be part of the general duty of an auditor. I agree with Deputy Bruton that perhaps my description of section 41 was a little too wide ranging but that is additional to the general power and duty of an auditor to call attention to breaches of the Act.
Chairman
Is amendment 22 agreed?
No. May I ask the Minister if he would agree to extend section 41 to make it clear that the auditor has a responsibility specifically to monitor compliance with this section? Could I further suggest to the Minister that he might look at the point made by Deputy Barrett in regard to personal loans, between now and the next Stage? One way of achieving that would be to add in amendment No. 37, after the reference to 10 per cent of the company, a provision which exempted arrangements as follows, "or the loan is bona fide for a purpose related to the objects of the company". That might serve the purpose of allowing bona fide loans that are related clearly to the purposes of the company. I do not expect the Minister to reply to that point at this stage, but this is perhaps something that could be dealt with by subsequent amendments in this Part, without interfering with the committee's adoption of these amendments.
Could we give notice that we may table amendments on those matters for Report Stage, both in relation to amendments Nos. 37 and 43?
Certainly those points that have been made are ones that I will give full consideration to between now and Report Stage, particularly the question of possibly extending the scope of section 41 in regard to the auditors' powers and duties. I have a feeling that that point is covered somewhere else in the Bill but the Bill is so extensive that I would have to check it. I think it is and it is also covered under the 1963 Act to some extent.
The problem, even if you widen that section, is that if there are no penalties — or who is going to impose the penalties — the auditors can bring it to the attention of the shareholders who usually are the same as the directors and damn the bit of difference it will make to anyone, except in the case of winding-up.
I would remind the Deputy that there are penalties. They are the very things we have been talking about, the potential liability on a director for abusing, or going beyond his power to borrow, as it will be laid down here. There are not penalties as of today, but when this Bill is passed there will be penalties. There are potentially severe personal penalties which will cause directors to think twice about going beyond the powers of borrowing that are allowed to them.
Amendment agreed to.
I move amendment No. 23:
In page 24, subsection (1), to delete lines 28 to 44.
Amendment agreed to.
Amendment No. 24 not moved.
I move amendment No. 25:
In page 25, subsection (1), to delete lines 1 to 5.
Amendment agreed to.
I move amendment No. 26:
In page 26, subsection (4) (e), lines 1 and 2, to delete "section 31 (3) or 31 (4)" and substitute "section 31 (2) or 31 (3)".
Amendment agreed to.
I move amendment No. 27:
In page 26, subsection (6) (d), lines 21 and 22, to delete "section 31 (3) or 31 (4)" and substitute "section 31 (2) or 31 (3)".
Amendment agreed to.
I move amendment No. 28:
In page 26, subsection (7), line 31, to delete "section 31 (3) or 31 (4)" and substitute "section 31 (2) or 31 (3)".
Amendment agreed to.
Section 24, as amended, agreed to.
The Committee adjourned at 7.15 p.m. until 4 p.m. on Tuesday, 28 November 1989.
Progress reported; Committee to sit again.