Special Committee on the Companies (No. 2) Bill, 1987 debate -
Tuesday, 5 Dec 1989

SECTION 30.

Mr. S. Barrett

I move amendment No. 35:

In page 32, line 8, to delete "reason to believe" and substitute "actual knowledge".

This amendment in the names of Deputy Bruton and myself was tabled because we agreed that the matter should be more clear-cut. It is reasonable to establish that there was actual knowledge, particularly in relation to minors or spouses. While I am on that amendment, let me also mention again the point that I brought up the last Stage: the definition of the spouse in relation to the Judicial Separation Act, now operating and also the whole question of cohabitation.

We have a situation in this country in which, because we do not have legal divorce, people are cohabiting on a regular basis. It appears to me that the only person who has been affected is the legitimate spouse. If you have actually been cohabiting with somebody for the last 20 or 30 years no restrictions apply. Surely the same principles should apply in those sort of instances.

Mr. O'Dea

This section extends and contains certain definitions for the purpose of section 29. Section 29 creates a criminal offence. It is not a situation, that you would normally find under the companies legislation, where civil liability is created. What is being created is a criminal offence and it would seem to me that there are grounds for the proposed amendment. I do not necessarily go along with it all the way, but I can see the logic of it, because section 29 creates a criminal offence it would seem to me that it would make sense to provide a heavier burden on the prosecution than would operate if it were only creating civil liability.

Are there any civil consequences of an infringement of section 29? I note that section 28, subsection (5), which deals with the substantial property transactions involving directors, operates so as to secure that a spouse of a director, or any other person connected with a director, can be sued for infringement of section 28. The burden of proof here is actual knowledge in a civil case, whereas in a criminal prosecution under section 29, which section 30 elaborates, it seems that the burden of proof is less. That seems to be against the normal tendency.

Also, if you look ahead to section 34, we are talking about the infringement of the provisions relating to loans to directors. Again, the burden of proof in the case of a civil action is actual knowledge, whereas here, in the case of a criminal offence, it is something less than actual knowledge. Section 29 is extended by section 30 to the spouse of a director. Why is this not extended in the normal way to other connected persons? Is there some reason why it is confined to a spouse?

Mr. Leyden

Section 29 prohibits a director who would obviously be in a position to avail of inside information from entering into certain speculative dealing in the options of listed shares or debentures of his company, or its subsidiary or holding company. Section 30 then extends this prohibition to the spouse and any children of such a director. However, the section goes on to provide that it shall be a defence for such a person to prove that he had no reason to believe that his spouse or parent was a director of the company in question.

The amendment proposed by Deputies Bruton and Barrett proposes to substitute "actual knowledge" for "reason to believe". If we were to accept this amendment it would considerably lighten the burden of proof on a person suspected of contravening the prohibition and wishing to avail of the defence being provided in this section. This is something I would be reluctant to do without very good reason and the comments I have heard so far from Deputy Barrett have not convinced me that such a relaxation is desirable and Deputy O'Dea has also contributed to that section. In my view the amendment would enable a person to go into court and claim that he did not actually know that his spouse, or whoever, was a director of the company concerned. This would make it too easy a defence to avail of, since such a person might not find it too difficult to prove that his spouse never actually told him that she was a director of the company.

On the other hand, under the text as it stands in the Bill, the defendant would have to prove that he had no reason to believe that his spouse was involved. This would cover situations where it was clear from the evidence that, whether the person had been told formally of their spouse's interest, he must have known about it. For example, in a family environment it would be most unusual for one member of a family not to be generally aware of what the other members of the family are involved in without, necessarily, of course, knowing the details. In such a situation the proposed burden on a person of proving that he had no reason to believe that another member of the family was a director of a company would rightly, in my view, be more onerous than proving that he had not actual knowledge that this was the case. In all the circumstances, I cannot accept this amendment.

In relation to the point made by Deputy O'Dea, there is no civil liability intended here, criminal penalties only. Deputy O'Dea made a point under section 2 in relation to connected persons. We thought the section went far enough but we will certainly look at it again, if that is the view of the committee. The same applies to Deputy Barrett's point, which I understand he expressed at the last meeting of this committee, in relation to the definition of the word "spouse", which is a fair point and my officials are looking at this at the moment. Both points are related and I will examine them before the Report Stage. But in relation to the amendment itself, with respect to the points put forward by Deputy Barrett, I am satisfied from the advice given to me that it would not be beneficial to make the changes, as proposed by Deputy Barrett and Deputy Bruton.

Mr. S. Barrett

I am a little disappointed that the Minister cannot find his way to agree to this amendment. There is a number of points involved here. How could a minor child of a director of a company be engaged in share purchase and how could he enter into a legal contract? Also, a minor child would not have actual knowledge that his parent was a director of a certain company. I know what the Minister is referring to but, as Deputy O'Dea pointed out, we are talking here about a criminal offence. At the end of the day we have to be extremely careful that we are not going to drag people into court and put the onus on them to prove that they did not know that a parent, or a husband or wife was a director of a company. We are living in a democracy and it is reasonable that if they actually knew that the person was involved then they are clearly breaking the law.

The phrase "had no reason to believe", is all very well until one who is totally innocent is dragged into court. As Deputy O'Dea has said, the words "actual knowledge" have been used in other sections of the Bill, but why not in this instance? Maybe I am misreading it but I wold like to know how a minor child can involve himself in a legal contract. Are we going to bring a 14 year old into court to prove that he had reason to believe that one of his parents was a director of a particular company. Can you foresee a situation where a person's 14 year old, 17 year old or, indeed, 18 or 19 year old son may be up in court having to prove that he was entirely innocent of this charge? Let us be realistic here. It is not going to weaken the Bill substantially if we substitute the words "reason to believe" with the words "actual knowledge". That will not weaken the legislation we are trying to put into place here.

Mr. Leyden

First, I know that Deputy Barrett's proposal is in the best interest of making this Bill more effective, but it would make it easier, basically, for a person who is charged to get off if the words "reason to believe" are inserted. We believe that this is the correct wording, but we would be prepared to amend subsection (b) which states: "a minor child of a director of a company not being himself or herself a director of that company" and apply the words "actual knowledge" to that subsection, because, in relation to a minor, it is possible for a person to buy shares in the name of a minor and that could be a way of getting around the Act. Therefore, in the circumstances and because of the case put forward by Deputy Barrett, we would be prepared to include those words in section 30 (b) and we will look at that section generally.

Mr. J. Bruton

The Minister's suggested amendment is half a loaf, but could he explain the reason spouses have been chosen? We are all aware that unfortunately, in our society many marriages break down and frequently people may be cohabiting with people who are not their spouses and may be engaged in concerted business practices, as well as other things. Is it wise, therefore, to pick out a relationship, namely a marital relationship, which has nothing in particular to do with business and say that criminal offences will apply, which may be committed by a wife or a husband, but that for any other associate of a person to act in the same fashion is not a crime? Could the Minister give me the reason for this choice of creating criminality in the case of certain conduct by a spouse which, if taken by somebody else, who in all other respects was acting as closely with the person concerned, would not be a crime?

Mr. Leyden

The situation is controlled, as the Deputy knows from his experience as a Minister in the Department, by the circumstances surrounding the Bill and from some of the UK legislation which we studied in relation to this issue; but I am impressed by the points made by the Deputy in relation to the word "spouse". We have agreed to look at this because I believe there are grounds for doing so, because of the points raised by Deputies O'Dea and Barrett. The word "spouse" is certainly questionable and we want to define as far as possible the connection with the actual director. From the point of view of strengthening the Bill, that is certainly worth looking at and I want to thank the Deputies for their contributions.

Mr. S. Barrett

I would like to make one brief point. Basically, what we are trying to do here is deal with a formal possible insider trading or dealing. If we insert this particular section in the Bill, a director will not ask his wife or child to be involved but rather his cousin, best friend or whatever. We are singling out here a spouse and a minor child when people can find other ways and means of getting around this. We should deal with section 29 in a more specific way and make it an offence for anybody, either the individual or any person connected or associated with that individual, and not be picking on a child or a spouse. It is a joke to think that one can get one's best friend to exercise these options but one cannot get one's wife to do it.

I would ask the Minister, rather than blindly accept this section as it stands, simply because it is what is in British legislation, to think again about sections 29 and 30 at Report Stage and take on board the points we have made. The word "spouse" can be amended but that will not stop a 14 year old child being dragged into court on a criminal charge to prove that he had no reason to believe that his parent was the director of a company or that he had actual knowledge of it, or whatever wording is used. Another person can get his first cousin to do the same thing and nothing will be done about it. I would ask the Minister to have another look at this section bearing in mind what he is trying to prevent which, I am sure members of the committee will agree, is not a political point. It is a question of making good law that will stand up to scrutiny so that we will not make fools of ourselves. There will not be "a dicky bird" about it.

Chairman

A final contribution from Deputy Bruton and then Deputy Lawlor. We are getting into repetition and we want to avoid that.

Mr. Carey

You are not listening to Deputy O'Dea, Chairman. He made a good point.

Chairman

He did, and you are welcome to make one as well whenever you feel like it.

Mr. J. Bruton

The Minister might look at the provisions of section 26 which deal with shadow directors. They refer to people who are accustomed to act in a particular way by reason of their relationship with another person, in terms of being directors of a company. It defines shadow directors. The Minister might find a similar analogy here, that if people are accustomed to having their business affairs dealt with by another party, that would, if you like, place them in a relationship with that other party which would then bring the provisions of section 30 into play. That would be more appropriate. There might well be situations in which one spouse would be accustomed to having the other spouse do their business deals for them.

There may be other cases in which the spouse has a well-established record of being accustomed to doing the work for them in terms of business. Using the analogy of section 26, which is obviously one that has some legal respectability, might be a way around the problem which we have identified.

Mr. Lawlor

I know the Minister is willing to have a look at it, but is he going to prepare a schedule of people who will come into this category? That is a complication here. Will he specify girlfriends, mistresses, those who are cohabiting, sons, daughters, first cousins? Just how specific will it be? Going back to Deputy Barrett's point, we would need to look at the overall position because otherwise we could end up making it look very foolish. There are so many diverse possibilities in regard to holding shares, etc., that perhaps there is no point in us all agreeing now. It will come back on Report Stage if there is not going to be some sort of tangible comment as to how they propose to look at it.

Mr. T. Kitt

Deputy Lawlor has made the point I was going to make. As anybody who has served on Dublin County Council knows, we have actually handled this problem recently in our housing policy, where initially it was married couples with children who were on our list. Now we have on the list boyfriends and girlfriends who are cohabiting, and I think this is going to be the problem. Is the Minister going to look at this area of definition? Will we be talking about people who are living together, or does he wish to comment at this stage? This is going to be difficult for the Minister but I appreciate that he has been responsive to the points that have been made and the obvious implication from the discussion on this Bill is that we are dealing basically with outdated terminology. Maybe the Minister would like to comment now. There is a major social issue to be addressed here.

Mr. O'Dea

I think Deputy J. Bruton is moving in the direction of a solution. I would share his views that rather than categorising the sort of people we are trying to prevent acting on behalf of or in concert with a director, we should aim at preventing directors from doing certain things and preventing them from getting things done by people whom they control. Deputy J. Bruton referred to section 26 which deals with shadow directors. I was not here when the committee debated that section and it is a pity that I was not. However, I can now make the point that I wanted to make on it. I am unhappy with the definition of shadow director in section 26. I am unhappy with the use of the word "accustomed". It gives the impression that the person in question, the person who is under control, has, in fact, acted on the director's behalf in the past. It can easily be got around by bringing in somebody new that you can control. But when the Minister of State is looking at the situation perhaps he would bear that point in mind as well.

Mr. Leyden

I would like to thank the Deputies for their contributions to this section. I can assure the committee that we will certainly consider the very relevant points put forward as far as definition is concerned. Section 25 of the Act — connected persons — which has been amended, will be our guideline in relation to this section when we come to Report Stage. Let me assure the committee that, in fact, the points being made — and this is the point about the Companies Bill — and the advice given here is something that should be borne in mind by the officials. It will be to ensure that the final Bill is workable and effective, and that is what we are all trying to achieve.

Mr. S. Barrett

Just to keep our options open, we would like to state that we will be tabling our amendment for Report Stage.

Chairman

On the basis of the assurances the Minister has given, would the proposers agree to withdraw their amendment?

Mr. S. Barrett

And table it for Report.

Amendment, by leave, withdrawn.

Section 30 agreed to.

NEW SECTION.

Mr. Leyden

I move amendment No. 36.

In page 32, before section 31, to insert the following new section:

"31.—(1) Except as provided by sections 32 to 36, a company shall not—

(a) make a loan or a quasi-loan to a director of the company or of its holding company or to a person connected with such a director;

(b) enter into a credit transaction as creditor for such a director or a person so connected;

(c) enter into a guarantee or provide any security in connection with a loan, quasi-loan or credit transaction made by any other person for such a director or a person so connected.

(2) A company shall not arrange for the assignment to it or the assumption by it of any rights, obligations or liabilities under a transaction which, if it had been entered into by the company, would have contravened subsection (1); but for the purposes of this Part the transaction shall be treated as having been entered into on the date of the arrangement.

(3) A company shall not take part in any arrangement whereby—

(a) another person enters into a transaction which, if it had been entered into by the company, would have contravened subsection (1) or (2); and

(b) that other person, in pursuance of the arrangement, has obtained or is to obtain any benefit from the company or its holding company or a subsidiary of the company or its holding company.".

Amendment agreed to.

Chairman

Acceptance of this amendment involves the deletion of section 31.