Amendments Nos. 137 and 138 may be discussed together. Agreed? Agreed.
SECTION 107.
I move amendment No. 137:
In page 91, to delete lines 32 to 37.
These amendments would essentially leave section 256 of the original Act closer to what it is at present, as against what the Minister is proposing in the Bill. Section 256 contains essentially the matter in the Bill in subsections (1) and (2) down to (b). The Minister is bringing in new provisions, (c) and (d), which are not in the original Act and which require a report by an independent person in accordance with the provisions of the section. This independent person has to make this report. I understand some concern has been expressed about the operation of this from the point of view of the liabilities it will place on the independent persons concerned. This was why I was wondering whether the amendment was to be taken with amendment No. 139. The Minister's amendment No. 139, is designed to achieve something similar to what we are trying to achieve in our amendments, modifying the rather exacting requirements of the independent person concerned producing this report. Perhaps the Minister would like to respond in that context. He might refer to section 139.
We agreed to deal with amendments Nos. 137 and 138 together. Certainly the point made by Deputy Bruton is correct, that Government amendment No. 139 also has certain bearings on the restrictions imposed on the independent persons. If we deal with the first two amendments, Nos. 137 and 138 together we could then proceed with No. 139.
I would prefer if the committee would agree to take amendments Nos. 137 to 143 inclusive, together, as I think they are all more or less the same. The reason I say this is that when the Minister comes to deal with amendment No. 139 he may deal with the problem we are driving at in amendments Nos. 137 and 138. That is all.
The proposal at present is to discuss amendments Nos. 137 and 138 together. It is then proposed to group amendment No. 139 with amendments Nos. 140, 141, 142, 143 and 144, as alternatives, and amendment No. 145 is related, so we could take amendments Nos. 137 to 145, inclusive, together.
That is agreeable.
If amendment No. 139 is agreed, amendments Nos. 140, 141, 142, 143 and 144 cannot be moved, because they are alternatives. We will agree, therefore, to take those two groupings as one? Agreed. As we are agreeable to that, I then would ask the Minister to formally move his own amendment and deal with the ones I have already mentioned in his reply. The Minister can discuss them together and move it later.
I will deal first with amendments Nos. 137 and 138. Section 107 substitutes an amended section for section No. 256 of the Principal Act. Section 256 deals with the declaration of solvency made and delivered to the registrar of companies by the directors of a company in a members' voluntary winding up. This declaration of solvency distinguishes a member's voluntary winding up from a creditor's winding up. It follows that a member's voluntary winding up is permitted to take place only where the company is solvent. Thus, where the member wishes to have the liquidation conducted on this basis, the directors must make a statutory declaration that they have investigated the company's affairs and that they are satisfied that the company will be able to pay its debts in full within a specified period not exceeding 12 months.
A number of difficulties have arisen with the existing section 256, and section 107 of the Bill sets out to overcome these deficiencies by re-enacting the section with amendments. For instance, there have been complaints about abuse of members' voluntary liquidations where declarations of solvency had little or no relationship to the real state of the company's affairs. In such cases the companies concerned failed to pay their debts within the periods stated in the declaration. To avoid such situations in the future, section 107 will insert in the revised section 256, a procedure whereby an independent person will assess whether the directors' statements are reasonable.
Amendment No. 137 deletes paragraphs (c) and (d) of subsection (2) which provides that a report by an independent person should be attached to the directors' statutory declaration and this report should also state that the independent person has given and has not withdrawn his written consent to the attachment of his report to the directors' declaration.
The Deputies' amendment, No. 138, would remove subsection (3) which provides for the preparation of the independent person's report itself and subsection (4) which specifies the matters which must be addressed in that report. Thus, Deputies Bruton's and Barrett's proposals do away with one of the two main ways in which the section proposes to strengthen the law in regard to the making of statutory declarations of solvency and in effect would completely undermine what I am trying to achieve. In the circumstances I must oppose these particular amendments.
I hope, Mr. Chairman, you will bear with me on the length of this reply, it is very long. I do not know what your proposals are on the finishing time of the committee today?
I should like to deal with these amendments.
I have already mentioned the problems which exist with section 256, and one way that section 107 of the Bill sets out to overcome these deficiencies is by requiring the appointment of the independent person to report on the reasonableness of the declaration of solvency made by the directors. The amendment we turn to now, No. 139, has to do with the other main reform being introduced in section 107 of the Bill. So I will move amendment No. 139.
The Minister can move them subsequently. We will discuss them now.
Section 256 of the 1963 Act currently provides for criminal sanctions against a director who makes a declaration of solvency without having reasonable grounds for doing so. However, these do not, in general, appear to have been effective deterrents against the particular problem that this section is designed to tackle. In these circumstances the current text of the Bill proposes in subsection (8) of the new section 256 to introduce the possibility of personal civil liability for two categories of people: first, directors who can be shown not have had reasonable grounds for making the declaration in the first place; and second, an independent person who knowingly or recklessly makes a statement which is materially false, misleading or deceptive in the report which will now be required to be appended to the director's declaration. I have given further consideration to these particular sanctions and I feel that the provision concerned could be improved in a number of respects.
The purpose of amendment No. 139 is therefore threefold. First, I think it should be made clear that the possibility of making a director personally liable for company debts should only apply where despite a declaration of solvency, the company is nevertheless subsequently shown to be insolvent. The potential liability in this subsection as it currently appears is somewhat more open ended at present. Second, such insolvency should have to be proved to the court — this is not specified in the present text. Finally, I have reflected on the matter and I think it is inappropriate that the independent person who will now be involved here should be open to personal liability for the company's debts, particularly when, unlike the directors, he had no limited liability to begin with. I feel, therefore, that the present subsection (8) (b) should be deleted, thereby removing the potential civil liability of the independent person involved.
Having said that, it is important to point out that under section 204 of the Bill the independent person will remain open to the sanctions set out in that general section. In other words, if the independent person makes a false statement in his report he will be liable to prosecution under section 204.
Amendment No. 145 is related although it arises under a different section, namely, section 109. Section 109 replaces section 261 of the 1963 Act and provides that where a liquidator in a member's winding up forms the opinion that the company is, in fact, insolvent, he must call a creditors meeting whereupon the winding up becomes a creditors' winding up. Section 261 subsection (3) provides that from that point onwards, the Companies Acts shall have effect as if the director's declaration under section 256 has not been made. However, as I have already explained, section 256 of the Principal Act gives the court a number of powers to deal with a situation where the statutory declaration of solvency required under that section turns out to have been falsely based. For example, section 256 (8) allows the court to impose a degree of personal liability on the directors who are party to the declaration.
Unfortunately, if the director's declaration is to be treated under section 261 (3) as never having been made in such cases, it would seem to be difficult for the court to exercise its various powers under section 256. Therefore, a saving provision does appear to be necessary in section 261 (3) and that is the purpose of amendment No. 145.
Regarding the amendments tabled by Deputies Bruton and Barrett, amendment No. 142 would effectively remove subsections (8), (9) and (10) from the section. Not only would this have the effect of removing the potential sanction of civil liability altogether, it would leave the section devoid of any penalty at all. This would be totally unacceptable. Amendments Nos. 140 and 141, which are more limited in their application, raise the basic question as to whether it is appropriate to apply personal liability where the directors make a declaration of solvency without having reasonable grounds for doing so. The question of the independent person being held personally liable will no longer arise by virtue of amendment No. 139, which I have just detailed.
This is one of a number of sections in the Bill where personal liability is proposed. In each of the situations where it is proposed, we have thought long and hard about its appropriateness. In this particular caes, I am satisfied that the situation which applies at present, whereby directors can make a declaration of solvency, even though they must know that the company's position is such that it will not be able to meet its debts, is most unsatisfactory and has to be tackled. In the circumstances I am opposed to amendments Nos. 140 and 141.
Amendments Nos. 142, 143 and 144 — which I asume are alternate amendments — tabled by Deputies Bruton and Barrett, appear to accept the principle of personal liability but seek to modify the details of its application. Amendment No. 142 would qualify the circumstances in which a director can be held liable. I note that the Deputies borrowed the wording of the proposed amendment from subsection (2) (a) of section 297 A of the Principal Act, proposed to be inserted by section 116 of this Bill, which deals with the imposition of civil liability on persons concerned with reckless trading. In that section the reference to the general knowledge, skill and experience which may be reasonably expected of a director appears in the context of defining when a director is deemed to be knowingly a party to the carrying on of the company's business in a reckless manner. However, section 116 differs from the provision we are dealing with here. What we are addressing is the making of a statutory declaration at a given point in time, following whatever review is considered necessary by the directors that the company will be able to pay all its debts.
Section 107 (9) provides that where a company's debts are not paid within the period stated in the declaration of solvency it is to be presumed, until the contrary is shown, that the director did not have reasonable grounds for his opinion. This places the responsibility firmly on the directors to be sure of any declaration they make under this section. That is how it should be. There is a serious problem here which needs to be tackled. I do not think we should be seeking ways to enable directors to escape their responsibilities. In my view, the qualification by way of the amendment proposed by the Deputies would not help the situation. This would also apply in the context of the revised subsection (8) proposed in amendment No. 139. In the circumstances I would be opposed to this amendment.
Amendment No. 143 seeks to qualify the subsection dealing with the report made by an independent person to provide that it must have been prepared in a professional capacity and that the independent person must have been paid for it. As I have already indicated in relation to amendment No. 139, I propose that the independent persons will no longer be liable under this section so the necessity for amendment No. 143 does not now arise.
In amendment No. 144, the Deputies are proposing the deletion of the phrase "without any limitation of liability" and substituting for it of liability in relation "to an extent which accords with his share of blame for, and the damaged caused by, his act or omission". I certainly appreciate what the Deputies are trying to do and sympathise with their intentions. However, I am more than happy that the present wording, which is repeated in amendment No. 139, allows the court the flexibility to do precisely what the Deputies are seeking to do in that the court has total discretion to make the director personally responsible for all or any of the debts or other liabilities of the company. In deciding what liability to apply, the court will, of course, have regard to the extent to which the director concerned is responsible for the company's situation, or the damage caused by their action or omission.
I could see the Deputies' amendments having the opposite effect to that which I am sure they intend. For instance, the amendment talks specifically about "the extent which accords with his share of blame for and the damage caused by, his act or omission". This could be interpreted to mean the courts must make the person liable in direct relationship to his acts or omissions and that the court would not be able to take other mitigating circumstances into consideration.
While I see the point behind the Deputies' amendment, I am more than happy that it is adequately catered for under the present formulation, as repeated in amendment No. 139. In the circumstances, I am also opposed to this amendment.
I regret the length of this reply, but I think it is necessary to put on the record the explanation behind our view in relation to the amendments put forward by Deputies Bruton and Barrett and the amendment we put forward which clarifies the situation satisfactorily.
I am glad we have taken these amendments together because it clarifies the situation considerably. Amendments Nos. 137 and 138 were put down to remove the report of the independent person from this section entirely. These amendments were put down because of the provision in subsection (8) which created personal liability for the independent person in the event that an error was made in his report. Since that has been removed, the need for amendments Nos. 137 and 138 has consequently also been removed, as also has been the need for amendment No. 143 in that it was only saying that if an independent person was going to be liable for an act or error in a report, it should only be in respect of the services for which he had been paid, that if the person was doing the work voluntarily he should not be caught in those circumstances. That is removed as well. Likewise amendments Nos. 140 and 141 are not necessary as they are now covered by amendment No. 139, which — and this is important — was put down after Deputy Barrett's and my own amendments were put down. To some extent it is probably the case that amendment No. 139, in the name of the Minister, is in a response to or in anticipation of the points that would have been made on these amendments if amendment No. 139 had not been put down. So we achieved something before ever coming here, if that is the case, and I believe it is.
Two amendments are still standing on their own merits — amendments Nos. 142 and 144 — which are in the form of amendments to the original text, but they could equally be substituted now as amendments to amendment No. 139. In other words, in respect of amendment No. 139, if amendment No. 142 was accepted, the personal liability of a party making a declaration about the solvency of a company without having reasonable grounds, would now read "without having reasonable grounds having regard to the general knowledge, skill and experience that may reasonably be expected of a person in this position".
A person who was a director of a company, and who is not a top flight accountant may have made a declaration which he genuinely believed to be true and had taken all the care and skill he would have as an ordinary director — and let us remember that many company directors are people who, shall we say, not only have had no third level education, but many of them probably had no second level education. There are plenty of people who avail of a limited liability in that situation and who would not have the sort of familiarity with the figures which others would have. That is not to say if they do anything malevolent or are negligent that they should not suffer for it. At least the court in deciding on personal liability would take into account the general knowledge, skill and experience that may reasonably be expected of a person in that position. That is the purpose of amendment No. 142 which still stands, if I may say so to the Minister, as a reasonable amendment even in the context of the new text in amendment No. 139.
On amendment No. 144, the Minister made a valid point. He said that this amendment, which seeks to have the blame put on a director who makes a false declaration of solvency for any damage caused rather than to leave it to the court, could in fact be rigid and could mean that the director would have to accept liability even though that might not be fair in all circumstances. I would not be too keen on pressing amendment No. 144. if the Minister's interpretation is correct. However a good case could still be made for accepting amendment No. 142, which would be inserted after the words "reasonable grounds" in the seventh line of the Minister's amendment. Perhaps the Minister might look at that again.
We have gone a long way towards taking on board the amendments put forward. I would not like to water down the responsibilities of directors in relation to the making of any statutory declaration, which is a very serious statement. The declaration will be made under oath, and we should not minimise the responsibility involved. I suggest that Deputy Bruton withdraw his amendment because the amendment we have proposed arises directly from the amendments put forward. Having carefully considered the matter we have proposed this amendment in an effort to satisfy the concerns expressed by the Deputies.
That is what one might call plamás. The Minister has not really met the case put forward for accepting amendment No. 142. This is a declaration of solvency and under the new dispensation an independent person will make a report with the declaration being made under oath. Criminal sanctions may be imposed on a director if he makes a false declaration. In addition to the criminal sanctions, he may have to accept personal liability. All that we are saying in amendment No. 142 is that the extent of the personal liability should be related to the general knowledge, skill and experience that may reasonably be expected of the person in the position in question. That is not an unreasonable request.
The Deputy's intention is to be reasonable to the person involved. The making of a declaration under oath is a very serious matter and we should not minimise or try to water down the serious responsibility involved and provide the person with a way out if things do not go right. The Deputy's amendment would certainly provide a way out.
If a person makes a false declaration under oath they are committing a criminal offence and they will be got for that one way or another. They will also have to accept personal liability if, in the opinion of the court, they made this declaration knowing it was false, given their general knowledge skill and experience. It is not as if they would get away scot-free or anything like that.
I am not supposed to comment on substantive issues but let me say the statutory declaration he makes would be based on facts within his knowledge. The Deputy is contending that we should not impute any more knowledge to him than what he should reasonably be expected to know. It covers his fear that he would not reasonably be aware of the position. He would make a statutory declaration on the basis of facts within his own knowledge.
As I understand it, he would be making a declaration on the ability of the company to pay its debts in which he would be expressing an opinion about the prospective value of certain assets in the hands of the company which could be sold at some future date with the proceeds being used to pay debts. In making a declaration that the company was solvent, he would be taking a view — it would not simply be a question of facts — about what certain things were worth. In that context it is not unreasonable to say that if you ask a person to make a declaration in which they express an opinion of that kind, they should only be liable for any mistake they make in the light of the general knowledge, skill and experience they can bring to bear in making that declaration. It is not as if they would be making a declaration solely about facts, such as whether they own two bicycles or just one. There would also be the question of how much the bicycle is worth, in the light of their knowledge of what the market for bicycles is likely to be at the time the bicycle might have to be sold to pay off debts. If it transpires subsequently that the bicycle cannot be sold for what they thought if as a result the company turns out to be insolvent, they could be caught. What we are saying here is that if that they are going to be caught in that way they should only be liable for the deficiency in their knowledge relative to what people would expect them to know.
We have gone through a number of amendments and have discussed many aspects of this matter. You, Chairman, put forward certain suggestions. I can see exactly what Deputy Bruton is getting at. A director in a company may have a reasonable view of the situation, but he may not be in a position to know everything about every aspect of it.
While he may not be an auctioneer, who knows exactly what everything is worth and what the market is, he may still have a genuine view about the value of the company and its assets, but he could be wrong.
Could I ask that the Minister would accept this amendment for the simple reason that the new section 256, which is section 107, has a number of safeguards built into it now? In addition to the declaration you have an independent report which is effectively an audited report. Therefore, you get down to a question of liability at the end. There are sufficient safeguards now built in that people will not, willy-nilly, be winding up companies. They would have to make a declaration and have an independent report presented by an auditor. You then get down to the question of liability.
The question of liability will depend on the knowledge of individual directors. Take for argument's sake, somebody's wife who may not be involved on a day-to-day basis in the business. She may listen to advice and be satisfied that a reasonable declaration has been made and she agrees to do it. At the end of the day if it turns out that it is a question of personal liability involved, the court should take into account the fact that that person may not have had the same knowledge or skill as another director should have had. In assessing personal liablity, the court would be more lenient on, say, a spouse or wife in that instance, than they would be on another director.
Exactly.
Quite honestly, I think there are sufficient safeguards now to be able to accept this amendment just to protect the innocent at the end of the day.
I take Deputy Barrett's point but I do not think that the Judiciary, reading this section, are going to apply the same standards to a financial accountant as they are to somebody who is a worker-director in a company. There is an element of subjectivity in this, despite the fact that it looks like a totally objective test. It is a mixed subjective and objective test. The effect of the amendment would be to make it much more subjective. You must have a certain amount of objectivity in the test, otherwise you open yourself to the danger that people will make the statutory declaration without sufficiently acquainting themselves of the situation. You can have a situation of wilful blindness to some of the facts. I can see a lot of merit in the amendment but it is something that perhaps the Minister might think about. I do not see us resolving it today.
Suppose you have somebody who is brought on to the board of directors of a company. Frequently you will get the boardroom centre, for example, recommending — and Ministers too, and I did it myself when I was in the Minister's position — to companies that they should bring on outside experts to their board so that those people would help them to avoid problems, and so on. If you have a situation where some personally wealthy individual comes onto the board of a small company to act as a director of the company, helping the people along without any great financial advantage and he goes along with a statutory declaration that this company is solvent, the other directors have nothing much at the end of the day, so there is not much pont pursuing the creditors. But this non-executive director who was brought in happens to be a fairly wealthy individual in his own right. He may be an independent accountant in his own right with his own money. One creditor is enough to trigger this section and that person could decide to go after that guy because he has money, and try to get a personal liability direction made against him.
Once you have this provision in regard to personal liability for any one of the directors, you are going to have a tremendous temptation for creditors to go gold-digging; you are going to have a situation where professional advisers to creditors will feel they might be liable to a personal liability suit for failure adequately to advise their client, if they did not advise the client to go after, for personal liability, every one of the directors, particularly the director who may have money. Remember solicitors can be sued for professional negligence.
You are going to have a situation in which if it is open to people to go after personal liability and if solicitors know this — just as you get doctors, in the context of the present health debate, over-prescribing and over-testing patients in case somebody might sue them if they did not go through a particular procedure — they are going to say, "Hey, hang on, I do not want to be caught because I did not advise this guy to do everything he should do. Let us throw in an application for personal liability under subsection (8) against so-and-so. We know that he was a director in the company but really did not have much to do with this and was probably misled, but let us have a go anyway, because if we do not I might be caught for not having advised my client to do it." We should be very careful in the context of non-executive directors. This is a point that we will be coming back to in other sections of the Bill. We must be very careful about personal liability, particularly in the context of either the case Deputy Barrett was referring to, the case of the wife of a director who is also a director herself — the non-involved spouse might be more accurate — or the non-executive director who is brought in the circumstances referred to.
Once a person agrees to become a director of a company it does confer enormous responsibilities on him. Sometimes the type of person who joins the board, as referred to by Deputy Bruton, brings a name and experience and it can itself give the wrong impression to suppliers and creditors and workers etc. I think it works slightly in reverse.
If I had to make a decision I would prefer that the present position pertain and that the expansion of the liability issue which we are discussing ought not really take place. I believe that in any reasonably sized company you probably have only one person on that board who could reasonably say that he or she understands the financial implications of the company's assets and its work in progress, its sales etc. The remaining directors could hide behind the amendment. I think that possibly that would water down the responsibility of a director to inform himself or herself of the precise assets of the company, its strength and ability to pay its debts, etc. It would probably negative, to a great extent, the onus that is surely on directors to act as directors of a company in their own interests and in the interests of the taxpayer and the workers.
You must bear in mind that it is a majority of the directors at that meeting who would decide. Not all directors would have to prepare a statutory declaration, so the non-executive director may decide that he or she is not in a position, would not knowingly have enough knowledge of the situation, to declare a statutory declaration. Certainly I would not, in their circumstances, after a few meetings, be in a position to sign such a form. I would not like to give people a way out either as Deputy Flood said, they could just sign it on the basis that there is another way out, there is another amendment or clause, there is an opportunity to get out.
Depending on your timing arrangement, Chairman, we will be prepared to look at this situation before the next meeting.
I propose we come back at the next meeting and finalise this point. You can take the other amendments now if you wish.
Amendments Nos. 137 and 138.
If I take the amendments now it is concluding discussion on them.
To put our amendment No. 142 is in order; it needs to be recast as an amendment to the amendment. What we could do is put down another amendment which would be an amendment to the amendment and withdraw the rest of them altogether. We will start on that the next day.
Agreed? Agreed. The next meeting will be Tuesday next, is that all right? What time? Seemingly there is a difficulty with the Order of Business.
I would say 4.15 p.m. Chairman.
The Special Committee adjourned at 6.10 p.m. until 4.15 p.m. on Tuesday, 13 February 1990.