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Special Committee on the Companies (No. 2) Bill, 1987 debate -
Tuesday, 13 Feb 1990

SECTION 107.

The Committee have agreed to discuss amendments Nos. 137 to 145, inclusive, including amendment No. 1 to amendment No. 139, together.

Debate resumed on amendment No. 137:
In page 91, to delete lines 32 to 37.
(Deputy J. Bruton.)

Since, in the course of the debate on these amendments, it emerged that Ministerial amendments removed the need for most of the amendments Deputy Barrett and I had put forward, with one exception, we do not wish to press the amendments. That exception is amendment No. 142, or at least the material thereof which Deputy Barrett and I have now re-presented in a new form, namely as an amendment to the Minister's amendment No. 139. We are proposing here the inclusion, after the words "reasonable grounds" in line seven of the Minister's amendment, of the words contained in our amendment No. 142. The purpose of this is to make explicit what may well be implicit, that the judge, in deciding whether personal responsibility should rest with a person under this amendment, should take into account that person's general knowledge, skill and experience, which would indicate whether they were knowingly culpable in making a declaration under the relevant section. We believe it should be clear that somebody who has a full knowledge of accountancy and accountancy practice and of the ways of determining whether such a declaration is accurate would carry greater culpability than somebody who would not pretend to have such knowledge and would be known not to have such technical knowledge. To that end I feel that our amendment, while in many ways it may not add a lot to what may happen, in practice renders explicit what should happen. I hope that in that event the Minister will accept the amendment.

As was said here last week, Deputy Bruton's fears in this regard may be misconceived. The section as amended by the Minister states that the person who makes the statement must have reasonable grounds for his opinion. The criteria that the courts will apply to this formula will be the same as they apply to ordinary civil actions where different standards are applied to different people depending on who they are. We have the old example of a person being injured and of somebody coming on the scene and trying to help. If a question arises as to whether such person was negligent, different criteria will obviously be applied depending on what knowledge the person could have been expected to have. I do not believe that Deputy Bruton's amendment will necessarily add to the situation.

As I also pointed out last week there must be a certain amount of objectivity here. If Deputy Bruton's amendment is accepted it would seem to me that the test will be too subjective and people will be able to remain wilfully blind to certain knowledge that they could have ascertained had they taken the trouble to do so. From that point of view I do not believe it adds to the situation. I have an open mind about it. I do not think it is going to add anything in the sense that it will not achieve what I think Deputy Bruton wants it to achieve. It might have detrimental affects in the other direction.

As Deputy O'Dea has said, this may not be necessary but on the other hand it may prove to be necessary. We do not know how the courts are going to react. It is better to be safe than sorry.

My point is that we do not know how the courts will react to the situation as proposed to be amended by Deputy Bruton. I am pointing out that it might open the door too widely. In other words it might make the test too subjective in the sense that people might be able to wilfully blind themselves to certain facts or deliberately not find out certain facts and just go ahead and sign a statutory declaration. That would be an undersirable result.

Since the discussion the last day I have re-examined the merits of the amendment being proposed by Deputies John Bruton and Seán Barrett. The conclusion I have come to is that I am satisfied with the content of the revised subsection (8) which I am bringing forward in amendment No. 139. I do not consider that the amendment now being proposed is desirable. Subsection (1) of section 256 of the 1963 Act which is being re-enacted with amendments by section 107 of the Bill requires the directors availing of the section to declare that they have made a full inquiry into the affairs of the company, and, having done so, are of the opinion that the company will be able to pay it debts within the time specified. Amendment No. 139 which I have tabled substitutes a revised subsection (8). This now provides that where it is subsequently proved to the court that a company is unable to pay its debts and the court is satisfied that any director was a party to the declaration without reasonable grounds, that director can be made personally liable for the debts of the company. This is a subjective test of whether the declaration was made on reasonable grounds. If we were now to turn around and restrict the court in declaring any director who had signed a declaration personally liable for all or any of the debts of the company under subsection (8), not on the basis of the full inquiry he was obliged to undertake or on what the director actually knew or believed but by reference to an objective test of what he ought to have known given the normal knowledge, skill and experience that should be expected from a person in his position, I venture to suggest that the subsection would be inoperable. That is not something I would be happy to see happen and I know that the members of the committee would not be in favour of that. The subjective test which is contained in the revised subsection (8) will turn on the court's consideration of whether, on the basis of all the information presented, it was reasonable to conclude that the person making the declaration was justified in doing so. I am satisfied that this is the correct approach. I would also like to point out that subsection (9) provides that where a company's debts are not paid or provided for in full within the period stated in the declaration of solvency, it shall be presumed, unless the contrary is shown, that the director did not have reasonable grounds for his opinion. In these circumstances the onus of proof will fall on the director to show that he had reasonable grounds for making his declaration and if he can do so he will be able to escape liability. The fact that an independent person will have to certify whether, in his opinion and on the basis of his information and according to the explanation given to him, the opinion of the directors that the company would be able to meet its debts was reasonable would, I suggest, weigh heavily with any court considering an application under subsection (8). Indeed another consequence of this particular requirement would likely be that if the independent person in his report stated that the director's declaration was not reasonable, it is unlikely that the directors would proceed with the winding up as a members' winding up and instead go for a creditors' winding up. I would remind the Deputies that the making of a statutory declaration is not a matter to be treated or taken lightly. I would not wish to introduce an amendment that might enable directors escape the consequences of not discharging their duties in a reasonable manner.

In the light of the foregoing considerations, I am more than happy that there are sufficient safeguards in the section. I must reject the Deputies' amendment and request them to withdraw this amendment in the light of what I have stated.

To follow up on that, I am fortified in my original conclusion by what the Minister has said. If Deputy Bruton's amendment were to be accepted we would have a totally subjective test and in my opinion a subjective test is not the sort of test that should be applied here. The whole tenor of the section implies that the sort of test we should have here is an objective test, the traditional, reasonable man test. The test must be whether the director has come to his conclusion on reasonable grounds. That implies that the director has made all the necessary inquiries, consulted all the necessary officials of the company, consulted all the necessary documentation available and so on, to enable him justify the conclusion he has reached, namely, that the company will be able pay its debts and that the company is therefore technically solvent.

On the question of the Minister's change to the original subsection, there are a few question I would like to put to the Minister which will have a bearing on what Deputy Bruton is trying to achieve. It seems that on reading the original subsection (8) that the court, on the application of the liquidator or any creditor or contributory of the company may, if it thinks proper to do so, declare that the director did not have reasonable grounds for reaching the conclusion he did. As the section is redrafted, in amendment No. 139 in the name of the Minister it states: "Where a statutory declaration is made under this section and it is subsequently proved to the satisfaction of the court. . . ." I would like the Minister to comment on this, before we finish our discussions on this subsection. "When it is subsequently proved to the satisfaction of the court", does that mean proved by the creditors when they launch a challenge under subsection (5)? If it means something else, does it mean that the creditors have to bring an action under subsection (5) and get a decision from the court? Does it mean that a creditor who is making the application under subsection (8) is also able to make an application under subsection (5) and the new subsection (8) simultaneously?

What is the situation regarding the liquidator or the contributory? Do they have any independent powers, independent of creditors, to bring an action under the new subsection (8)? It seems that they do not, because reading the new subsection (8) it seems that the action can be brought only when it has been proved to the satisfaction of the court that the company is unable to pay its debts.

I would like the Minister to comment on those points and to comment on the amendment as proposed by Deputy Bruton. I would specifically like to hear the Minister's views on my conclusion, that the test proposed by Deputy Bruton is a totally subjective test which will render this nugatory in that it will remove all the director's obligations to make the ordinary, reasonable kind of inquiries that we would expect a director to make in order that he be entitled to put his name to a statutory declaration.

The amendments which I put forward the last day apply to the points raised by Deputy O'Dea. They make clearer the responsibility that making a director personally liable for a company's debts should only apply where, despite a declaration of solvency, the company is, nevertheless, subsequently shown to be insolvent. The potential liability in the subsection as it currently appears, is somewhat more open-ended at present. Such insolvency should have to be proved to the court. This is not specified in the present text which provides that where the court on the application of the liquidator or any contributory of the company may, if it thinks it proper to do so, declare that any director who was a party to the declaration without having reasonable grounds——

No, amendment No. 139 which gets rid of the original subsection (8) and brings a new subsection (8) states:

Where a statutory declaration is made under this section and it is subsequently proved to the satisfaction of the court that the company is unable to pay its debts, the court on the application of the liquidator or any creditor or a contributory. . .

may do certain things. When it is subsequently proved to the satisfaction of the court, is that in a case that was been brought under subsection (5) or can an independent application be made, and, if that is the case, why is the word "subsequently" used?

Subsection (5) deals with creditors in that situation, so they would turn it into a creditors' voluntary winding up. Therefore, I think we should move on.

No, I am not totally dissatisfied about it. I am just slightly curious——

(Interruptions.)
Amendment, by leave, withdrawn.

I move amendment No. 138:

In page 91, to delete lines 42 to 48, and in page 92, to delete lines 1 to 5.

Amendment, by leave, withdrawn.

I move amendment No. 139:

In page 92, lines 26 to 39, to delete subsection (8) and substitute the following:

"(8) Where a statutory declaration is made under this section and it is subsequently proved to the satisfaction of the court that the company is unable to pay its debts, the court on the application of the liquidator or any creditor or contributory of the company may, if it thinks it proper to do so, declare that any director who was a party to the declaration without having reasonable grounds for the opinion that the company would be able to pay its debts in full within the period specified in the declaration shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.".

I move amendment No. 1 to amendment No. 139:

In the seventh line of subsection (8), after "reasonable grounds" to insert "having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position".

I am opposing the amendment.

(Interruptions.)

No, I did not give such an undertaking. I said I would look at it, which is quite different. I was sympathetic at the time. I looked at it and I am less sympathetic than I was and I am now opposing it.

Question put: "That the amendment to the amendment be made."
The Special Committee divided: Tá, 6; Níl, 6.

Barrett, Seán.

Carey, Donal.

Boylan, Andrew.

Rabbitte, Pat.

Bruton, John.

Reynolds, Gerry.

Níl

Cowen, Brian.

Leyden, Terry.

Flood, Chris.

O'Dea, Willie.

Kitt, Tom.

Roche, Dick.

Amendment to amendment declared lost.
Amendment No. 139 agreed to.
Amendments Nos. 140 to 144 inclusive, not moved.
Question proposed: "That section 107, as amended, stand part of the Bill."

I would like to make a statement on section 107, as amended. For the record, a particular difficulty has arisen in the operation of section 256 of the Principal Act which will not be tackled in the amendments which I have tabled on section 107 and may necessitate a further amendment on Report Stage. The particular problem arises where companies going into voluntary members' winding up fail to observe the time limits contained in section 256 and even though they may be solvent they must proceed to be wound up by way of a creditors' winding up. This problem has just recently been brought to our attention by the Registrar of Companies but time did not permit us to complete our examination before today's meeting. So I propose to put this forward on Report Stage when we have examined the situation.

To put forward an amendment?

To say what exactly?

We have received a report from the Registrar of Companies and the problem arises where companies going into voluntary members' winding up fail to observe the time limits contained in section 256, and even thought they may be solvent they must proceed to be wound up by way of creditors' winding up. It is a technical difficulty relating to subsection (2) (a) of the Act. It talks about 28 days immediately preceding the date of the passing of the resolution winding up the company and some directors make the declaration on the same day. It is a technical difficulty which has been brought to our attention. With the permission of Members I propose to bring back an amendment on Report Stage.

Subsection 2 (c) and (d) of this new section 256 of the Principal Act refers to a report being made by an independent person in regard to the contents of declarations which are made where there is a proposal to wind up voluntarily by the members. Could I ask the Minister if this applies also to a creditors' voluntary liquidation?

Because it is the declaration of solvency that makes it a creditors' winding up. Where they cannot make the declaration it becomes a creditors' voluntary winding up.

I do not understand that. Perhaps the Minister will elaborate more fully. My understanding is that it would be useful to have this report by an independent person in the case of all voluntary liquidations of companies lest there be any difficulty created for a minority of the creditors for example where the large creditors would get together.

Just to clarify the question raised by Deputy Bruton in relation to this section: section 256 (11) is almost the same as section 256 (7) of the Principal Act. The one small amendment lies in the addition of the words "or in the case to which section 261 (3) applies". The general purpose of the subsection is to differentiate between the two possible types of voluntary winding up. The essential difference between a members' voluntary winding up and a creditors' voluntary winding up is that a declaration of solvency has been made in relation to a members' voluntary winding up. For practical purposes the main difference is that a members' voluntary winding up is a solvent winding up whereas a creditors' voluntary winding up is an insolvent winding up.

Yes, that is obviously the case. That is just a statement of the law. It is not, however, an argument against including the provision for a report by an independent person in the case of a creditors' voluntary liquidation.

Subsection (4) provides that the report shall state whether in his opinion and to the best of his information and according to the explanation given to him, the opinion of the directors referred to in subsection (1) and the statement of the company's assets and liabilities embodied in the said declaration are reasonable. If there is no declaration there is not need for a report. That is the situation.

Yes, I know that. That is clear. The point I am raising here is that there is in this section before us an interesting and useful provision for an independent person to make a declaration in regard to the state of the company in advance of a voluntary winding up. What I am really raising is whether in the case of sections 265 to 273 of the Principal Act which relate to creditors' voluntary winding up, for instance in section 265 of that Act, we should not introduce a similar provision to that which we are introducing here to section 256 of the Principal Act. I understand what section 256 is about — I hope I do anyway. I am not really making a point about section 256 rather about section 265. When you are at it, why do you not essentially introduce the same controls for both types of voluntary winding up?

What the independent person is reporting on is the declaration of solvency. I do not see how we can improve on the situation but I am prepared to look at it in advance of Report Stage if that is agreed.

I am reluctant to accept the Minister's goodwill in view of the experience of the last few days where the Minister almost encouraged us to put in an amendment which he opposed today. I am afraid that declaration by the Minister is not worth the paper it will be written on. I have to pursue the matter a bit further, if I may. We should look at section 265 of the Principal Act here and I seek the guidance of the Chair as to what are the procedures for the introduction of amendments which would have the effect of altering section 265 and subsequent sections of the Principal Act. Is it possible for us to do that at this stage in the Bill, or is it possible to do it at any stage during Committee Stage?

Just to clarify one point, when we agree to look at a situation that does not imply that we are going to actually agree to the amendments proposed. We have examined the points put forward at the last meeting of this committee. We have studied them in my Department and we have come back here today with a studied response. That is a very reasonable approach. As Deputy Bruton is well aware, we have to consult quite a number of people in different sections of the Department in relation to these amendments. It is only fair and reasonable that we would study it, examine it and come back with the actual decision at that stage, as far as we can see it from our point of view. It is unfair to say that we did not examine any point put forward the last day, we certainly did. Even though I may express a certain sympathy to the point, which is quite reasonable as well, after reflection and consideration of the points involved we came back with a studied opinion which we have put forward. I consider that reasonable.

Would the Minister be prepared to accept an amendment to section 266 of the Principal Act, subsection (3), which refers to the responsibility of the directors in a creditors' voluntary winding-up to cause a full statement of the position of the company's affairs together with a list of the creditors of the company and the estimated amount of their claims to be laid before the meeting of the creditors to be held as aforesaid? Would he agree that in respect of the statement of the full position of the company that the directors should also be obliged to have an independent person vouch for what the directors are saying under the provisions of section 266 (3) of the Principal Act which would be the introduction of a provision analogous to that contained in this section to the other form of voluntary winding-up?

I missed some of the debate there, but so far as I can recall, Deputy Bruton put down an amendment to this section to take the independent person out of the situation here? Now he is arguing to bring an independent person into the other type of winding-up. I do not see much logic to that.

If the committee have accepted the principle that we should have independent persons involved and it would appear that we have done so, and as I said in my first contribution this afternoon I accepted arguments advanced in committee in respect of some of the amendments I put forward — Deputy O'Dea remembers that, he was one of the people who was here at the time — if that is accepted by the committee it is not, therefore, in any way inconsistent to seek to apply to the other type what is accepted in respect of this type of voluntary winding-up. I could almost level the same charge of inconsistency at anybody who would oppose this proposal at this point, having accepted it earlier.

To try to conclude on this point, it would be self-evident that a company could not pay their debts in a creditors' voluntary winding-up situation. An independent person is not there to verify a declaration in a creditors' voluntary winding-up situation. I have said already that the points put forward by Deputy Bruton are being put forward on the basis of improving the Bill and they will have to be given consideration before Report Stage. I am prepared to give that commitment here today, if that is agreeable. Then we can discuss them in more detail and in more considered detail, on Report Stage, if that is agreeable to Deputy Bruton.

I would propose to put down an amendment for consideration on Report Stage on this matter as it would be in order.

Section, as amended, agreed to.
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