SECTION 130.

I move amendment No. 180:

In page 108, subsection (1), line 27, to delete "section 128" and substitute "section 129".

Amendment agreed to.

I move amendment No. 181:

In page 108, subsection (1), line 31, to delete "section 128 (5)" and substitute "section 129 (3)".

Amendment agreed to.

I move amendment No. 182:

In page 108, subsection (1), lines 32 and 33, to delete "section 128 (3)" and substitute "section 128 (4)".

Amendment agreed to.

I move amendment No. 183:

In page 109, lines 7 to 9, to delete subsection (4) and substitute the following subsection:

"(4) Without prejudice to section 35, sections 32 and 36 shall not apply to any company to which subsection (1) applies.".

I note that the footnote reads: "These are the appropriate references if amendments Nos. 37, 40 and 41 are accepted.". What does that mean? Evidently, the footnote is incorrect.

The footnote will not form part of the amendment. It is explanatory and refers back to what are appropriate references if certain earlier amendments were made. I understand that they were made. For that reason, I move amendment No. 183 which would delete subsection (4) from section 130 and substitute the words "without prejudice to section 35, sections 32 and 36 shall not apply to any company to which subsection (1) applies.".

Would the Minister please explain the relevance of section 130 to which this is an amendment so that we might better understand the amendment?

To section 130?

Yes. There is no point talking about a tiny amendment to a section which has not been explained.

This section relates back to new section 129, that is the one we just agreed be inserted, subsection (5) of which prescribes certain capital requirements for a company with which a director of an insolvent company can become involved as a director, promoter or manager. The purpose of the present section is to impose a number of further restrictions on such a company. The purpose of these restrictions is to prevent the capital of the company being eroded. Thus, where the director of an insolvent company becomes involved in another company, that second company first, will be required to be capitalised to the sum of £100,000 in the case of a public limited company and £20,000 in the case of a private company. This share capital must be fully paid up in cash.

In addition to these requirements, the present section proposes further requirements. First a company will, in general, be prohibited from giving financial assistance for the purchase of its own shares. Section 60 of the 1963 Act provides that a company shall not, whether directly or indirectly, give any financial assistance for the acquisition of its shares. However, this prohibition is relaxed somewhat in the subsequent subsections which provide that financial assistance may be given if approved by special resolution of the company and also provided that it is supported by a statutory declaration to the effect that the directors of the company are of opinion that the company will be solvent having carried out the transaction. This facility will not be available in the case of a company to which section 130 applies. Thus the giving of financial assistance by a company for the acquisition of its shares will be allowed only in the circumstances set out in section 60 (12) and (13) of the 1963 Act.

The second restriction which will apply relates to sections 32 to 36 of the Companies (Amendment) Act, 1983. These sections impose restrictions in relation to the acquisition of non-cash assets by public limited companies. The present subsection, however, proposes the application of the provisions to all companies whether public or private. The final restriction in this section relates to sections 31 and 32 of the Bill. Section 31 deals with the prohibition on loans to directors, whereas section 32 sets out the exceptions from this general prohibition. Section 32 (3) provides that a company may make a loan to a director provided that the loan does not exceed £2,500. Section 130 (4) will have the effect of totally prohibiting a loan to a director where he has previously been a director of an insolvent company even within the new directors' loans limits introduced by a Committee Stage amendment here.

In order to ensure that the provisions of new section 129 are complied with section 130 (6) provides that where a person who has been a director of an insolvent company proposes to act as a director or become involved in the promotion or formation of another company, he must give notice to that second company of the fact that he has been involved in an insolvent company. This provision is clearly necessary in order to ensure that the company can comply with the capitalisation requirements set out in new section 129 and also with the other requirements in section 130.

I come now to amendment No. 183 which I moved. It is consequential on the restructuring and the provisions of Part III on directors' loans which the Committee dealt with at their first few meetings. In the current text of the Bill, section 32 (3) would allow a company to lend any one director up to £2,500 while section 130 (4) would have the effect of disapplying this where one of the directors was a restricted person under Part VII. Since we have substantially recast the directors' loans provisions in Part III, however, we have had to think again about the kind of restrictions in this area we wish to apply to a company with whom a person who is subject to Part VII, Chapter 1, becomes involved. The conclusion that I have come to is that a company with whom a restricted person becomes involved should be prevented from taking advantage of the following new options we are allowing to companies generally under Part III: (a) new section 32 which would allow companies to lend up to 10 per cent of their net assets to their directors and (b) new section 36 which would allow loans to directors without limit on normal commercial terms. These are the exemptions which I think it would be inappropriate to allow a company having as a director a restricted person to take advantage of. This explains the reference to sections 32 and 36 in the present amendment. At the same time if such a company disregarded such a restriction I think the director concerned ought to be subject to new section 35 which we have inserted in Part III and which creates a potential personal liability for company debts in certain cases. This is why we mention "without prejudice to section 35" in the present amendment.

Finally, and since we have done away with the term "relevant company" in Part III, the use of this term can now be dispensed with in section 130 (4).

I thank the Minister for his explanation. It might be most convenient if we could dispose of the amendment because my main contribution will be on the section itself. The amendment is such that I have no particular views about it.

Amendment agreed to.

I move amendment No. 184:

In page 109, subsection (5), line 11, to delete "section 128" and substitute "section 129".

Amendment agreed to.

I move amendment No. 185:

In page 109, subsection (6), line 15, to delete "section 128" and substitute "section 129".

Amendment agreed to.
Question proposed: "That section 130, as amended, stand part of the Bill."

I am opposed to section 130. Section 130 provides additional restrictions on companies which do not apply to other companies if those companies have among their directors a director who was previously the director of a company that became insolvent. For example, provisions have been made for exemptions in regard to loans to directors limits and the purchase of a company's own shares, both of which were introduced and accepted here as proposals that had merit. These will not apply if the company has among its four, five or six directors, one director who previously was the director of an insolvent company. This is fundamentally wrong in that it will apply even where that director was utterly blameless in the series of events that led to the previous company with whom he was associated becoming insolvent. These penalties, including the company having to have a higher paid up share capital, and the extra restrictions on loans to directors and purchasing one's own shares, will apply even simply because they have a director on their board who previously was a director of an insolvent company, even though he was utterly blameless in the events leading to that insolvency.

I could fully accept these and more restrictions applying in respect of a company which had among its board of directors a director who was a director of an insolvent company and who had been found by the court to have contributed by his negligence, his recklessness or by some act or omission to the fact that the company became insolvent — certainly such a director should be the subject of restrictions and any company with which he subsequently became associated should be the subject of restrictions — but where a person became a director on a board of a company late in its life with a view to preventing it becoming insolvent, and if the company became insolvent subsequently, he should not attract these restrictions and have all these other restrictions attracted to any company with which he becomes associated subsequently even though he was blameless. To my mind this is unnecessary.

The Minister has made the case that we want restrictions to prevent the socalled "phoenix syndrome", in other words, we want to prevent people closing down one company, leaving debts unpaid and setting up a new company the following day. I fully agree. We want to prevent that, but we want to prevent it in circumstances where such a director has behaved in a fashion that contributed to the company becoming insolvent, either knowlingly or recklessly allowing the company to become run down. Any person in that category will be restricted under section 135 of this Bill, and I believe that is more than sufficient to deal with that sort of director.

To apply these restrictions across the board to all directors of insolvent companies, regardless of whether any blame attached to them in the series of events that led to the insolvency, is throwing out the innocent with the guilty. It is creating a form of negative implication or slur against a director simply because the company became insolvent. I do not believe that is necessary for the prevention of the phoenix syndrome. I think it is perfectly sufficient to attach such restrictions to people who have been proven to be blameworthy in some way.

I have not made the point as well as I would like but I do not really understand why the Minister wants this part of the Bill at all. The other parts, particularly section 135 which totally disqualifies directors from being directors again if they have committed an offence under the companies legislation, is more than sufficient. Why do we need to attach restrictions to directors, innocent directors of insolvent companies who have not been prosecuted under this legislation? Presumably if they are not prosecuted under section 135 they did not do anything wrong. Why put restrictions on innocent directors of insolvent companies? Available evidence shows that in business people will fail for reasons that are beyond their control. Perhaps creditors who owe them money get into difficulty and their companies will become insolvent.

This provision will mean that the Companies Office will have to keep a black list of directors who were directors of insolvent companies in order that this section should be workable. That is unnecessary and I do not understand how, of all Members of the Dáil, the Minister, given his often expressed and sincere desire to promote risk-taking and entrepreneurship, could promote a proposal which puts a blanket stigma on all who fail, regardless of whether they were blameworthy or if they failed by reason of circumstances beyond their control. I do not understand how he can justify this.

This is essentially the same argument that was made at length the last day. We went through it fully then. It is the general principle that Deputy Bruton is discussing now, not specifically this section. It applies to all of this Part, in particular to all of this Chapter. I do not know that it would be fruitful for any of us to reopen the entire argument since it was fully discussed the last day. I will just briefly try to meet some of the points he makes.

This section does not refer to a company giving assistance in the purchase of its own shares. That matter arises later. This section refers only to a company giving assistance to others to purchase its shares, and that is quite a different matter. The argument Deputy Bruton makes on the question of giving assistance in the purchase of its shares should really be held over until new Part XI, which deals with that specific question.

Regarding the case of an innocent director, one who failed honestly or honourably in the course of business or whose company became insolvent honestly and where there was no fraud or negligence involved, Deputy Bruton makes the point that the restrictions in this Chapter should be confined only to those directors who were prosecuted. I presume by that he means prosecuted successfully and convicted of fraud or activity of that kind.

If found guilty.

Yes. The number of people who are likely to be found guilty of a criminal offence in connection with these matters is very small — under the existing legislation the numbers are tiny —and while I would hope that in appropriate cases more people will be convicted under this proposed legislation, nonetheless the numbers will be quite small. If we are to confine control of these matters only to cases where people have been successfully prosecuted for fraud or some allied activity, then we will not be giving the kind of protection to the public at large that the public are rightly demanding. These sections we are discussing will clip the wings of the phoenix.

No. Sections 115 and 135 are the ones that clips the wings of the phoenix and there is no need for this. We can well and truly ground the phoenix with other sections.

Phoenixes of their nature tend to try to rise from the ground in all circumstances and we have some people who make successful take-offs in one company after another every few months as they deliberately go out of business. They may not have engaged in fraud to the extent that they would ever be convicted, either under existing legislation or under this proposed legislation, but nonetheless, they have acted in a way which is improper and has caused a great loss to many innocent people who entrusted money to them or ordered goods or services from them.

It is certainly my desire that we do not overdo things and restrict people unduly, but I do not believe that is the case. The restrictions here are modest. It is not as if this is preventing a man going back into business, or running a company or becoming a director of a company. The section simply provides that if he goes back after running an insolvent company he and his fellow directors must have £20,000 capital paid up.

Many people have made the case, and will continue to make the case, that to have that restriction — and effectively that restriction alone because the public company end of it does not really arise — is insufficient. They make the case that I am plucking, or proposing to the Committee to pluck, only a very few feathers out of the phoenix's wings — perhaps an insufficient number of feathers — and that he will rise again too often. I am trying to reach a balance between what is fair to the public and what fair to entrepreneurs, even those how have failed. I would like to instil in this country, if I could, the kind of respect there frequently is in, for example, the United States for those who fail and start again and fail again and start again and fail again.

That is why the Minister is putting them on the blacklist.

I am not putting them on a blacklist; I am putting a minor restriction on them. The argument will be made, as it was made in this Committee the last day and is made by many others outside the House, that the restrictions are not great enough. I am trying to balance both considerations. I would remind the Committee, with respect, that we all have a duty to the public, too and that there are thousands of people who are being ripped off by others, who are stopping short of outright fraud and therefore cannot be convicted of fraud, but who nonetheless are ripping off the public. We have to try to stop it in a way that is fair to everyone. If somebody is innocent in the insolvency of a previous company, then all he has to do is go to the court and show that is the case if he does not want the restriction related to the £20,000. That restriction is a very slight one.

I would remind the Committee that all these amendment we are discussing now are, from the point of view of the director of a insolvent company, ameliorating the position in the Bill as it stands. At the moment it is automatic that such a person become restricted. It will be no longer automatic if these amendments are accepted and he will only continue to be restricted if he was fraudulent or reckless. I think that is very fair. It is far better than the Bill as passed by the Seanad and as read a Second Time in the Dáil.

It is perfectly clear that we are after the people who carried on their first company in such a fashion as to leave debts behind, closed that company down insolvent and then started another. That is the sort of person we are trying to stop. It is quite clear that such a person is caught within the provisions of section 115 of this Bill, which provides for a criminal offence of carrying on the business with intent to defraud the creditors of the company. Anybody who keeps a business going knowing that the company would not be able to pay all their creditors at the end of the day will be caught under section 115. Such a person will be convicted of an indictable offence and will be subject to disqualification under section 135 of the Bill.

Fine Gael have submitted amendments to widen the scope of section 135. I would be perfectly happy to see section 135 also include among those who could be disqualified people who have been the subject of civil proceedings under section 116 for reckless trading. I would like to see all those people disqualified from becoming directors under section 135. What I do not understand is why directors who were neither fraudulent nor reckless — and if they were neither fraudulent not reckless they must have been prudent — but whose company for reasons beyond their control become insolvent should have the same restrictions applied to them as people who were fraudulent or reckless under this section. I do not think there is any need for that.

I would agree with the Minister if he were to come back to me and say section 135 as it stands should be tightened and that there should be much wider grounds for disqualifying directors. I would also agree with the Minister if he were to come back and say we should provide that all companies being set up should have higher amounts of paid up capital to act as a safeguard for the creditors. What I do not understand is why directors who are insolvent blamelessly should have to carry around their neck a notice saying, "I failed in business, anybody who wants to appoint me a director of a company should beware". I do not think that is reasonable.

You have already made that point.

As I said before, that is not what people are being asked to do. If I did not put down any amendments and left this Bill as it is now, as passed by the Seanad, arguably that might be the position because there would be automatic restriction, but that is not the case. We have ameliorated the position greatly in these amendments. The other point I would make is that we are not talking in this Chapter about disqualification, we are talking about restrictions only. We will come to disqualification in the next Chapter. That is a different matter. The Committee will have to bear in mind that there is a considerable distinction between outright disqualification as a director and this very minor restriction which is placed here on people to try to ensure that this phoenix type rip-off does not continue.

As far as section 115 is concerned, where people can be convicted of fraudulent practices, that is fine in so far as the relatively small number of people who will actually be convicted of the criminal offence of fraudulent trading is concerned, but the numbers will be small as it is a criminal offence. Proving a person's fraudulent intent, which is a necessary part of that crime, is not impossible but it is certainly difficult. It is perhaps only in the most glaring cases that a jury will, in practice, be satisfied in relation to a person's guilt. It would not be in the public interest to confine, therefore, the element of restriction to the very limited number of cases where a criminal conviction has been obtained.

Question put "That section 130, as amended, stand part of the Bill."
The Special Committee divided: Tá, 5; Níl, 4.

Barrett, Michael.

Hilliard, Colm.

Bell, Michael.

O'Malley, Desmond J.

Cowen, Brian.

Níl

Barrett, Seán.

Carey, Donal.

Bruton, John.

Doyle, Joe.

Question declared carried.