Tuesday, 2 July 2019

Questions (358, 364)

Joan Burton

Question:

358. Deputy Joan Burton asked the Minister for Business, Enterprise and Innovation her plans to ensure companies have a minimum level of paid-up share capital and reserves which reflects the size of their balance sheet and annual turnover to ensure that if a company ceases to trade, the Exchequer and trade creditors are not left unpaid; and if she will make a statement on the matter. [28290/19]

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Joan Burton

Question:

364. Deputy Joan Burton asked the Minister for Business, Enterprise and Innovation her plans to introduce legislation to set the minimum level of paid-up share capital and reserves required by a limited company as a proportion of the annual turnover of the company as a way of preventing companies from ceasing to trade and leaving unpaid taxes and trade creditors; and if she will make a statement on the matter. [28295/19]

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Written answers (Question to Business)

I propose to take Questions Nos. 358 and 364 together.

While there is a minimum share capital requirement of €25,000 for Public Limited Companies set out in the Companies Act 2014, there are currently no plans to introduce legislation to set the minimum level of paid up share capital and reserves required by a limited company as a proportion of the annual turnover of the company.

Minimum share capital requirements are often cited as a potential method of protecting creditors. However, the money that is paid in as share capital is not required to be kept separate but is mingled with the other funds of the company and/or used by it. Thus, even if minimum thresholds of share capital were to be required, there would still not be a readily available cash fund equivalent to the share capital from which to cover creditors’ claims against the company in an insolvency situation.

Furthermore, a requirement to set share capital and reserves as a proportion of turnover could represent a significant obstacle to the conduct of commerce through company structures and have unintended consequences. If a minimum level were set and a company breached that minimum it could result in the loss of limited liability and force viable companies into liquidation with adverse consequences for employment in such companies. Further, if a company had a poor trading year, the amount of proportionate reserves required would fall in monetary terms as turnover may be reduced but a company’s debts could increase nonetheless.

Limited liability is one of the principal reasons why most businesses decide to incorporate in the first place. The availability of limited liability facilitates entrepreneurship and job creation by allowing entrepreneurs to trade without compromising personal assets. However, the availability of limited liability is a privilege not a right and is subject to safeguards to protect the interests of other stakeholders. The Companies Act 2014 contains provisions in which the separate legal personality of the company may be pierced in certain circumstances to visit liability on persons concerned in the carrying on of the business e.g.:

Section 610 - Civil liability for fraudulent and reckless trading

Section 612 - Misfeasance

Section 722 - Fraudulent Trading.

Section 599 and 600 contain further safeguards as they provide respectively that in certain circumstances a related company may be required to contribute to the debts of a company being wound up, and for the pooling of assets of related companies.

It should also be noted that minimum share capital requirements are stringent in respect of their application to companies which have a director who has been restricted. Section 819(3) of the Companies Act 2014 requires that any company which has a director who is subject to a restriction order must have an allotted share capital of nominal value not less than €500,000 in the case of a public limited company (other than an investment company) or a public unlimited company, and €100,000 in the case of any other company type. These requirements can be difficult to meet. However, perhaps more importantly, the fact that a director is subject to a restriction order can make it much more difficult for a company to obtain credit and as a result, the threat of restriction acts as a powerful disincentive. The Office of the Director of Corporate Enforcement has extensive powers to investigate and prosecute cases of corporate failure involving directors who act dishonestly or irresponsibly, particularly in respect of insolvency situations.