I move: "That the Bill be now read a Second Time".
Deputies may recall that at the end of May last year the House passed the Companies (Amendment) Act 1982 which was a short measure to improve the facilities and information available to the business community at the Companies Registration Office, to make some necessary revisions and to up-date the fines and some other figures in the Companies Act 1963. That was the first measure in a planned programme of legislation to reform company law which I intend to continue and which will consist of a series of amending Bills. The Bill before the House today is the second measure in that series and it is designed to amend and extend the Companies Acts 1963 to 1982 to give effect to the EEC Second Directive on company law and certain related matters. That directive is concerned with the formation of public limited companies and the maintenance and alteration of their capital.
The Companies Act 1963 is the basic statute governing the operations of different classes of companies in Ireland and prior to the short 1982 Act it was only amended twice in its 20 years' existence. The first change was by way of regulations in 1973 which gave effect to the First EEC Directive on company law which was concerned with the publication of documents and certain other information about various classes of companies. Subsequently, the Companies (Amendment) Act 1977 dealt with the transfer of title to securities on the Stock Exchange.
I would like to impress upon the House that the Bill before it today is an urgent matter. Some Deputies will probably be aware that the EEC Commission brought Ireland before the European Court of Justice for failure to implement the Second Directive by the appointed date, December 1978. On this point it is very relevant to mention that five other member states were brought before the court on the same charge. The court in a judgment last October ordered that, as we had failed to fulfil our obligations under the Treaty of Rome, Ireland should pay the costs. Incidentally similar judgments were handed down in respect of three of the other member states, the remaining two having recently introduced appropriate legislation. It is worth pointing out even at this stage that the necessity for the proceedings demonstrated that the requirements of the directive turned out to be rather more complicated than was at first realised and called for complex adjustments of legislation. Deputies will recognise that some of the member states involved have administrations and resources much greater than ours and yet the Bill which we have to produce as a consequence of the Directive is not any less complex than theirs. It was really no surprise, therefore, that we took as long as those larger administrations to bring about the necessary changes in our legislation.
It is relevant, in relation to the court proceedings, to tell Deputies a little about the EEC approach on company law matters. The fact is that the Commission has made company law an area where there has been a very large number of EEC initiatives. Eight directives, including that which dictates the Bill before the House today, have already been adopted and must be translated into Irish law. There are various other proposals at different stages in the EEC negotiating process. These put a considerable strain on the limited resources of my Department which must analyse and discuss them, and service a variety of meetings in Brussels in connection with them. In general, the EEC approach is one which seeks harmonisation in relation to different aspects of company law and sets out principles about those aspects to be included in an appropriate form in its laws by each member state. To put it another way, the complexity of the subject of company law accounts for the very big number of EEC initiatives.
Outstanding among the directives already adopted as far as Members of this House will be concerned is the Fourth Directive which deals with the content, format, presentation and publication of the accounts of both public and private limited companies. I can inform Deputies that work is proceeding on the implementing Bill and I intend to have it before the House later in the current year.
Of more immediate interest to Deputies, I imagine, is another stage of the programme on companies legislation, which I have already mentioned. This is another new measure designed to prevent or eliminate abuses and evasion of responsibilities in the operation of limited liability companies. I can assure the House that, in accordance with the commitment in the Programme for Government, work is drawing to a close on the drafting of a Bill which will strengthen some of the existing provisions of the Companies Act 1963 and introduce new measures the objective of which is to eliminate, deter or penalise the abuses and malpractices which are occuring all too frequently in the direction and management of companies.
I think that it is as well for me to explain my intention with that measure in clear and simple terms. I am going to spare no effort to try to put an end to the activities of fly-by-night operators in various sectors who make a mockery of the privilege of limited liability. These are the people who deliberately close down one company leaving substantial debts to creditors and employees and form another company to repeat the same process again, perhaps more than once. It is not relevant to the Bill before us today to go any further than to say that in the proposed measure to combat abuse I will be seeking among other weapons to increase dramatically the penalties in company law as a whole and to pitch them at the highest level that can be imposed by law.
Before turning to the detailed contents of the Bill now before the House I would like to ask Deputies to bear in mind one fundamental factor when they are examining it. The principles of the Second EEC Directive have been discussed at length, have come through the administrative process of the EEC and have been adopted some years ago. Consequently they are not negotiable at this stage. Therefore most of the provisions in the Bill are not negotiable either.
The objective of the directive and, consequently, of this Bill is the protection of the interests of both shareholders and creditors in relation to the formation of public limited liability companies and the maintenance, increase or reduction of their capital. While there is only slight reference to employess in the directive and in the Bill it is quite clear to me that the proper conduct of such companies in relation to their capital cannot but redound to the benefit of employees. If public limited companies thrive and prosper then the position and interests of the employees are obviously secured. The Bill is divided into six parts and most of the provisions of the directive are given force in Parts II, III and IV. The remaining parts deal with ancillary matters and companies changing between limited and unlimited status.
The directive calls for the creation of a new entity called a "public limited company" and attaches special requirements to it. The new type of company is separately defined in section 2 of the Bill. The Joint Oireachtas Committee on the Secondary Legislation of the European Communities, in a report in 1978, recommended that the definition of a private company as in the 1963 Act should be maintained. That recommendation has been accepted so that the definition in section 33 of the Companies Act 1963 will continue to hold for private companies. In summary, this is that a private company must:— have a share capital; restrict the right to transfer its shares; limit the number of members; and prohibit any invitation to the public to subscribe for shares. It is important to leave that definition stand because the private company so defined has long been the dominant vehicle for business activity in this country.
The significance of private companies in the economy is best illustrated by the fact that in December 1982 there were about 69,000 private companies and 340 public companies registered at the Companies Registration Office. The measures in the directive apply only to public companies limited by shares and public companies limited by guarantee and having a share capital and as there are only two or three of the latter type I am discontinuing any further registrations of them. The effect therefore is that with certain exceptions, to which I shall refer in relation to Parts III and IV, the Bill will have greatest impact on the 340 existing public companies which, as I shall explain, must change from their existing status. It will also apply, of course, to any new public limited companies.
Part II of the Bill implements the requirements of the directive as to the name and registration procedures for new public limited companies. These are that:— the name of a public limited company should distinguish it from other types of company; the memorandum of such a company must state that it is a public limited company; and the allotted share capital of a public limited company must not be less than a specified minimum and must be paid up as to, at least, 25 per cent of the nominal value of the shares and all of any premium on them.
To meet those requirements I am providing for the designation "public limited company" or its abbreviation "p. l. c." or the Irish equivalent of these so that an incidental outcome as far as public companies are concerned is that the old identification of "and company limited" will be replaced by "public limited company". However, private limited companies will continue to use the well recognised "and Co. Ltd.". I am providing, in section 19, for an authorised minimum share capital of £30,000 for public limited companies. This figure takes account of all relevant considerations — and I shall touch on these later — and is, incidentally, almost double the £16,000 required by the directive.
Part II also sets out the re-registration requirements for any company wishing to change from its existing status to that of a public limited company. Predictably, the key requirements imposed by the directive for changes are that such companies must meet the criteria as to name, authorised minimum capital and the payment up of the shares. The main focus in this area is on the 340 existing public companies limited by shares, or limited by guarantee and having a share capital, which are defined as "old public limited companies". These companies, if they wish to retain their present status, must re-register as public limited companies within fifteen months of the appointed day and to the extent that they do not have the £30,000 authorised minimum capital they will have three years within which to bring their capital up to that level. Alternatively, they may be re-registered as some other form of company.
Part II also provides that private companies, as they may under existing legislation, may become public companies but if they wish to re-register as public limited companies in the new form they will have to comply with the requirements as to name, capital and payment up of shares. There is also provision in this part for a public limited company to change its status in the opposite direction, so to speak, and to re-register as a private company. If it does so it will, of course, have to meet the requirements of the definition of a private company to which I have already referred.
Part III of the Bill implements the provisions of the directive in relation to the share capital of public limited companies. Requirements are set out as to the issue of and payment for share capital, the maintenance of share capital, the rights of existing shareholders on the occasion of the issue of further shares in the company and the variation and registration of class rights attaching to shares. Part IV deals with distribution of profits. I have already mentioned that the second directive applies only to public limited companies. However, many ideas of the directive in relation to the share capital and profits of a public limited company simply reinforce existing practice or have for some time been recognised as desirable for the proper conduct of companies generally.
Therefore, and though there is no obligation to do so, I consider it appropriate, in the interests of the development of company law generally, to apply some of the provisions of Parts III and IV to private companies. In doing this I am adopting the recommendations of various interested professional bodies who have made representations on the matter. In my approach I have been careful to strike a balance between, on the one hand, the desirability of developing proper commercial practice which would result in some benefits for members, employees, creditors and the business public generally and, on the other, the need to avoid imposing unnecessary and fruitless burdens on private companies which have a very significant role on the Irish business scene and provide considerable employment.
I would like to refer again to the idea of an authorised minimum share capital for public limited companies which is dealt with in Part III of the Bill. This figure is somewhat above the minimum requirements of the directive but, since the underlying principle is that small enterprises ought not seek to become public companies and that such companies should not be allowed to commence business without some semblance of financial viability, it would not be appropriate to fix a lower figure. On the other hand when settling this figure it is necessary to consider the effect on existing public companies as well as on any new public limited companies which might be formed in the future.
About 30 per cent of existing public companies have an authorised capital below £30,000 so that if they are to re-register as public limited companies in accordance with section 12 they must increase the capital and the amount of it that is paid up to comply with that section. The procurement of this amount may prove to be a difficulty for some of those companies whose capital is small and this is why I have taken advantage of an option offered by the directive whereby old public limited companies may be given three years in which to attain the authorised minimum capital set. Alternatively, they may re-register as another form of company. I would ask the Deputies to note that section 19 enables the Minister to increase the authorised minimum capital by order.
There is also a provision, new to Irish law, that directors of a company may not allot shares unless they are authorised to do so by the articles of association or by the company in general meetings. Such an authority must state the maximum amount of shares involved and the duration of the authority given, which may be for a period of up to five years but can be revoked, varied or renewed. This kind of control on the directors' issuing the shares has been mooted for some time. It should be to the advantage of shareholders in private as well as in public limited companies in so far as it should prevent directors making an offer to issue shares to some members of the company or even outsiders on terms below market value which offer, if taken up, would result in the value of the holdings of the remaining members being reduced.
The application of pre-emption rights, which are the rights of first refusal when the capital of a company is being increased by a new issue of shares for cash, is not a new idea in this country as it is a requirement for those public companies which are quoted on the Stock Exchange. It is an innovation, however, to have them provided for in companies legislation and the relevant provisions in this Bill apply to both private and public limited companies. Those provisions set down the principle that such shares must first be offered to existing shareholders in proportion to the nominal value of shares already held by them. These provisions will have the effect of safeguarding the interests of all the existing shareholders against any allotments which might change control of the company or damage their relative position in the company as represented by their holdings.
Provisions, imposed by the directive and included in Part III, that shares may not be issued at a discount and must be paid for in money or money's worth represent what is, in practice, the existing position and, therefore, they are being applied to all companies. The directive makes it necessary, however, to impose a partial restriction on the existing position in that it specifies that an undertaking to perform work or supply services may not form part of the assets paid for the share of public limited companies. One of the innovations of the directive and, consequently, the Bill, is that, as I have already mentioned, the shares of a public limited company must be paid up as to at least 25 per cent of their nominal value and the whole of any premium on them before they are allotted. For comparison Deputies will be interested to know that the Companies Act, 1963, requires that only 5 per cent is payable on application. So as to encourage the participation of employees in the capital of public limited companies I am taking advantage of the option offered by the directive whereby the payment on allotment of at least 25 per cent of the nominal value of shares need not apply to shares issued in connection with employee share schemes. The idea of employee share schemes is not, of course, new to our company law code. Section 60 of the Companies Act, 1963, recognises the special place of such schemes by providing that financial assistance may be given by a company for the acquisition of shares in the company or its holding company to be held by its employees or the employees of a subsidiary company. I understand that a number of Irish companies already operate share purchase or share option schemes for employees.
Where shares are not paid for by cash, the directive introduces another new idea in that it requires the valuation, by an independent expert, of whatever considerations other than cash are paid for shares in a public limited company. A further requirement is that such payment of non-cash assets for shares must be made in full within five years of the allotment. An expert's valuation is also required where a public limited company proposes to acquire non-cash assets from a subscriber to its memorandum within two years of incorporation and the value of those assets exceeds 10 per cent of the subscribed capital.
Deputies will appreciate that these provisions of the directive, which are reflected at sections 29 to 33 of the Bill, represent a serious attempt to get an objective assessment of the proper value of non-cash assets transferred to a public limited company. This attempt is, of course, in line with the objective of the directive to preserve the capital of the company and to provide protection for all those involved with it.
Part III also includes provisions preventing companies from acquiring their own shares either directly or through nominees. At present there are provisions in section 60 of the 1963 Act which enable a company to provide financial assistance in certain special circumstances for the purchase of its own shares and while the directive requires the amendment of those provisions so that they will no longer apply to public limited companies, that section will remain in force for private companies.
I would like to draw the special attention of the House to the provision at section 40 of the Bill which requires that where it becomes known to any director of a company that there is a serious loss of the subscribed capital he must arrange for an extraordinary general meeting of the shareholders to be held to consider what measures should be taken to deal with the situation. I need hardly remind Deputies that in the present difficult economic situation there is an increasing number of company failures and it is now widely accepted by persons such as liquidators, receivers and financial bodies closely involved in such matters that almost all of these failures have a common factor, which is that company directors and managers do not take appropriate action when financial difficulties begin to appear on the horizon. I believe Deputies will agree that this provision should be applied to all companies if only to encourage those concerned to consider all possible courses of action which might remedy the situation with a view to avoiding the failure of the company and all the attendant adverse consequences, partic ularly the loss of employment. I intend to watch closely the effects of this provision as an early warning system and I am encouraging directors and shareholders to do likewise by the amendment, made in the Seanad, of the Seventh Schedule to the 1963 Act which requires a comment by the auditors on the company's balance sheet position in relation to section 40.
Part IV of the Bill implements the requirements of the directive about distributions to shareholders, including in particular the payment of dividends. Section 45 states the basic principle that distributions may only be made from profits available for that purpose and that, in fact, represents the present position. It is in the definition of "available profits", meaning a company's accumulated realised profits less its accumulated realised losses, that a change in relation to the present position is brought about. The requirement that a company may not make a distribution until accumulated losses have been made good clarifies a situation that has been in some doubt.
The principles involved represent prudent accounting practice and I am accepting the recommendations of the accountancy bodies that they should be applied to all companies. The directive imposes a further restriction on public limited companies in that they may only pay dividends where the amount of the net assets is not less than the aggregate of the called-up share capital and undistributable reserves and where the payment of the proposed distribution would not have the effect of reducing the net assets below that level. The remainder of Part IV recognises the special position of assurance companies and investment companies in relation to those basic principles and specifies the accounts, and regulations concerning them, to which reference must be made by all companies before any distribution is contemplated.
I have already mentioned in relation to Part II that this Bill deals with the re-registration of companies and it is for that reason that I think it is appropriate to include provisions for companies changing between limited and unlimited status. The Companies Act, 1963, already authorises an unlimited company to re-register as a limited company and I am merely improving that provision for the better protection of the interests of its creditors where an unlimited company re-registers as limited and, subsequently, goes into liquidation. There is no provision in the 1963 Act to enable a limited company to re-register as unlimited. I am making this facility available now in section 52.
I have already mentioned, in relation to Part II, that existing public limited companies must within a given period re-register as the new public limited company or, as an alternative, be re-registered as another form of company. This provision provides such an alternative. Moreover, various representations requesting this facility have been made to me. While I am providing the facility I am satisfied that a change in status from limited to unlimited is not one that will be lightly taken because such a change will require the assent of all the members of the company and will have serious consequences for all involved in that the assumption of unlimited liability means that the members will be responsible for the debts of the company to the full extent of their personal assets.
On the one hand it is only right for me to signal to Deputies today that I will be introducing a number of amendments on Committee Stage and, on the other, to assure them that these are marginal and reflect reconsideration by the draftsman on one or two issues.
Finally, Part VI of the Bill covers matters such as the publication requirements imposed by the directive, the use of misleading names, penalties and procedures for indictable offences, expenses and order-making arrangements.
I have already referred to the fact that the complexities of the directive have called for a Bill which, Deputies will agree, is fairly complicated. It has been formulated with care as to its consequences for existing companies and with regard to the views of various interested professional groups. I would like to take this opportunity to thank the groups concerned for their views and recommendations.
In conclusion, I need hardly remind this House that the enactment of this Bill is now a matter of urgency because of the judgment of the European Court. I am sure that I can rely on Deputies to get it enacted with maximum speed. Being generally dictated by the directive, the Bill itself is largely technical and, consequently, uncontroversial. Therefore, I think it is reasonable to ask Deputies to refrain from pressing for amendments in relation to other general matters not connected with the second directive. I am making this request on the clear understanding that I have given Deputies a guarantee that I will be introducing further stringent and comprehensive measures for the reform and up-dating of company law as soon as possible. In those circumstances I look forward to the co-operation of Deputies in dealing with this Bill quickly and recommend it for the approval of this House.
