The Bill before Seanad Éireann was first published on 20 January this year by the then Fine Gael Government. The Explanatory Memorandum which accompanies the Bill states that the underlying aim is to create a climate of confidence for business activity in which genuine commercial endeavour will prosper. The memorandum notes that the Bill was also designed to introduce measures aimed specifically at curbing certain identified abuses. Last week the Minister spoke about the Bill as being the most radical overhaul of Irish commercial law since the Companies Act, 1963. For all these reasons this Bill is timely indeed and I welcome its re-adoption by the present Government and urge its adoption by Seanad Éireann.
It is worth reviewing in some detail the principal measures proposed in the Bill. Firstly, in a winding up situation, the directors may often become personally liable for the company's debts. Secondly, directors of companies which become insolvent will have certain considerable restrictions placed in the way of their ever again becoming directors of companies. Thirdly, insider dealing, a particularly corrupt phenomenon, with which we have become very familiar because of recent goings on in the United States, will be expressly prohibited. Fourthly, greater powers are to be given both to creditors and to the Minister to have inspectors investigate the affairs of a company which may have entered into trading difficulties. Fifthly, directors of certain holding companies may have the same responsibility as directors of an insolvent subsidiary for the affairs of that insolvent subsidiary. Sixthly, there are to be very substantial penalties for noncompliance with regulations established by this Bill once it has become law.
We all know that what is needed in Ireland today is a new spirit of enterprise, the creation of an environment in which people will be willing to work for themselves and to take the risks which are the only known route to commercial and economic success. There are many obstacles in the way of creating this type of society in Ireland today, not least being the archaic, unfair and unworkable tax regime. One of the problems which business suffers from in Ireland is the overwhelmingly negative image with which it is associated in the public mind. To the extent that this negative image has been due to the activities of a number of cowboys within the overtly loose structure of our present company law, this Bill represents a step towards improving the situation and is, therefore, obviously a step in the right direction.
In Part II of the Bill it is proposed that inspectors can be appointed by the High Court to investigate the affairs of a company in certain circumstances. These inspectors will be authorised to examine past and present officers of the company, including bankers, solicitors, auditors and any person likely to be in possession of relevant information. Any evidence given to these inspectors will be admissible in subsequent criminal and civil proceedings. To many Senators these powers may appear to be somewhat draconian. We in this party are committed to the fuller development of society which will allow ordinary citizens the right to live their lives in privacy and without unnecessary interference by outside persons or bodies, least of all the State.
It can be claimed not unfairly that there is too much State activity in Ireland today and that only with a devolution of power and responsibility for their own affairs to ordinary people can we lift this huge burden of State interference off the backs of our citizens. Yet, the new investigatory powers conferred by this Bill must be seen in their proper light. To the vast majority of companies they will never be relevant. To all those individual companies who run properly, without shady or improper dealings, the provisions of this section of the Bill will prove immaterial. There are, however, as we all know, individuals in our society who feel no responsibility either to those with whom they work or to those whose lives are otherwise affected by the operations of their companies.
The pages of our newspapers, magazines and even our television screens are at times littered with the accounts of the doings of individuals whose recklessness and selfishness in business affairs have wrecked the lives of many innocent bystanders. It is these unscrupulous individuals we wish to pursue under the provisions of this Bill. So often the cry has gone up: "If we only had known in time". This provision will allow us to know in time the affiars of a company whose activities appear to be drifting close to disaster. It requires the full authority of the High Court to initiate an investigation of this type. This provision gives the lie to those who claim that it will prove an unwarranted interference in the affairs of the ordinary citizen. It is a reasonable provision which seeks only the protection of society at large, and it is to be commended to the House.
Additionally the Bill gives the Minister power to appoint an inspector to report on the ownership of a company. This is an important provision which will allow the Minister to determine the identity of those persons who are fronting a company and perhaps using improper influence because of their position to determine the affairs of that company. Again those who are acting within the law will have nothing to fear from this provision. It is proposed in section 7 (d) of the Bill to give creditors power to request the appointment of an inspector. It is important that this provision should be retained and strengthened because almost invariably the unsecured creditors stand last in the line to recover their investment in a company which is getting into trading or financial difficulties. Again, the purpose of all legislation of this type must be to create a climate of business confidence, a climate which will encourage people to get started in a business of their own and to take the risk which alone can turn Ireland into a profit orientated industrial and service economy.
It is invidious that ordinary people in business should have carried a greater exposure to the activities of sharp operators with whom they have had to deal from time to time. I welcome the provision which will allow creditors the right to request the appointment of such an inspector although I must say I have reservations about the practicality of the requirement by such creditors to lodge as security an amount against any costs which may be incurred in this process. I urge the Minister to reduce the potential cost of such a procedure for creditors to the absolute bare minimum. The Bill gives the Minister the right to require the production of a company's books and papers for inspection and, under a court order, to enter and search premises and to seize books. It is unfortunate that such practices have become necessary to safeguard the welfare of some unfortunate business people from a small number of sharks we have to deal with. On balance I welcome this measure as necessary and constructive.
Part III of the Bill deals with transactions involving directors which lie at the heart of the intention behind this legislation. The principal features of the Bill in this regard include the following: (1) the company may not buy or sell a non-cash asset to or from a director where the value of that asset exceeds £50,000 or 10 per cent of the total assets of the company without the approval of shareholders at an ordinary meeting; (2) there is a prohibition on the making of certain loans to a director or any person connected with him where the value of that loan exceeds £2,500; (3) in general, companies may not enter into credit transactions with a director or anyone associated with him for any amount exceeding £5,000 unless the transaction is entered into in the ordinary course of business or under normal commercial terms; (4) such transactions by directors must be disclosed by way of a note in the company's accounts; (5) directors service arrangements for periods of five years or more require the approval of shareholders in a general meeting.
There are other provisions introduced under the Bill which regulate the relationship between directors, shareholders and company operators, but these are the most important provisions. They are an attempt to regulate the behaviour of directors generally and in particular those directors who have especially close operating or financial relationships with their own firms. It has long been a source of some concern to me that so little information is furnished in the published statutory accounts of a company in respect of the amounts which the company pays to its directors. In the case of larger companies where a sort of old boys' club of company directorships seems to apply, this is particularly the case. All one ever sees disclosed in company accounts are brief items of information relating to directors' fees and emoluments, whatever they may be, and of subsequent pension payments. I favour the complete disclosure on a director to director basis of the amounts which have been paid to each director during the year. In the past we have seen too much shady dealing by directors with their companies, together with the use by directors of companies merely as tax shelters, or in the construction of quite elaborate tax avoidance shemes.
I know there is a legitimate distinction between tax avoidance and tax evasion. Nevertheless the distinction between the two issues is often a very fine one. I am aware it is the practice in the civil jurisdiction of many of our European partners that where a commercial arrangement has been established solely for the purpose of tax avoidance it will be looked through for the purpose of raising an assessment of tax. The courts here and in Great Britain have been moving towards an increasingly less sympathetic interpretation of some of these tax avoidance schemes in recent years. Nevertheless, I believe it would be beneficial if such a strict interpretation of these artificial schemes were written into our statute law as well. Too often we leave it to the courts to deal with these issues for us. We should have the courage to do away with these artificial schemes and I welcome an indication from the Minister that he will consider incorporating such a provision in legislation in the near future. The issue dealt with under this part of the Bill will prove of benefit in showing ordinary members of the public that we will not tolerate the use of companies by directors simply to make financial arrangements for their own personal advantage without any underlying commercial basis.
There are two intentions behind the sections of the Bill which deal with winding up and I subscribe to both intentions wholeheartedly: (1), the Bill attempts to strengthen the position of creditors in winding up; and (2), the Bill increases the accountability of company officers where the company is liquidated. I commented before on the undesirability of having ordinary trade creditors in the least strong position with respect to the company which is being wound up. These directors in smaller concerns invariably provide companies with goods and services which they need to carry on their daily activities and are the backbone of our economy. If we are to place our hope for future employment and growth in Ireland on small businessmen, it is imperative that we afford the businessmen all the protection and assistance we can give them under the law. This is what the Bill is attempting to do in these sections.
Secured creditors of a company when registering particulars of a charge will be required to include a monetary limit of a fixed and definite sum on the amount to be secured by that charge. This registration will, at least, have the benefit that potential investors or creditors in a company will have some indication of the extent of secured charges which rank before them for consideration in the event of a winding up. Too often it has happened that the unsecured creditors have been left penniless not least because it was unknown until the winding up how great was the value of the charges which had received prior security in the office of the company. In the matter of increasing the accountability of officers of a company it is proposed that any person, while an officer of the company, who is knowingly a party to carrying on any business of the company in a reckless manner may be held personally responsible by the court without any limitation of liability for all or any part of the debt or other liabilities of the company. This is, of course, only as it should be.
The original purpose of limited liability was to protect the shareholder, to indicate the limit of his potential liability so that business confidence might be maintained and the economy might prosper. It was never intended that limited liability should serve as a shield behind which dishonest directors or other operators might shelter. I welcome the removal of this anomaly and warmly support this section of the Bill.
There are sections of the Bill which deal with the role of auditors. In the past auditors have had too easy a time in their dealings with client companies. For a company the price of limited liability is the annual audit, the process whereby an independent report is made on the accounts prepared by the client company. How much work and actual research goes into running a statutory audit? Is it not the case that very many audits are conducted by the same firm of auditors year after year for the same company? In these circumstances I wonder whether it is unreasonable to expect that a certain cosiness creeps into the relationship that exists between the officers of a company and the company's auditors where the annual audit fee merely becomes payment for the varnishing of a company's accounts by the audit firm. Do auditors really deliver any service of estimable value to the clients they serve? I do not know what the answer to these questions is but I wonder if we should consider, in a future Companies Bill, what the expected role of the auditor might be. Perhaps we might suggest a rotation of auditors away from their client company after a particular firm of auditors have worked for that company for a period of, say, seven years. These are interesting issues, not quite appropriate to the present discussion, but perhaps of value for a future debate.
Under the Bill auditors are required to report on a declaration of solvency and they must state whether, in their opinion, the opinion which has been expressed by the directors that the company can pay its debts within 12 months of its liquidation is reasonable. This declaration must also state whether the directors' assessment of the companies assets and liabilities gives a true and fair view. I know that much debate has taken place over what a true and fair view actually means. We should note that auditors are required to give a true and fair view, not the true and fair view. What precise meaning this distinction has I do not know. To me as a layman it sounds like allowing the auditors very considerable leeway in the work they do in preparing their various reports. I wonder whether in phrasing the requirement for the declaration of solvency in this way we are drawing its boundaries too wide. Perhaps the Minister might consider the imposition of stricter guidelines for this declaration since the declaration itself appears to be an issue of such importance and of much potential assistance in work of this sort. I welcome the provision of the Bill which states that an auditor is precluded from acting as liquidator in a member's voluntary winding up. I similarly welcome the provision which states that all regular returns by receivers and liquidators to the Companies Registration Office are to be required to include a report as to whether the officer or member of the company may be guilty of a criminal offence.
This may be an appropriate time to make a comment on the operation of the Companies Registration Office. Many Senators will have had direct experience of the difficulty which can often be experienced when trying to retrieve a file from the Companies Registration Office for examination. One often has to spend a great deal of time waiting for the material in question and at times the file which one requires is nowhere to be found. This does not reflect in any way on those civil servants working in the Companies Registration Office. They must be one of our most over-worked group of civil servants.
It is surely time for the Government to apply more resources to that office and this would not require any manoeuvering with the embargo on employment in the Civil Service. I could instance a number of Government Departments where civil servants have a great deal of time on their hands and could be more usefully deployed in the work in the Companies Registration Office. This office is at present undergoing a programme of computerisation. Perhaps the Minister could tell us something about the progress of this computerisation project and any other plans which he may have to make the operation of the Companies Registration Office more effective.
Finally, it might be useful if the Minister could give some consideration to the problem of getting companies to file their accounts with the Companies Registration Office in time. We must accept that some of the practices which have grown up in this regard, not least from time to time in semi-State or State-sponsored companies, are disgraceful. The only way we will get companies to file their accounts on time is to impose financial penalties on those who default in this regard and also to increase the personal liability of directors in this area. Perhaps the Minister could let us know if he has given this matter any consideration or what he intends to do in this area in the future.
Part VII deals with the disqualification of directors. The heart of this Bill and its most welcome features lie in areas relating to the restrictions and disqualifications which relate to directors and other corporate body officers. I welcome the provision that, where a company is insolvent and is winding up, any person who is a director of a company at the commencement of the winding up, or within the previous 12 months, will not qualify to be appointed as a director or to form another company unless the other company has a minimum allotted share capital fully paid up in cash. We have all grown too familiar with the Phoenix syndrome where individuals have been able to walk away from the disasters which they have imposed on other people's lives through their reckless conduct and then begin to trade again, without any shame or accountability, within a very short time. This measure aims to do away with that carry on and I fully support it.
The ability of individual directors to apply for relief from these provisions is welcome in that it allows genuine cases to escape from the rigours of these regulations. The disqualification from acting as a director of any person who has been convicted of any indictable offence in relation to a company or involving fraud or dishonesty is also welcome. It might, perhaps, have been appropriate for the Minister to take this opportunity to exclude other categories of persons from acting as directors. It is hardly edifying to find a company one of whose statutory directors is a typist, or secretary, or other basic employee of the original instigator of the company. It would be a difficult area on which to legislate, but the Minister should investigate areas where anomolies and further abuses could be eliminated.
A number of other matters are addressed in this Bill but I do not propose to comment on any of them in great detail. The imposition of an obligation on a receiver to compile a statement of affairs within two months of his appointment may prove difficult to implement in practice if the receiver experiences difficulties in obtaining the required information from directors. The requirement on directors to call a general meeting where they have been notified by the auditors that proper books of account are not being kept is a welcome addition to the earlier provisions of the Companies Act, 1963. The even stricter invocation of personal liability on an officer of a company where the inability of the company to pay its debts has been contributed to by the lack of proper books of account is a particularly welcome development.
The new provision relating to the appointment of an examiner for companies which are ailing and are still potentially viable is also welcome. We all earnestly hope that measures of this sort will prevent the sort of collapse which the Exchequer had to endure and ultimately rescue in such cases as the PMPA, Irish Shipping and the more recent Insurance Corporation of Ireland fiasco. The whole thrust of this Bill is correct and timely. The Minister in his remarks last week pointed out that there were only 11,500 companies registered when the 1963 Bill was enacted and today there are over 100,000 companies. Companies, large and small, are now a major part of economic life in Ireland. We owe it to all the parties concerned in developing and fostering the growth of our economy to see that these affairs are regulated properly, fairly and wisely. The Bill does this in full measure and I welcome it.