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Special Committee on the Companies (No. 2) Bill, 1987 díospóireacht -
Tuesday, 28 Nov 1989

SECTION 25.

Section 25 deleted.
NEW SECTION.

Amendments Nos. 31 and 34 will be taken together, is this agreed?

Agreed.

I move amendment No. 31:

In page 27, before section 26, to insert the following new section:

"26.—Section 13 of the Act of 1980, concerning information to be included in a director's report, is amended by the addition of a new paragraph (e) as follows:

‘(e) a statement of any guarantees given by any individual director of a company concerning the repayment of debts owed by the company to an individual creditor of the company, which are secured by the personal assets of the director in question,'.".

This concerns the increasing tendency of banks to circumvent limited liability by looking for guarantees of repayment of loans from the directors of the companies in their personal capacity. This has two bad effects. First, it means that the bank do not assess the company's proposals on their merits or lend to the company on their merits. Instead they will lend to companies that are sponsored by individuals who have substantial private assets but not to the same company with the same proposals if the director does not have substantial private assets. That is not fair. Secondly, it means that the purpose of this legislation in throwing open, in the cases of genuine abuse, the assets of a director to be pursued by creditors who have been unfairly treated by the company, is going to be set at naught because the bank, by insisting on a prior personal guarantee, will have a first claim on any assets that the director may have. So all the sanctions contained elsewhere in this legislation, the purpose of which is to say that an aggrieved creditor will be able to go after the director's own assets, will be set at naught because the bank would have got there first by the insistence on a personal guarantee.

I would point out to the Members opposite that the Fianna Fáil Party in their election manifesto in 1987 specifically stated that they intended to do something about this question of the abuse of the demand for personal guarantees by banks. I say that because I think it is an indication that this is a serious problem. I do not think that it is a proposal that would have found its way into the manifesto of a major political party — and nobody can deny that is what Fianna Fáil are — if it did not represent a genuine problem. But unfortunately the Minister, and this applies to the previous Minister who was in the party who made the claim in question, did not introduce any amendments to the companies legislation to deal with the problem which had been specifically adverted to in the Fianna Fáil manifesto. Indeed, it was the only company law matter referred to in the Fianna Fáil manifesto on that occasion. Banks should not be allowed to get away with this practice.

It seems to me that banks in this country are obsessed with security. Frequently they have no interest in the validity of projects whether or not there is a good risk involved so long as they have their "hold" on the deeds — it does not particularly matter whose deeds they are — so long as they have this hold on somebody's deeds they are happy, but do not ask them to assess a business proposition on its merits because that is something they are not trained to do. They are only trained to read deeds it would appear to me. That is not satisfactory.

The purpose of these amendments is to deal with this problem and to help to fulfil a promise that was made by the party opposite — with the exception of Deputy Mac Giolla — during the 1987——

(Interruptions.)

He finds himself in strange company. I am in good company over here. It is in order to enable that to be done that I propose this amendment. Could I just say something briefly about the structure of these two amendments? The first requires that there should be a statement of any guarantees given by individual directors in the directors' report. This is necessary because elsewhere in this legislation we are relying on the assets of directors as a source of funds in the event of abuses occurring. It would be useful for those dealing with a company to know that those assets are not encumbered already by bank guarantees. That is material information that should be contained in the annual report.

More importantly, in amendment No. 34 we propose that it should not be lawful for the director of a company to give a personal and individual guarantee for a loan made to the company if the guarantee is secured by a liability or charge affecting the personal assets of the director in question and the guarantee is given for a greater amount than one-half of the amount of the loan in question.

We are not proposing that bank guarantees would be abolished altogether; we are only allowing the guarantee to be used up to one-half of the amount of the loan, so the bank will have to lend the other half of the amount that it is owed on the strength of the assets of the company without reference to any assets that the director may have.

I think that is a fair balance between the demands, that may have some legitimacy, from banks for a measure of security outside that granted by the company's own assets. It also considerably restricts the present position. I look particularly to my colleagues, the Fianna Fáil Members, for support for this amendment which is consistent with their policy.

I would just like to add my support here. I think all of us can state cases where we had practical experience of individual constituents coming to us in relation to this type of problem. What has happened is that people have got into bad habits. Today, institutions are tripping over themselves to lend money to companies or individuals who wish to purchase property as distinct from investing in industry in the real sense of the word. There does not seem to be any shortage of money available for those who want to purchase property because, obviously, there is security there for those lending the money. If we are ever to get off the ground in this country in helping young people, in particular, develop entrepreneurial skills and to take risks and take on the opportunities that are out there, then the financial institutions have an obligation towards those people.

In many cases many young people just would not have the assets that would, perhaps, be required by the institution in question. We are in the process of development in this country. We have to say to the institutions, "You have a part to play in the overall development in using the young people we have trained in the skills we have given them in giving them a chance to start their own businesses without having to go through this whole continuous requirement of having to give personal guarantees in respect of loans being sought".

I had one instance in regard to a small building company where an individual persuaded his wife to allow the deeds of their home be given to a particular bank and when the company got into temporary difficulties for a very small amount of money, they were told by the assistant manager of the bank to sell their house. The loan originally was for £6,000 and because of interest build-up it became something like £24,000 or £25,000. The answer they got from the bank when they asked, "Is there any chance we could do a deal and maybe you would give us a house loan which we would be prepared to repay" was that they were not interested; they wanted their money even if it meant selling the house and going to a local authority — if you do not mind — to be rehoused.

If institutions are in the business of lending money and taking risks, they should be prepared to investigate each application on its merits without asking or persuading people to put up their small, modest home as security for a very small loan. It falls back then on the State to rehouse that family, never mind the turmoil involved for the family itself. It was the attitude of the institution in question that really annoyed me. There was no attempt whatsoever to deal with this in a sane, rational manner. It was a question of, "sell the home and pay us the money", which included interest amounting to £18,000. Yet, we see Visa card holders are now being asked to pay 26.8 per cent on their Visa cards. I am told, from investigations made, that that takes into account the number of bad debts that occur in respect of Visa card holders or all credit card holders. I am quite certain that the banks and other institutions build into their interest rates a particular percentage to cover possible bad debts in the future. I do not think that is the way business should be run. This amendment is dealing with a situation that all of us, irrespective of our party political beliefs, have come across on a day to day basis dealing with people in business. Like my colleague Deputy Bruton I appeal to all members of this committee, inclusive of the Minister, to accept this amendment and to deal with this matter which is part and parcel of what we need to develop industry in this country and to encourage people starting their own business without having to go through this day to day difficulty of finding assets to secure a loan they might be seeking.

I strongly support the amendments tabled in the names of Deputies Bruton and Barrett. Every one of us must have had countless experiences of constituents who have had the problems these amendments propose to obviate. Like my colleagues, I believe the lending institutions should have regard to the company's assets in the first instance in determining whether it is possible, feasible and worthwhile to lend money to them, but they are going a little bit further. In order to safeguard themselves they are looking for the personal guarantee and invariably with the personal guarantee there is the request for the spouse to sign on the dotted line as well. If anything goes wrong at a later stage, the spouse and the children are left without a home and the State, on one or two occasions and I know this from experience, had actually to house the people concerned afterwards.

What Deputy Barrett has just said in relation to the financial institutions refusing to give a loan is quite common. That is a regular response from these institutions despite the fact that on paper the request for a housing loan will be reasonable, and will be regarded as being reasonable, having regard to discussions entered into by the Minister for the Environment and the banks in relation to housing loans. Oddly enough, the banks in these instances, or the lending institutions, will tell the applicant to go to the local authority to get the loan. They say they want their interest in the company redeemed and the only way that can be done is by calling in the assets and selling the house. It is imperative that these amendments should be included in the Bill. I am sure that every Member here must have had countless similar experiences to these I have just outlined.

In conclusion, with no disrespect to the legal or accountancy professions, I think company law by its labyrinthine nature, must be the Garden of Eden as far as both professions are concerned. Although these matters can be decided by the courts at a later stage, I think we should set down hard and fast rules and guidelines so that the courts will have regard to the legislation that is written into the Satute Book when the courts, the legal profession and the accountancy profession sit down to decide who is right or who is wrong. I strongly support the amendments.

I appreciate we have concentrated on the personal assets being the house of the director but the personal assets, I understand, would extend much wider than that. I accept that there may be a need to protect directors from their own actions. At the same time is it not true that a tremendous amount of Irish industry, small industry, got going because the entrepreneur, being a director, was in a position to raise finance by offering as collateral his own assets? I think it would be a retrograde step if we were to decide that that facility was not to be available to a director in future if he wished to raise finance to get his business up and running or to expand and develop it. Many asset holders would be critical of us if we were to withdraw from them the right to utilise their assets as they saw fit. That is the problem I would have in supporting this proposition. I certainly agree with the various statements about the financial institutions and the fact they invariably require coppertight guarantees so that they will be fully reimbursed should a particular project go wrong as far as their lending to support the project is concerned. I think there is a tremendous criticism due to the financial institutions on that basis. The old story is if you have access to finance or assets we will look after you but if you have not, forget it — we do not want to know you. That has hampered development in this country particularly the smaller entrepreneur who is trying to get up and going.

This restriction, as I see it, would put a tremendous block on groups or individuals attempting to utilise whatever assets they happen to have, be it houses or other personal assets which are not specified here, to fund a particular enterprise — an enterprise that is already up and running and requires some additional capital to expand or diversify. For that reason I think the amendment is flawed.

These two amendments relate to the same issue. I would like to deal with the second amendment, No. 34, first, and then with amendment No. 31. I appreciate that the Deputies' concern relates to the position directors can find themselves in and the need to endeavour to protect them in the event of the guarantee being called in. There are a number of matters that would give me concern arising from the proposed amendment No. 34. In the first place the amendment would, I feel, lead to a significant interference with the freedom of companies and with the directors of those companies to negotiate with lending institutions. I think companies must be free to negotiate with lending institutions and also be free to decide as to how any loans provided are secured or guaranteed. I think that is essentially the point that Deputy Flood has made; I think he made it in a commonsense way. It is possible that lending institutions which at present seek such guarantees would devise some other means of guaranteeing loans and they may adjust their lending policy to take account of the new limits which this amendment would introduce. This could further affect the ability of companies to finance their operations.

If the banks are not allowed guarantees the likelihood is that they will switch money into investments which, of their nature, give a guarantee. That is what would worry me. That means we will get an even higher proportion of money going into the purchase of property and public houses and things like that that are regarded as good security, where the money is lent on the basis that the deeds, as Deputy Bruton said, will be handed in. I agree with him and other Deputies and the experience I have had with banks is similar. The attitude of Irish banks is frequently far from progressive when it comes to lending to companies which are prepared to take risks rather than companies that simply want to hold assets. I think it would be wrong in principle to say to companies who want to take risks which are inherent in the manufacturing process as opposed to the property holding process that they will be very constrained in how they finance their operations. Secondly, if the Deputies feel that as a matter of principle, directors should not be able to guarantee loans, then it seems to me that any prohibition on them should be an outright prohibition. Curtailing the amount of the guarantee to half the loan would effectively limit the amount of the loan to twice what the director is in a position to guarantee.

At the same time, it could mean total exposure, and it will mean total exposure, for the director concerned. For example, if a director has total assets of £100,000 and if he is prepared to use the full value of the assets to guarantee a loan, then the company can borrow £200,000. However, in such a situation if the lender calls in the guarantee, the director's total personal assets are exposed. In other words, the amendment is not, in those circumstances, protecting the director. If anything, it is protecting the lender by introducing a limit on his lending.

Furthermore, I am not sure of the extent to which lending institutions always look for such guarantees. If, as Deputies said, it arises very frequently then that raises fundamental questions about the whole concept of limited liability, rather than the question of directors guaranteeing loans. In fact, it seems to suggest that lenders are unhappy to deal with limited liability companies as such, unless those companies are dealing in property. If this is the case, then perhaps the question we should be looking at is whether the concept of limited liability is viable in itself in these circumstances rather than simply putting an upper limit on directors' exposure.

The amendment also raises the question of which directors would give such guarantees. Directors in public limited companies would be very unlikely to be called on to give such guarantees. To my knowledge they never are. If this is the case, the other main groups of directors likely to be called on are those in private companies. Are these not least the very ones who require most flexibility in regard to funding and expanding their company. I find it difficult, therefore, to be supportive of the amendment because I am not very happy to interfere with the existing process without good reason, if we are going to cut it off altogether.

Amendment No. 34 prohibits guaranteeing by directors above a certain limit. In practice, what would happen would be that the banks would continue to treat a director in the same way and say they would lend him £200,000, or they would lend the company £200,000, and because the person can only guarantee £100,000 the other £100,000 would have to be guaranteed by the person's wife and brother and father and uncle or whoever else he could call on but, they would say, "this amendment to the Companies Act will not defeat our purpose", we will still get there by forcing you to give guarantees anyway, even if they are not all given by you personally". The dilemma that the director is faced with in those circumstances is that he does not provide the guarantees the company will not get the money and, therefore, cannot undertake its activities which may be very beneficial and, unfortunately, like a lot of other companies, it is forced back into non-productive activity where the holding of assets is a major function of the company.

In relation to the second of the two related amendments, No. 31, by way of clarification I presume that the reference in the first line to the Act of 1980 was intended, in fact, to be a reference to the Act of 1986. My recollection is that there is no Act of 1980 which would be relevant. Having listened to the Deputies, I can certainly appreciate the reasons underlying their wish to include such a provision in the Bill if it would add to the information available regarding companies. However, as I mentioned in relation to amendment No. 34, it would be more in the case of a private rather than a public limited company that guarantees would be sought from and provided by directors. As Deputies are aware, the reporting requirements imposed on public companies are more substantial than those on private companies and this is as it should be.

I do not wish to add to the disclosure requirements of smaller private companies and I am sure that directors would not want that. Deputy Bruton mentioned, in speaking about amendment No. 31, that it would be useful for creditors to know if directors are personally encumbered. That possibly might be, but it would be an appalling imposition on directors if their own income, of a personal nature, had to be disclosed. People just would not want to trade in those circumstances because it would extend to things such as personal hire purchase, bank overdrafts and so on. It would be deeply resented if there had to be further disclosure of their personal interests, by directors of private companies, in particular.

There is a more general consideration as to whether such a requirement is appropriate in principle. The kind of sensitive information involved in guaranteeing loans would not be appropriate for public consumption by way of inclusion in the accounts of public companies and certainly not in private companies. Consideration of increasing the burden on industry would also arise in regard to this proposal. In all the circumstances, I would not favour amendment No. 31 which, even though its intentions are good, could actually be quite harmful in practice.

I find this discussion very interesting. In relation to the Minister's point about disclosing the personal encumbrance of a director, that is not involved at all in this amendment. It specifically states, "repayment of debts owed by the company to an individual creditor of the company" and it is only in those cases that the statement would be required. However, all sides have agreed that the problem is with the banks, not with the directors or the company, and generally it is smaller companies which will be involved and which will have problems trying to raise a few thousand pounds in cash. It is they who will have the problem of personal guarantees. Nobody in a huge multinational company will have a problem with personal guarantees. Perhaps the Gallagher Group might have proof that there is another problem there.

However, basically we are talking about smaller companies who are looking for loans and the banks are doing "the dirty" on them. Instead of saying that it should not be lawful for a director of a company, etc., we should be saying it shall not be lawful for a bank to give a loan to a director of a company on a personal and individual guarantee, rather than it should not be lawful for a director to do this. The director does not want to give any guarantees. The director just wants the money. It is the banks that are doing the "dirt". The banks are saying that they will give you the money, twice as much if you want, provided they get this, this and this. The Minister has agreed that the banks' position is really untenable and, internationally, Irish banks are notoriously conservative in this area.

Surely we should then be ensuring that the banks are adhering to the limited liability of a company. One could say that if you do that then you are ensuring that no limited liability company will ever get a loan. I do not know. The banks need to lend their money; they are accumulating interest on it every day once they lend it. That is their business, they need to lend money. If there was some legislation preventing them from screwing people into the ground, which is what everybody agrees they are doing in the most vicious manner, they would begin to lend money on the basis of any moneylender knocking at the door. He is not looking for any guarantee. He says he will be calling next week and he wants nearly 100 per cent a week interest or whatever. This is the type of fear. The banks are in the business of lending money and they should be forced to do that. I would like to see restrictions imposed on the way banks screw people into the ground even when the project is developing well but is simply not developing fast enough for the bank. Even if it might come good in six months time, the bank would foreclose before that and you are ruined. That has happened frequently. I agree that something must be done. I do not know how it can be done but it should be done in relation to financial institutions in the area of company law and how they operate.

I do not think it is feasible to do it this way. You cannot prevent a director from raising money if he is foolish enough. Some people are gamblers, some are not. If they are foolish enough to put their house up and bet the money on a horse they will be foolish enough to do this. They will do it because they say they have a good idea and are convinced it is going to work — and they are able to convince the banks that it is going to work and that it is a good idea but the banks will check out the idea first as well and still look for the guarantees. The amendment should be directed against the banks.

I do not think anybody sitting around this table would disagree with what Deputy Bruton, Deputy Barrett and others have said about the banks and financial institutions. Whatever Deputy Bruton wants to say about the banks and financial institutions he could not say as much as I could, not from a personal experience but from what they have done to people I represented from time to time. What Deputy Bruton is trying to achieve is perfectly laudable but for reasons set out by the Minister, and for various other reasons, I do not think this amendment will achieve it.

If the amendment is accepted — I am talking about amendment 34 — there are two possibilities. First, money which is available for lending will go in a direction that would not be for the benefit of the economy. It will go to companies which are acquiring assets and will serve as guarantees against the money lent, or, and this is much more likely, the banks and other financial institutions will find a way around this. The Minister has outlined some ways in which this can be circumvented in the Bill as drafted; I have not read it too closely but it seems to me that it could be circumvented by the banks agreeing to give two loans instead of one. They could arrange to give the loan and for the director to give the guarantee before he becomes a director. They could arrange for the director to step down from the board for a period of a week or a day while they arrange this. The term "director" in Deputy Bruton's amendment does not extend to people connected with directors. Neither is it clear that it extends to shadow directors. The facts are that the banks and other institutions will either find a way around this and if they can find loopholes in it I am sure the people who want to borrow money will be more than happy to go along with these proposals — whatever proposals they make, because if people are prepared to put their personal assets on the line they will be prepared to go along with the banks and find ways around this. Deputy Bruton's amendment if incorporated into company law might prove to be another barrier to be circumvented. It might prove irksome to people who want to raise money.

If this Bill can be tightened to such an extent that it would be workable and watertight then I think it will have the undesirable effect on investment and on money available for lending which the Minister has already adverted to. Like Deputy Mac Giolla and other Members, I wish we could do something about this. I wish we could do something to relieve people of the trauma of having to give personal guarantees to banks and worry during uncertain time in their business when it is going badly. The problem will be solved ultimately by increased competition among the institutions providing financial services. If competition increases this problem will eventually disappear. That is a reasonable suggestion. That is the only way to do it. I do not think we will solve this problem by writing laws. That cannot be done unfortunately.

I am a little disturbed by what I hear from the other side. They made promises about what they were going to do to amend this Bill when they got back to power, yet there is not one suggestion from the other side, or from the Minister, as to how this problem will be resolved. Deputy Bruton and Deputy Barrett have put down an amendment which might have some technical difficulties. I would be happier if the Minister and his officials said there was some way they could tailor this amendment to meet the situation. You would swear that all Deputies did not have similar experiences to those outlined by Deputy Barrett.

Last Saturday I had a similar situation: a builder was in difficulty and was being bothered by a banking institution. While promises are made in manifestos and guarantees are given, sometimes these problems come home to roost and we have to make a genuine effort to resolve them. Otherwise many businesses are going to grind to a halt. In this amendment there is an effort to try to get it in order. I appeal to the Minister to take the idea on board and see if he can provide some substitution of detail which would meet his own wishes.

To reply to Deputy Carey, the point being made is a legitimate one. We would like to see this problem addressed by legislation which is bank directed rather than individual directed. Every public representative would have had experiences with people who had problems in giving personal guarantees. This legislation gets into the area of personal freedom. I would like to ask Deputy Bruton about that. I am sure he is anxious to reply to the queries from a number of Deputies on this side. Why did he not direct his attacks to the banks? Why did he not frame his amendment so that banks should not seek guarantees from individuals? The area of family life and property is something we should address. I accept Deputy Carey's points. I listened to the Minister's reply — and I did not contribute until I heard it — and he has covered the concerns that have been raised. There is a serious problem to be tackled but perhaps separate legislation would be required. Maybe Deputy Bruton has another way. He came at it from the wrong direction. The discussion has been very worthwhile. I repeat the points made by Deputy Carey that this area should be looked at, but unfortunately this is not the right way to approach it. The Minister is correct in saying that there will be another way around it.

The particular example that he gave — that the banks would simply look for guarantees from the wife or the brother — is a very logical follow-up from what Deputy Bruton and Deputy Barrett are proposing. The bottom line is that you have support again from people like myself, in particular, for what you are trying to do but unfortunately you have come at it from the wrong angle. I would ask Deputy Bruton if he could, at some stage, answer that question. Why did the Deputy not direct his attention towards the banks?

Before Deputy Bruton replies, my interpretation of the amendments is that they seek to eliminate the situation whereby extraordinary risks are undertaken by a company through the personal guarantee of a director and that the bank or the lending institution — which might not necessarily be a bank — is covered for this extraordinary risk by virtue of the personal guarantee. Various examples are being quoted but, for example, take a small building company, with two or three directors, which gets into difficulty and one director, on the advice of a solicitor, gives a personal guarantee, the other, on the advice of his solicitor, refuses to give a personal guarantee. The outcome of that has been — this happened recently — that one director lost whatever assets he had plus his home and the result is that his wife and family are homeless. The other director, who was advised by a different member of the legal profession, obviously, is still living in his house and cannot be ejected from it by virtue of various other Acts. His wife obviously did not give any personal guarantee or did not sign any agreement whatsoever. Consequently, one director is being victimised in that situation.

Another example of the extraordinary manner in which a lending institution can advance money to a company is as follows — this also happened recently — a lending institution advanced money in excess of the value of a house, which was a local authority dwelling, on the basis of the director furnishing a copy of the vesting order. It was a tenant purchase house which had been "sold on"— the key had been "sold on". The bank advanced, to the company, a sum in excess of the value of the house. Circumstances outside their control then took over and the result is that in excess of £45,000 is now owed to the bank or lending institution. At this stage the bank are putting pressure on the family to pay off and have told them that they have the deeds of the house in their possession. They do not have the deeds of the house in their possession at all, of course. In fact, the local authority, who should have been consulted in the first instance, were never consulted and never gave permission to anybody to have a second charge on the property whatsoever.

Those are just two examples of what is happening at present. Another example is where a director of one company gave a personal guarantee to a director of another company and the company in receipt of the loan for which the guarantee was given was subsequently liquidated. Years later, that director of the company to whom the guarantee was given, incurred further debts and got into difficulty and the unfortunate individual, who gave the guarantee in the first instance, was still found to be liable and had a huge debt hanging over his head and only through circumstances, which were a pure fluke, managed to extricate himself from it. Again, that is a classic example of a situation where a lending institution was prepared to use its muscle regardless of the consequences. In all cases, I might add, huge amounts of accumulated interest were involved.

There is a simple way around all this, and we are back to the housing situation again. If a director owns a house and wants to raise money, if this section is included in the Bill it prevents him, basically, from using his house as a guarantee. All he has to do then is go to a lending institution and sell his house to the institution or he could put it on the market and sell it and take the money and put it into the company. The end result is that his house is gone. You can drive a coach and four through this and, at the same time, it interferes absolutely with the right of an asset holder to use his or her assets for the benefit of a business. We have already talked about directors acting in the interest of employees and shareholders.

I find it quite extraordinary that if we include this in the Bill, it will directly affect the ability of individuals, directors and groups of directors acting together, to propel their business, to expand, to raise capital, to raise cash. It does not make sense to me although there is merit in trying to act in the best interest of the director. There is merit in protecting his assets, if we are talking about a house. There is no reference here to a spouse — the wife acting alone giving guarantees — does that rule that out? She can raise a loan in her own right and put it into the company.

Deputy Flood was elected to the Dáil for the first time, as I understand it, in 1987. He was elected on a manifesto in which his party said they would deal with the problem of bank guarantees being demanded of directors. He and his colleagues have spent the last half an hour criticising me for the fact that my amendment does not go far enough, that there are ways in which it could be got around, that I should have brought it into some other legislation, and that I should have made the sort of other brilliant suggestions they are now making.

I would point out to Deputy Flood, that it was his party that promised to do something about this. If they wanted to introduce it as an amendment to the banking legislation, it is fair to point out that a Central Bank Bill went through the Dáil in the last year and if the party represented by Deputies Flood and O'Dea and their colleagues here, were sincere in the promise they made — and I emphasise they made — in relation to this matter, they could have introduced it as an amendment to the Central Bank legislation.

My amendment has been before two Dála for the last 12 months. This is not a proposal that I have sprung on an unwitting Department of Industry and Commerce. If they wanted to do anything about the problem of bank guarantees and did not like the drafting of my amendment, they had the last year and a half, or two years, to come forward with their own proposals. I believe that their own idleness in this matter — to use a legal term — estops them from criticising the drafting of my amendment because they have not used the time available to them to come up with a better proposal. I do not think what I would categorise as these niggling criticisms — that it does not deal with this situation or that situation — are of any political validity, given that the Deputies making these criticisms had plenty of opportunities to come forward with better amendments to fulfil their own party's election proposal.

I would like to say why I proposed this in the context of the Companies Bill. It is directly relevant. May I ask the Minister a question? In respect of amendment No. 43, which he put forward last week, which provides for directors to be personally liable, without any limitation of liability, in the events that are considered to have impeded the orderly winding-up of a company by virtue of loans they had accepted from the company, will a bank guarantee demanded of a director in that circumstance, to repay money to the bank, take precedence over a court order made under the amendment the Minister introduced last week? If it does, what is going to happen will be that banks will frustrate the effectiveness of this legislation by getting in there and demanding personal guarantees in advance. If those take precedence over an order by the court under the legislation we have put through to allow for directors' assets to be available to compensate creditors in particular circumstances, then bank guarantees will actually be used as a means of frustrating the work that we are trying to do in this committee.

Section 116 of this legislation provides that in the event that a director was knowingly a party to the carrying on of any business of a company in a reckless manner or knowingly a party to the carrying on of any business of a company with intent to defraud creditors of the company, creditors of any person or for any fraudulent purpose, that director may be declared to be personally responsible, without any limitation of liability, for any or all or any part of the debts or other liabilities of the company, as the court may direct. If that director has given a personal guarantee of his assets to a bank, will the bank have precedence over the court in respect of those assets? If the bank does have precedence over the court in the exercise of its powers under section 116, then again the issue of personal guarantees being given by directors to banks is frustrating the very core of this legislation. In fact, what will happen is that if the problem of personal guarantees being demanded is not a big issue at the moment, and it would appear that the Minister has not informed himself about the extent to which they are being used, it will certainly become a great problem in the future because banks will now realise that as a result of this legislation, directors can be held to be personally liable in certain circumstances and the banks will demand more personal guarantees from directors than they would have demanded in the past in order to get in front of other creditors and to get in before the Oireachtas pass this legislation. That practice must be controlled.

Given that there is an intimate interrelationship as the same assets will be pursued between the relative rights of ordinary creditors as protected by this legislation and the banks as protected by their own guarantees, I submit to Deputy Flood, Deputy O'Dea and others who have been making these criticisms, that this is exactly the place where this provision should be introduced because it relates directly to the work of this committee. It is not proper to introduce it in banking legislation. The appropriate place to introduce it is in company legislation because it is easier to enforce it in individual cases. Under banking legislation there is no requirement to make available information about individual loans which they are giving to individual companies, whereas there is an obligation on companies to make declarations each year about their liabilities and so on at their annual meeting and in their annual report. Therefore, the right place to deal with individual liabilities being created is in company legislation rather than in banking legislation because there would be no method to enforce the provisions if they were incorporated in banking legislation as information is not required to be made available in a routine fashion under banking legislation.

Does the Minister know, or have his Department concerned themselves in the last year and a half since this amendment was put down with how often banks actually look for personal guarantees, because the Minister did not seem to have that information a few moments ago when he was answering earlier queries? If he does not have that information, he should have it. If he does not have that information, he should accept the consensus of the committee that this is a widespread practice. The Minister said in a philosophical mood at the beginning of his intervention, that if this practice was going on — I am paraphrasing him rather freely and if I "misparaphrase" him I am sure he will correct me — on a major scale then it is striking at the very core of limited liability. I can tell him that it is going on on a major scale. What are we doing? We are wasting our time making rules for limited liability if limited liability does not apply because the banks, using their economic power, are able to circumvent it. Are we in this committee going to waste our time over the next number of months, spending four hours a week on this, only to find that the whole thing means nothing because in the end banks have got guarantees and they are going to get in in front of everybody no matter how much legislation we pass and how sophisticated it is?

Like Deputy Bruton I feel frustrated sitting on this committee because it is obvious that we, on this side of the House, have tried to introduce amendments to deal with current problems and it annoys me to hear people pontificating about agreeing with this side of the House but that our wording is flawed. We all had an opportunity to table amendments. The only amendments before the committee are amendments Nos. 34 and 31. It is not a question of whether our wording is better than somebody else's; there is nothing to discuss but the issue that this brought forward by amendment No. 34. We should either accept that this is a problem or it is not a problem. I maintain that it is a very big problem.

You have not solved it.

We are trying to solve it. With respect, Deputy O'Dea is a member of the committee as I am and if he can put down a better amendment we will discuss it.

I would have problems in that regard.

The Deputy may have problems in that regard but that is his difficulty. The reality——

(Interruptions.)

The Deputy did not find it too difficult to break the whip when it suited him in the past.

I am not going to break it on your behalf.

I listened carefully to what Deputy Flood had to say and the points made by him would suggest that every director of a company wished to give personal guarantees. I have yet to meet a director of any limited company who wants to give a personal guarantee. I do not see that we are interfering with the rights of directors in this instance. As a director of a limited company I would prefer not to have to give a personal guarantee in respect of a loan for the company of which I am a director.

People do not want to give personal guarantees; they are forced to give them and that is the kernel of this argument. People are being forced to give personal guarantees and unless one has assets one will not get the money. That introduces a broader issue. We are also talking about helping young entrepreneurs to advance, develop, expand and to start up, and the Minister was quite capable in the recent past, without using legislation but by using threats, of bringing people to their senses on another issue. If lending institutions are beginning to find ways around the proposal before the committee today, the Minister can use the same sort of tactics he used recently or, indeed, he can come back to the House and introduce a further amendment to deal with the situation. Because a negative attitude is being adopted towards the wording used here, this Bill will merely sail through without this issue being addressed because there is no other amendment before us. If one is serious about dealing with this issue, one either supports this amendment or stops pretending he is in favour of helping people who are caught in this position. That is the choice facing this committee. We either support the amendment or accept the situation as it is and allow it continue. We, on this side of the House, believe that should not be allowed continue.

Thank you very much, Chairman. I am obliged to you for allowing me to come in. It is only right that I should say at this stage that I sincerely hope that this legislation will be passed at some time in the foreseeable future and I would ask Deputies on all sides to bear that in mind. It is of great importance to this country and its economic welfare that the legislation should be passed. We cannot indulge ourselves any further in the luxury of prolonged and repetitious debate about individual sections or amendments, when there are literally hundreds ahead of us. We will have to bear that in mind if we share, as I hope we do, a determination to try to make the major changes that are needed in company law.

You can work on the basis of the Volkskammer in Berlin. We will withdraw from the committee, if you wish. If you feel that what we are doing here is——

No, I am not suggesting any such thing. We have had very lengthy——

We spoke for about five minutes each.

(Interruptions.)

This amendment alone has been before the committee for an hour and a quarter now.

It is an important issue.

It is and——

I am sorry if the Minister is inconvenienced.

I am not inconvenienced at all, but I think it is a great pity that after a lot of time — last week and today — we are still on the second section essentially. At this rate it will take a very long time. Deputy Bruton makes the point that in some way the proposal in amendment No. 43 will be negated by a refusal to accept this amendment. That, I suggest, is not the case. Amendment No. 43 has the opposite effect to this. Amendment No. 43 deals with a company making a loan to a director. The problem we are concerned with in this amendment is the question of a loan being made by a bank or other financial institution to a company. The question, therefore, of guarantees only arises in the case of a loan to a company. It does not arise in the case of a loan by the company to one of its directors. Therefore, that point does not arise and that problem cannot arise.

In regard to section 116 where a director can be made personally liable for reckless or fraudulent trading, it is my understanding of the position that personal liability which can be imposed on him by a court would take precedence over other matters such as guarantees. There is nothing, as I see it, in the section to prevent that happening. If there is any doubt about it, and if it is thought that the banks might be able to inveigle themselves in any way to get in ahead of that personal liability to the detriment of creditors, we could deal with under section 116, which is in Part VI and which we will reach, presumably, some time in the future. We can make that absolutely clear at that time if that is necessary.

I do not think the concerns Deputy Bruton has expressed in this respect, that banks can get in ahead of people, are valid in these circumstances. I would remind him and Deputy Barrett and others that this pair of amendments come back to a particular thing, either prohibiting or limiting the power of a company to borrow through the personal guarantee of a director. We can do away with that and we will, as it were, have said to the banks "You can no longer get a personal guarantee from a director" and they will immediately say, "OK. We will not lend you money. We will only lend money to non-productive companies". I do not think that achieves any purpose at all.

(Interruptions.)

Unfortunately in this country they do a lot of their lending for non-productive purposes. This is one of the regrettable matters. Deputy Bruton asked me earlier how many directors have to give personal guarantees and I said I did not know, in the sense that I cannot quantify it; and I have no possible way of quantifying it. I could not possibly know, because I would have to go around on some kind of confidential basis to every private company in the country and ask them. I could not do that.

What I would say from my own experience is that the practice is quite widespread in companies that are in risky enterprises, particularly in manufacturing, but the practice is not widespread and probably does not even exist in places where there is no risk, such as in property acquisition and development, farming and other activities where the main purpose of the company is to acquire substantial assets which will retain their value anyway, irrespective of how the enterprise goes. The practice is widespread in companies that are under any risk and the amendments as proposed would do nothing to lessen that problem. They would not, unfortunately, much as we might all wish to do so, inconvenience banks because the banks will simply ask members of the family to give the guarantees, or outsiders to be brought in to give the guarantees, so nothing will be achieved. For that reason I think the Deputy would be well advised, in the interests of enterprise here, if he were not to proceed with these two amendments.

May I ask the Minister the source for the statement he makes that the bank guarantees would take second place to a statement by a court that a person should be personally liable in the event of a breach of the new section 35 or a breach of section 116?

The whole purpose of section 116 is to enable directors to be made personally liable where they have traded fraudulently. If the banks were, in some way, to act in concert with those who were trading fraudulently or recklessly to the detriment of the ordinary creditors, then I think the banks have no equity in that situation to help them. It would be quite inappropriate.

I am not talking about situations in which the banks are conniving.

In any event, the point, as I have told the Deputy already, is covered in the section I think fairly adequately. If it is not adequately covered, we can do it more fully in subsection (6) (a).

The position is that in both sections, the new section 35 and section 116, there is a provision to the effect that the court may order that the assets of an individual director may be open to be pursued as a means of repaying creditors who suffered as a result of breaches of the sections in question. If, prior to that, in a perfectly legitimate way, a bank, as part of the conditions for giving a loan to the company, has obtained, shall we say, the deeds of a director's house, it would appear to me that by obtaining the deeds of the director's house the bank has that house in its possession and that any general order affecting the assets of that director cannot affect the house. The house is not available to meet the debts of the company because the bank has already obtained that. A subsequent court order could not, under present law, set aside the rights that the bank had previously acquired in respect of the house and if, in the place of a delinquent director whose only assets were his house, and the bank had already obtained the deeds of the house as guarantee for a loan, the effect of a declaration of personal liability under section 116 or section 35 would be nil because the bank had got in first. The Minister has not given me any authority other than referring me to section 116 which does not refer to priority of debts in the case of bankruptcy; it simply refers to personal liability arising without saying who gets first charge of particular assets. The Minister has not answered that point. Could he tell me what would be the priority in the case of assets of an individual as between a prior guarantee given in good faith without any misfeasance on either party's part by a director to a bank covering particular assets and, on the other hand, a subsequent order by a court affecting the same assets? Who would have the first claim?

It cannot arise under section 35 as proposed because it is a transaction in the opposite direction. Under section 116 (6) (a) the court has jurisdiction to award such priorities as it sees fit. That is my reading of it. We are in the difficulty here that the documentation on this Bill is so voluminous that we physically cannot bring it with us to this committee. All the documentation you see in front of me and two officials is the minimum that is necessary for Part III alone and we have nothing for any other Part. I cannot refer to the detailed notes on section 116, but subsection (6) (a) seems to give the court discretion to prevent what Deputy Bruton suggests.

I suggest to the Minister that that is not the case. If a bank has legitimately entered into a guarantee arrangement with a director of a company in regard to a loan that it has obtained a prior property right under the Constitution in respect of those assets and that no subsequent court direction could have any effect to set aside those rights obtained by the bank——

The Deputy will agree that if it has a prior constitutional right over those assets, no law we pass here can deprive it of it.

Indeed, other than law that prevents the creation of that right in the first place and that is precisely the point of my amendment. My amendment is designed to prevent the bank from obtaining a right of that kind at any point, so that we do not have to attempt in a futile fashion to slam the door when the horse has already bolted.

That is all very well if the only thing that we had to be concerned about is simply the details of legalities, but I am concerned about the ability of people to do business, the commercial reality. We cannot simply take away the right of a company to raise money because you do not like the banks. It is obvious that everyone sitting at this table has an apparent intense dislike of banks that trade in Ireland and everyone I have heard speaking has given all kinds of instances of the way they allegedly ill-treat people. We all know that but in agreeing to this amendment, am I going to stop the normal commercial activity of companies that are in risky enterprises, such as manufacturing industry, and are we going to confine enterprise in low-risk activities, such as farming, public houses, property development and so on? I am not prepared to do that and I do not think the committee should be prepared to do that.

In case of any misunderstanding, could we clarify one point? We are not necessarily saying that we dislike banks; we dislike the practice that has crept into normal banking.

That is accepted. I have allowed discussion on this for some time and the animosity towards banks has been more than adequately articulated by every member in relation to this amendment. I have also allowed Deputy Bruton to tease out some aspects in relation to section 116, etc. People may speak, as far as possible, without undue repetition but we have to make progress on the Bill. That is not putting a guillotine, but if we continue with this rate of progress we will be here for a long time and, I submit, in extended sessions of over and above three hours per sitting. I have given more than adequate latitude to everybody to make a contribution and we now have to decide what we are going to do about the amendment. I am trying to be fair to everyone and I do not see what further information is going to be elicited from any further discussion. Can I put amendment No. 31?

The amendment is before the committee.

Question put: "That the new section be there inserted."
The Special Committee divided: Tá 6; Níl 6.

Barrett, Seán.

Durkan, Bernard.

Bruton, John.

Mac Giolla, Tomás.

Carey, Donal.

Reynolds, Gerry.

Níl

Cowen, Brian.

O'Malley, Desmond J.

Flood, Chris.

Power, Seán.

Kitt, Tom.

Roche, Dick.

As the vote is six each, the amendment is negatived.

In view of the fact that the committee is divided equally on this, the matter should be considered further.

Barr
Roinn