Amendments Nos. 152, 153 and 154 may be discussed together if the Committee agrees. There are a lot of amendments to this section because it is one of some consequence. Agreed? Agreed.
SECTION 116.
I move amendment No. 152:
In page 97, line 28, after "If", to insert "in the course of winding up of a company".
Amendments Nos. 152, 153 and 154 are related and are intended to clarify that section 116 will only apply where the company concerned is being wound up. The main amendment No. 152 reflects the wording of the opening line of the previous section, that is the section which establishes criminal liability for fraudulent trading, as well as the opening line of section 297 of the 1963 Act which it replaces. Amendments Nos. 153 and 154 are simply consequential on the first one being made. As a result of these amendments section 116 will generally apply only to companies that are being wound up.
I should say at the same time that by virtue of section 207 of this Bill, section 116 may in exceptional circumstances apply to a company that is not being wound up. Section 207 deals with the specific case where a company has been run down to the point where not alone is it insolvent but it has not even enough assets left to fund a liquidation. In such cases section 207 enables a number of provisions in the Bill and in the 1963 Act to be activated by a liquidator, provisions that would otherwise apply only if the company was actually in liquidation.
Amendment agreed to.
I move amendment No. 153:
In page 97, line 29, to delete "a" and substitute "the".
Amendment agreed to.
I move amendment No. 154:
In page 97, line 33, to delete "a" and substitute "the".
Amendment agreed to.
I move amendment No. 154a:
In page 97, line 38, after "proper to do so" to insert "and if the application has been made within two years of the appointment of the receiver or liquidator as the case may be".
This amendment relates to putting a time limit of two years on the time within which a director of a company may be pursued to produce from his own personal assets money to make up any deficiency in the company if the company becomes insolvent.
Section 116 introduces a new element to the law in that it says that if a person was a director of a company and he was knowingly a party to the business of that company being conducted recklessly, and that includes allowing things to happen even though he did not know they were happening, if in the view of the court after the event he ought to have known or ought to have inquired, that even though he did not know what happened it is possible that he could be personally liable for all the debts of the company without limit.
Similar provisions have been introduced in Britain since 1986 but we do not quite know how they are going to work because there have not been that many liquidations in the period which would have been brought to a conclusion between 1986 and today. Some of the fears that we might be expressing about the way the thing would work may not prove to be well grounded in the light of experience in Britain and others may prove to be well grounded, but we do not know yet because the thing is so recent.
The purpose of this amendment is to prevent a situation in which years afterwards perhaps a director of a company which went down may be pursued in respect of personal assets which he acquired subsequently on the basis that years afterwards a creditor who had not got all their money back, looking back on the thing decided that because the director had made money subsequently he was a good mark to be pursued on the basis that he ought reasonably to have known about something that went wrong in the company and which led to the company going down.
Obviously the ability of such a director, or ex-director as he would be, to defend the case would diminish with the passage of time in the sense that his recollection and his records of what happened or did not happen when he was a director of the company would be that much less vivid. Therefore, essentially you could have individual directors being pursued simply because they were subsequently quite successful and creditors felt they were a good mark, and they would not be in a position to prove that they were not reckless because the records would not be as good because of the passage of time.
What Deputy Barrett and I are suggesting in amendment No. 154a is that such a claim should be made within two years within which time a director would be expected to retain any records necessary to defend himself or otherwise, but that it should not be something that could be produced at any stage. I think this is a fairly reasonable proposal, and I hope the Minister will be able to accept it.
The effect of the proposed amendment, as the Deputy has said, is to reduce the period within which a civil action can be initiated against a person for fraululent or reckless trading to two years. As the Bill is drafted at present, and in the absence of any explicit provision to the contrary, I understand that the normal cut-off point for civil claims would apply, that would be six years in accordance with the Statute of Limitations, 1957. I must say that what the draft amendment led me to wonder was whether any limitation should apply given the nature of the actions we are talking about here, but particularly where a business is carried on with the intention of defraud creditors. In other words, if at any stage in a winding-up information emerges to suggest that a person was guilty of fraud in the conduct of his business one could argue that it should be possible to take action against him no matter when the fraud was discovered. I have however, looked at the Statute of Limitations, 1957 since the amendment was tabled and I know that the period of limitation is expressly postponed where the action is based on the fraud of the defendant. On the other hand, I gather that it is arguable whether fraudulent trading, which is what we are concerned with in section 297A (1) (b) would in all cases be encompassed by the term "fraud" used in the relevant section of the 1957 statute. However, even if it were I am happy that it would be no more than is warranted in the circumstances we are talking about.
In the second place in a winding-up involving any reasonably sized company there is every possibility that matters on which an action can be taken may not come to light for some considerable time, and in these circumstances I do not think it would be appropriate to introduce a time limit of two years within which such actions must be initiated. What the Deputy says in the amendment is two years from the appointment of the receiver or liquidator, not from two years from the discovery of the fraud; which might be a long time afterwards.
I should like to draw attention to two other amendments I have tabled on this section which tighten up the application of the section. Amendment No. 152, which has just been passed, makes it explicitly clear that the provisions of this section will only apply where a company is being wound up.
Amendment 159, which we will come to shortly, proposes to substitute a new subsection (3) in section 297A of the 1963 Act, to ensure that actions for reckless trading can only be taken where a company being wound up cannot pay its debts, whereas actions for fraudulent trading will be possible whether or not the company being wound up is solvent.
Finally, on this amendment, there is always the danger that the introduction of a two year limit could precipitate the initiation of unwarranted actions on the basis of incomplete information, whereas if the normal six year limit applied, a ready explanation for what originally might have appeared to be untoward actions, could emerge.
I think it would be preferable to allow sufficient time to enable any of the parties being given the right to bring an action under this section to consider their position without placing them under a two-year limit. On the basis of that, I would recommend against the amendment.
I am persuaded by the last argument that the Minister has made in that a two-year limit could lead to a rush of actions being taken within the time limit, which could be contrary to the effect that I am trying to achieve. I also accept the point made by the Minister that in a case of fraud it is not desirable to impose a narrow limit on the time within which people can take action to recover money. I would say, however, that the case I was making to limit the possibility of vexatious actions mainly refers to possible actions in respect of reckless trading which is a fairly new concept in so far as its practical application is concerned. As I have pointed out already, it is possible to be seen to be reckless even in respect of events that one was unaware of, and suffer the consequences. However, on balance the Minister's arguments are persuasive.
Amendment, by leave, withdrawn.
Amendment No. 155 is consequential on amendment No. 162 so we will take those two together. Is that agreed? Agreed.
I move amendment No. 155:
In page 97, line 39, after "liability" to insert "other than such limitations as are set out in subsection (9) of this section".
The basic idea behind these amendments is to limit the extent of personal liability that could apply to a person. I have been having a look at the particular limitations of the suggested amendment No. 162 and I have come to the conclusion that there is too much of a limit involved here. Certainly one-sixth of the total debts of the company is too small an amount to which a person should be exposed for personal liability, certainly in cases of fraud. Also, twice the subscribed share capital is too little in view of the fact that the subscribed share capital of many companies is extremely small, anyway.
I see a difficulty in regard to this section and I do not know if the amendment I am putting forward is necessary. It is probably going too far in trying to find a solution to it. Say you have a company, an American-British company operating in Ireland. They have one Irish director and the company is mainly directed from overseas. If it behaves in a reckless fashion, as subsequently decided by the court, and personal liability of the directors is decreed, it would appear that the entire debts of the company would fall to be paid by the one Irish director of that company and that there is no provision — although I may be wrong here — for readily pursuing the directors from other jurisdictions, inasmuch as they would not be subject to the Irish courts.
Perhaps the Minister would be able to clarify this. If there is mutual enforcement of judgments in regard to matters of this kind that problem does not arise but my understanding is that there is not. We could have a situation where an Irish director who was simply brought on to the board for the optics, just to have an Irish name on the board of directors, and who had very little part in the actual running of the company, may have been rather weak-minded in not insisting on greater involvement and he would find himself having to meet the entire debts of the company while the people who were actually running it, because they were non-nationals, would escape completely. That was the thought in regard to saying that no one director should have to pay more than a given proportion. However, I believe my amendment No. 162, on reflection, goes too far in that direction. I would like to avail of the opportunity to ask the Minister his views about the other points I have made, which are related.
My feeling is that the court would make all the directors liable, assuming that they had knowledge of the activity that gave rise to their liability. The question of the enforcement after that is really a procedural matter. I presume if a judgment is got against all the directors, if some of them are not resident here, you could re-mark your judgment in the foreign jurisdiction and seek to enforce it there. You would probably, in practice, try to enforce it against the Irish director, the resident director, first and the others could then be followed up for what was not recovered from him. That is what would be done in the normal course of legal proceedings. I do not really think we can change that. If people are outside the jurisdiction obviously they are not as easy to get at in the first instance as those who are within the jurisdiction, but with the proposals in Europe at the moment for directives on the enforcement of civil judgments, the difference between somebody being resident here and anywhere else in the Community will become progressively less.
Could I ask the Minister if in the hypothetical case I mentioned an Irish director who was not particularly involved was pursued first and was more or less bankrupted in having to pay off all the debts of the company, even though he was not the effective controller of the company, would that director have any remedies against the other directors in international law? Would he have any means of pursuing the other directors for a contribution towards what he had to pay?
A defendant among other defendants, or one of several defendants, would presumably apply. He could apply to the court at the original hearing perhaps for a division or partition of the award. Normally the liability of directors as a body, in a situation like this, is joint and several, as I understand it, therefore if he becomes severally liable for all the liabilities of the directors then that is too bad. That is the case in the normal instance. Say there were four directors and they were all Irish but three of them were men of straw and one of them was not, it is the one who was not who will get caught for the lot of it anyway, if they are jointly and severally liable. There is no proposal in this Bill to change that. In the interest of creditors it would hardly be equitable to change it.
Would the Minister not agree, given that we are moving towards a much more inter-dependent Europe and companies of multiple nationalities will be formed and will operate in and out of this jurisdiction, that if we have in our law the ability to throw the entire book at the Irish director in respect of debts incurred here and it is not possible for either him or the other creditors to actually pursue the foreign directors, we are going to have a very unequal situation. Will it not also be rather difficult to persuade people in those circumstances to accept positions as non-executive directors? We are constantly hearing advice being issued — I issued plenty of it myself when I was in the Minister's job — to smaller companies that they should take in outside capital and outside directors to help them run their business. The non-executive director would come to the board meeting once a month or once every two months and give advice. It is going to be harder to persuade people of this sort to go on boards if they find that the other directors, the people actually running the company, have no money, and that they, the non-executive directors who came in, have to fork out the entire amount of the company's debts on the basis that they ought to have known something that they did not know and the court subsequently decides that by failing to find that out they were reckless. That is going to cause something of a problem. I am struck by the vagueness of the Minister's response in regard to the enforceability of these judgments, whether judgments against a foreign director of a company are going to be enforceable either by the other director who may have had to foot the entire Bill or by the creditor. If they are not easily enforceable, saying, as the Minister did, that the Irish director in this scenario could apply to partition the award will not work because the creditors will not agree to partition the award because they will say, "we will not be able to enforce the judgment against the non-Irish directors, so we will not partition it; we will look for the lot from the Irish director". Can the Minister see the problem in that?
If you feel that no Irish director should ever be caught if we can lob it on to somebody else, then it is a problem. This section and this whole concept only applies to two instances. It applies to two classes of people who are acting as directors, the person who, while an officer of the company, was knowingly a party to the carrying on of any business of the company in a reckless manner. It could not be going on unknown to him. He had to know that it was being carried on recklessly or he must have been a person who was knowingly a party to the carrying on of the business of a company with intent to defraud creditors.
That is not accurate.
I am quoting from section 297 (1) (b).
The actual section is slightly contradictory because it says, as I understand it, that a person shall be deemed to have been knowingly a party to carrying on a business in a reckless manner if he was a party to carrying out certain actions which, having regard to his general knowledge, skill and experience, he may reasonably be expected or ought to have known that would cause loss. In fact it applies even though he did not know.
That is the way knowingly is defined.
Yes, it is defined to include situations where he did not know.
Yes, but where he ought to have known.
It is what he ought to have known as decided by a judge with the benefit of hindsight.
If he did not know he would be better off not on the board in the first place.
Deputy Rabbitte is quite right on that point. On the other hand if a person has accepted a number of directorships — the advice is constantly being given to people to take directorships in smaller companies to help them to develop——
If he has a number of directorships he had better find time to go to the board meetings.
That is true. What I am concerned about here is the situation in which one director could be placed in the position of having to carry the can for them all.
He could, that is true, but he will not be in that position unless, knowingly — either with actual knowledge or constructive knowledge, in that he ought to have known about it — he approved of fraudulent or reckless trading by the company. Therefore, while he may be getting penalised proportionately more than his share, shall we say, nonetheless he is only being penalised because he allowed fraudulent or reckless trading to be carried on. In that sense it is not unfair. Of course I would remind the committee that we are talking here about civil liability, not about criminal liability, because you could not have a concept like this here in criminal liability. Under subsection (5) there is considerable scope for relief from his obligation. I would draw Deputy Bruton's attention to that subsection.
Amendment, by leave, withdrawn.
I move amendment No. 156:
In page 98, line 5, after "actions", to insert "or those of the company".
This is a straightforward drafting amendment. Subsection (2) (a) was inserted by way of amendment in the Seanad to provide an objective test of reckless trading. On reflection, however, the subsection still does not go far enough since in most cases it would really be the actions of the company to which, of course, the director may have been a party which would actually cause loss to the creditors. The amendment would add this extra reference to the company in order to protect them.
Amendment agreed to.
I move amendment No. 157:
In page 98, line 9, after "grounds" to insert "having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position".
This is an extremely complicated amendment to which I have a complicated reply.
I am flattered that the Minister, despite his well-known brilliance, should find a simple amendment of mine complicated. What I am proposing here is that where the court is subsequently deciding that a person allowed a debt to be created which he did not honestly believe on reasonable grounds the company would be in a position to pay, he would be liable to pay that debt out of his personal assets even though the company was insolvent. The amendment suggests that in deciding what are reasonable grounds the court should have regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position. For example, an accountant or a financial controller making such a decision in his capacity as a director would be expected to have better knowledge of whether the company was likely to be able to repay that than somebody who did not have that capacity. The chairman would say that if he was at the board meeting he should know, but it is fair to say what we are talking about here is an estimate of the future capacity of a company to pay back a particular debt. That is not simply a matter of fact, it is a matter of judgment.
One would be more severe in judging a director who allowed a debt to be created which the company was not going to be able to pay, if that director was an accountant or somebody skilled in that area, than in judging an ordinary man who originally started off with a box of tools and eventually set himself up with a small two-person company. He would not necessarily have the same ability to foresee whether the cashflow situation of the company would be such that he would be able to pay the debt. We are simply proposing in this amendment, and I do not believe it is complicated, that the court should have regard to "the general knowledge, skill and experience that may reasonably be expected of a person in this position" in judging that matter.
In supporting this amendment, I do not think the insertion of these words will weaken the Minister's intention here. A lot depends also on what was actually said at a board meeting, what advice was given to, say, a husband and wife team as directors, or what advice is given by, say, the financial advisor to a small company. All the Minister is doing is taking into account the fact that one individual may have more ability to foresee a likely event than another. I am quite certain that if it came to court the judge would take that into account, if we specifically state it in the legislation. I do not think we are making it easier for somebody to behave in a more reckless fashion than they would if the provision was not there, or that we are encouraging people to behave fraudulently. It is a reasonable insertion into the Bill. I ask the Minister to consider the manner in which it is being put.
The reason I say it is complicated is that it brings in and mixes together both a subjective and an objective test. That is always a matter that gives rise to a lot of problems. I would start by saying that in general reckless trading arises where an officer of a company knew or ought to have known that his actions or omissions would cause loss to the company's creditors but despite this he went ahead with the action concerned. Subsection (1) (a) is expressed in general terms. It provides that a person who was knowingly a party to the carrying on of a company's business in a reckless manner may be held personally liable for all or any of the debts of the company. Subsection (2) defines when a person is to be regarded as having been knowingly involved in the carrying on of the business in a reckless manner. There are two tests in subsection (2) as to what will, in particular, constitute reckless trading. The first of these tests, in paragraph (a), is an objective one and concentrates not on what the person actually knew or believed, but what he ought to have known given the normal knowledge, skill and experience that should be expected of a person in his position.
The test in paragraph (b), on the other hand, is a rather more subjective one and concentrates on a person being a party to the contracting of a debt which he did not honestly believe, on reasonable grounds, the company would be able to pay. Thus in paragraph (b) we are talking about whether the officer concerned acted in a particular manner when he actually knew what the result of his actions would be. In effect, the Deputy's amendment is an attempt to introduce an objective test into what is already a completely subjective one. In my view, this is something we should try to avoid. Even if it were possible to do it, which I doubt, to my mind subsection (2) (b) boils down to a question of fact. In other words, did the person concerned incur the debt without honestly believing the company could pay it. It is as simple as that.
To introduce assessments as to what someone would do in such a situation would, I feel, only cloud the issue and, indeed, would make the provision unworkable. Overall, I think the distinction between the two cases, in paragraphs (a) and (b) of subsection (2), must be maintained. For that reason, I ask the Deputies not to persist with the amendment.
I think the distinction that the Minister is drawing between the two subsections is a false one. He suggests that paragraph (a) is a subjective test and paragraph (b) is objective, that is based on the facts.
Paragraph (a) is objective and paragraph (b) is subjective.
That is not my understanding of what the Minister said.
Paragraph (a) is objective because it refers to what a reasonable person would do, or what a reasonable person would be expected to do or to know. That is objectivity, because it relates not to the actual individual who is involved, but to what a reasonable person would do in all the circumstances. Paragraph (b) is subjective for the reason that it examines what the person involved actually knew.
I must say I am lost. Once the Minister has introduced the concept of reasonable grounds into (b) he has introduced an element where the court is going to be deciding what is reasonable and what is not reasonable. Our amendment is simply elaborating and giving guidance to the court as to what it would look at as being reasonable, that is that it would think that a person might have had reasonable grounds for believing that a debt could not be paid, if it was somebody who had very considerable financial knowledge, but somebody who did not have that knowledge might not be looked at in the same way. That is essentially what we are trying to achieve in our amendment.
May I just give an example here? Say you had a husband and wife team where the wife is purely the passive director in the company. This happens every day of the week as we all know. All of these things are grand when you are talking about medium or large companies where directors play an active role, but the reality of life is that in some cases you have, in order to fulfil legal requirements, the wife being appointed a director of a small company. Remember what this section is allowing —". . . on the application of the liquidator or any creditor or contributory the court may, if it thinks it proper to do so declare that such person shall be personally responsible. . ." A husband may die and leave an insurance policy and the wife suddenly comes into a few bob to look after the family. The next thing is the liquidator says, "There is money here, I am going to go to the courts under subsection (2) (b)". The reality is that the wife, in the normal course of events, would not have been in a position to know or believe on reasonable grounds that the company would be able to pay the debt when it fell due.
All we are saying here is that you insert "having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position". I do not think that that weakens the case or destroys what the Minister is trying to get at in a majority of cases. However, it could prevent bringing an unfortunate widow into a court to defend herself under this section.
In looking at this legislation we should take into account the various sizes and types of businesses in this country. It is grand when you are dealing with a large company and people are serving on a board on a daily basis, but in the vast majority of cases you have small businesses where the wife is actually a director.
(Interruptions.)
The position is as the Minister rightly said, that paragraph (b) applies subjectively because it adverts specifically to the state of mind of the person who is being sued. I am not concerned about people who have higher degrees and greater skills and financial expertise etc. than other people because the less a person's financial skill and the less they know about the actual management or affairs of the company or the less they know about the actual business being carried on by the company the more likely they are to be successful if there is a case brought against them under this paragraph. The whole question of what they knew or did not know or what they could understand is clearly set out in the paragraph. They must act honestly. If the wife did not have the proper level of expertise etc., she could hardly be said to be acting dishonestly if she did not know the consequences of the loan.
Mr. Kitt
Along the same lines, the problem raised by Deputy Barrett would also be covered further down in subsection (5): "where it appears to the court that any person in respect of whom a declaration is being sought under subsection (1) has acted honestly and responsibly in relation to the conduct of the affairs of the company" etc. I, too, would be very fearful of upsetting the structure that has been referred to by the Minister. There is a need to separate the objective view from the subjective one. Deputy Bruton would add confusion and chaos to a position that is quite clear. Taking the two subparagraphs — the objective and the subjective — in line with the section under subsection (5), lines 25 to 30, I think the problems referred to by Deputy Barrett are adequately covered within that framework.
If the matter is purely subjective, why have a reference to reasonable grounds? Why not just simply say "and did not honestly believe the company would be able to pay the debt."
There must be some limitation to it. A person could say that he or she honestly did not believe that this situation would ultimately arise. I do not think they are adding a lot to the subparagraph. What the draftsman is trying to achieve is a situation whereby if somebody says "I honestly did not believe that this debt would give rise to these consequences" that they must be able to explain why they did not believe it in the circumstances.
How would a widow be able to do that? What test would be applied to her? Would it be the same test that is applied to others?
I think housewives have to take the law as they find it.
(Interruptions.)
In the case of a director, whether a housewife or not, where they consented to a company borrowing £50,000 when they knew perfectly well that they had net assets of only £1,000, that would be an instance where they could not claim that they honestly believed on reasonable grounds that the company would be able to pay the debt when it fell due.
The Minister is taking an extreme case to illustrate his point. It is not going to be as clear as that. There may be situations in which a man and his wife who are the directors of a company will take the view that present trading conditions which are favourable are going to continue. They will undertake certain liabilities in the light of that projection and will be proved to be wrong. A judge, two years later, will say that, in his opinion, they ought to have known that there was going to be a downturn in business conditions and ought therefore to have realised they would not be able to pay the debt and they did not have reasonable grounds for believing they would be able to pay the debt because they should have foreseen this, that and the other happening. We are all in favour of going after fraudulent directors, but hindsight is going to be applied here, with a judge saying in the light of all the knowledge he has subsequently acquired, that the person should have known two or three years previously that that debt should not have been undertaken.
On a point of clarification, the objective test relates to the carrying on of the business where the actions will cause loss to the creditors. The subjective test relates to the contracting of a debt which is a specific point as distinct from the general running of the business where the objective test will apply. The safeguard is put in with regard to general knowledge, skill and experience. I would like to make progress on this amendment.
I do not think the words "on reasonable grounds" add a great deal to it. To speed up the proceedings, I will propose that the words be removed.
I think it is a valuable enough protection and the phrase should be left in. Deputy Bruton's last contribution illustrates the paucity of his point because judges do not operate on the basis of points, they operate on the basis of an objective view of the law and the knowledge as it stood on the occasion when the event they are considering occurred.
What is the position regarding the amendment?
We are pressing the amendment.
Amendment put.
The Special Committee divided: Tá, 5; Níl, 10.
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Tá |
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S. Barrett. |
B. Durkan. |
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J. Bruton. |
G. Reynolds. |
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D. Carey. |
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Níl |
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M. Bell. |
J. McDaid. |
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B. Cowen. |
W. O'Dea. |
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C. Flood. |
D. O'Malley. |
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T. Kitt. |
P. Rabbitte. |
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L. Lawlor. |
D. Roche. |
Amendment declared lost.
I move amendment No. 158:
In page 98, between lines 12 and 13, to insert the following subsection:
"(3) In considering applications for a declaration that a director shall be personally liable for all or parts of the debts of a company on the grounds set out in this section the court shall take due account of the fact that the day to day conduct of business demands that risks be taken on occasions, and that if a director makes a decision which he genuinely believes to be in the best interests of the company and its employees, that such a decision shall not be deemed to have been a reckless one simply on the ground that it has proved, with the benefit of hindsight, to have been a mistaken decision.".
This is recalling the points I am making that the court should take account of the practicalities of the split-second decisions that have to be made in business while not taking away any of the powers to go after fraudulent trading, reckless trading and so forth. It says in considering such applications for personal liability that the court shall take due account — not necessarily overwhelming account, and in some cases it may not take account because it may not be relevant — of the fact that the day-to-date conduct of business demands that risks be taken on occasion. If a director makes a decision which he genuinely believes to be in the best interests of the company and its employees such a decision shall not be deemed to be a reckless one simply on the grounds that it is proved with the benefit of hindsight to have been a mistaken decision. It may well be argued that the judge will do this anyway but it would be no harm to have this safeguard to give appropriate balance in the section.
Before the Minister comes in may I just make one point? It seems to me that Deputy Bruton's amendment is discriminatory. The civil consequences of this section apply to officers of a company. The protection that Deputy Bruton is seeking to include here is confined to directors.
Mr. Bruton
It is a mistake, if that is the case.
While the concept of fraudulent trading has been with us since the 1963 Act and relates to a person's intent to defraud, the concept of recklessness is one that is introduced into company law for the first time in this section. I have already mentioned that amendments were made on Committee Stage in the Seanad to tighten up the provisions in this area in terms of definitions, and so on. This resulted in the recasting of subsections (1) and (2) of section 116. I am satisfied with the provisons as they now stand and they go as far as I would wish them to go.
That could be seen as an all-purpose rejection of all amendments to this section. Could the Minister address himself to the particular amendment?
No, it is not. I will go on.
Perhaps the Minister could speak from his general knowledge.
On reading the amendment I think it would quite clearly be inappropriate. The Deputy's amendment is so widely cast that it would, in my view, completely negative the effect of the whole section. Furthermore, it would tie the court's hand completely and make the provision unworkable in practice. If the Deputies' amendment were adopted, all a director would have to do in order to avoid liability would be to claim that he genuinely believed that his decisions were in the best interests of the company and its employees. This would be far too easy an escape route to provide and would obviously be used in each and every case which arose.
Secondly, the last part of the amendment, which talks about hindsight and mistaken decisions, would be completely unworkable no matter what obligations the law puts on a person, whether we are talking about the laws of libel, driving a car without insurance, or whatever. Human error can occur but that does not exonerate the person concerned. For example, if I were to libel Deputy Bruton, why should I be able to escape liability by simply showing with hindsight that I had made a mistake? Or, if I drive my car mistakenly——
It would be a mistake.
——believing it to be insured, why should I escape prosecution? Yet that is the principle that the Deputies are trying to introduce here and it is one that I simply cannot accept. While we all know that business involves a certain element of entrepreneurial risk and that it is often easy to be wise after the event, concepts like hindsight and mistaken decisions are ones which we really cannot ask or expect our courts to grapple with.
I think the Minister's case is wrong in so far as all that this amendment is asking is that the court should take due account of these factors. These factors are not negativing any of the other provisions of the section; it is simply saying that the court should take due account of these factors. In some cases, the court might decide that due account was, in fact, no account.
Are the Deputies withdrawing the amendment?
No, we are not.
The Minister admitted that it is the first time we are putting into law this whole concept of behaving in a reckless fashion. There is no precedents as to how the courts will look at these matters. As legislators we should not be handing over all powers to the courts to make up their minds. I believe that we are here just to make certain that if genuine cases occur due account will be taken of that fact. It is easy, with hindsight, to say "I was wrong," but everybody knows that on a daily basis people are taking business risks and there are times, I am sure, at board meetings when the easiest thing to do is to say, "I had better not do that now because there is a new provision in the law". How will that affect business?
It is ridiculous for the Minister to make a case by comparing my getting into a car and driving without insurance with a new definition in law about taking a reckless decision in business. The Minister admitted it is the first time that this is going into law. The public are quite entitled to have some reasonable guarantees, again from the point of view of the small business person. We are not all talking about multinationals and large companies with financial advice available to them daily. We are talking about people who operate very small business, who are going to be employing lawyers and so on, to get interpretations of this Act before they take a decision.
If the Minister has doubts about the actual wording of this amendment, it would be far more beneficial to the speedy passage of this Bill through Committee Stage if he were to say, "I accept that you are talking about genuine cases and I will have a look at it for Report Stage, and if I find that your fears can be expressed in a less threatening way to the overall spirit of the Bill, then I will have a look at it." We would pass on if we got such slight encouragement, but as far as I can see, whatever we put down is just going to be opposed anyway. Are we going to have a filibuster for 25 minutes as we did the last day and then get a lecture from the Minister about getting the Bill through quickly?
It is regrettable that if someone does not agree with Deputy Barrett's point he goes into the sulks.
Deputy Bruton has moved the amendment on the basis that due account should be taken of these factors. Deputy Barrett has amplified that point. The Minister has replied. Is the amendment being withdrawn?
Deputies
No.
Amendment put.
The Special Committee divided: Tá, 5; Níl 10.
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Tá |
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Barrett, S. |
Durkan, B. |
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Bruton, J. |
Reynolds, G. |
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Carey, D. |
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Níl |
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Bell, M. |
McDaid, J. |
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Cowen, B. |
O'Dea, W. |
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Flood, C. |
O'Malley, D. |
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Kitt, T. |
Rabbitte, P. |
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Lawlor, L. |
Roche, D. |
Amendment declared lost.
I move amendment No. 159:
In page 98, to delete lines 13 to 20 and substitute the following:
"(3) Notwithstanding anything contained in subsection (1) the court may grant a declaration on the grounds set out in paragraph (a) of that subsection only if—
(a) paragraph (a), (b) or (c) of section 214 applies to the company concerned, and
(b) an applicant for such a declaration, being a creditor or contributory of the company, or any person on whose behalf such application is made, suffered loss or damage as a consequence of any behaviour mentioned in subsection (1).".
This amendment proposes inserting, in subsection (3), the words "on the grounds set out in paragraph (a) of that subsection" into the preamble of the subsection. This is because, while we want reckless trading actions to apply only where a company cannot pay its debts, fraudulent trading actions should not be restricted in this way. In other words, it should be possible to take an action for fraudulent trading whether the company in liquidation is solvent or insolvent.
Amendment agreed to.
I move amendment No. 160:
In page 98, between lines 20 and 21, to insert the following:
"(4) In deciding whether it is proper to make an order on the ground set out in subsection (2) (b), the court shall have regard to whether the creditor in question was, at the time the debt was incurred, aware of the company's financial state of affairs and, notwithstanding such awareness, nevertheless assented to the incurring of the debt.".
This amendment is really a response to submissions made to the Department by various interested parties who feel that some allowance ought to be made for situations where a company continues to trade with a view to ultimately ensuring that existing creditors are paid in due course. Having reflected on the matter, I can see merit in this argument. For example, a creditor or prospective creditor might be aware that the company concerned was having problems but might nevertheless agree to provide the credit anyway. In such a situation the court might well decide that the creditor went into the matter with his eyes open and that he should not, as a result, be able to fall back on this section if things go wrong subsequently. On the other hand, the amendment would not be absolute about this. All it provides is that the foreknowledge of the creditor concerned would be a factor and, obviously, not the only one to be taken into account by the court in any action based on subsection (2) (b) of the section.
The existing provisions about fraudulent preference in the Companies Acts would, of course, still apply to such a situation so that a liquidator would still have the right to have any transaction set aside subsequently as a fraudulent preference of the creditor concerned in appropriate cases. Overall, I think the amendment is a useful refinement of this section and I commend it to the Committee.
I think it is better to use amendment No. 163 for this purpose than amendment No. 160. The Minister's drafting is not good. My understanding is that this will apply in the case of somebody who hears that a company is in trouble. Quite frequently when a company is in difficulty creditors will agree to try to allow that company to trade out of its difficulty by not pressing for the collection of debts, not from the point of view of becoming accomplices in the mismanagement of the company but simply because they want to preserve a customer in being and with this contribution they will allow that to continue for a while. It would seem that the danger here is that if that sort of action leads to those creditors finding that their claims will subsequently be reduced by this amendment, creditors will not tend to facilitate their customers any more, and if there is any indication that the company cannot pay its debt they will slap in whatever procedures are necessary to bring the company to an end rather than accommodate it. Therefore, amendment No. 160 — which mixes the idea of compensation with the idea of guilt — I think is mixing two concepts that do not mix. I believe amendment No. 163 is a better approach to this problem because it simply takes account of delays in making an application. I ask the Minister to have another look at this because I believe — and others believe — that the formula in amendment No. 160 is not the best and that amendment No. 163 is preferable.
From personal experience over a long number of years in this type of situation I would think amendment No. 163 is reasonable because, taking all the information they have or should have into consideration, if creditors are prepared to take a gamble on a company continuing and getting back into a profitable situation, it would be in the interests of the employees of that company to put that stipulation into the legislation, provided the creditor is given the necessary information and is not misled into believing that the company is in a solvent or healthy position. It is a reasonable amendment.
Of course, this is being done at the moment by many creditors. If this amendment is passed, the creditors who do that will find subsequently that the claim they are able to make in respect of the debts will be reduced because they gave consideration to that company and enabled it to continue. Because they allowed the jobs to be preserved, they will suffer. That is the danger.
That is happening anyway.
That is not the point of the amendment. The point of the amendment is that they will not, in those circumstances, be able to pin the charge or the civil charge of reckless trading on the company, because they knew there was a problem, but they tried to help the company, as Deputy Bell suggests, to try to get themselves out of the difficulty. I think that is reasonable. I am sure the body concerned who argued for this rather strongly would not mind my using their name in the circumstances. The Irish Venture Capital Association are people who would put in money in those circumstances. It is in everyone's interest that they put in money into a company that is having a problem rather than act as some other financial institutions do, which is to clobber the company the minute it has a problem, with serious consequences. For that reason, without prejudice to Deputy Bruton's amendment No. 163, I suggest that the Committee should agree to this amendment anyway, and we will have a look at the other one.
Amendment agreed to.
I move amendment No. 161:
In page 98, line 24, to delete "subsection (1)", and substitute "subsection (1) (a)".
This amendment is intended to solve a particular problem involving a conflict between subsections (1) (b) and (5) of section 116. Subsection (1) (b) allows the court to make a declaration of personal liability against a person for fraudulent trading and this, of course, involves proving intent to defraud. Subsection (5), on the other hand, allows the person concerned to escape liability if he can show that he acted honestly and responsibly. However, these two concepts are really mutually exclusive since if the liquidator can prove intent to defraud then, by definition, the defendant could not show at the same time that he acted honestly and responsibly. Indeed, if the defendant could show this, then the liquidator's proceedings would fail in the first place and the question of relief under subsection (5) would not arise. The amendment, therefore, would make it clear that the relief available under subsection (5) only applies in the case of reckless trading under subsection (1) (a) and not in the case of fraudulent trading under subsection (1) (b).
Amendment agreed to.
Amendment No. 162 has already been discussed in tandem with amendment No. 155.
Amendment No. 162 not moved.
I move amendment No. 163:
In page 99, between lines 18 and 19, to insert the following subsection:
"(10) In assessing any personal liability of officers of a company under this section, the court shall take into account any delay or omission on the part of the applicant which, if it had not occurred, would have substantially reduced the potential claim against the officer of the company.".
While I appreciate that the intent of the Deputy's amendment is to concentrate people's minds on where they delay taking action that they suffer the consequences. I think the Deputies are overlooking a number of things in this particular amendment. First, the section deals with both fraudulent trading and reckless trading. Whatever about actions for reckless trading I do not agree that there should be any lessening of responsibility for outright fraud simply because a plaintiff, whether the liquidator, a creditor or whoever, does not go into court on the matter right away. To put it simply, fraud is fraud and it does not matter how long it takes to start the ball rolling from a legal point of view. Secondly, we must bear in mind that by virtue of amendment No. 152 this section will only apply where a company is being wound up. Consequently, if the company is no longer trading it is difficult to see how any delay or, indeed, omission on the applicant's part would worsen the position of the director concerned. At the same time, having listened to the arguments earlier advanced by Deputy Bruton in support of this particular amendment, I would prefer rather than reject it outright to reflect further on it between now and Report Stage, if that is agreeable to the Committee.
I think the Minister has made a valid point that if there is a case of fraud the amendment should not apply, but perhaps he could apply it to reckless trading?
We may be able to do that in relation to reckless trading, but not to fraud.
Amendment, by leave, withdrawn.
The amendment is withdrawn on the basis that the Minister will come back to it on Report Stage.
Section 116, as amended, agreed to.
Section 117 agreed to.