Special Committee on the Companies (No. 2) Bill, 1987 díospóireacht -
Tuesday, 6 Mar 1990

SECTION 118.

Mr. J. Bruton

I move amendment No. 164:

In page 99, subsection (1), line 46, to delete "the whole or part of all or any" and substitute "a proportion related to its day to day influence on the conduct of the company".

This relates to where you have, as frequently occurs nowadays, a group of companies one of which goes down and the section says that the stronger companies in the group should be required to contribute towards the payment of the debts of the member of the group that goes down. The amendments Deputy Barrett and I have proposed say that the liability of a company in a group for the debts of other companies in the group should be related in proportion to the day-to-day influence on the conduct of the company in the group — the day-to-day influence which company A in the group which is being asked to pay up, has on the operation of company B which has become insolvent. We also propose to delete paragraph (b). I cannot recollect the reason for that amendment at this point. Amendment No. 165, deleting from amongst the factors that should be taken into account the conduct of the related company towards the creditors of the company being wound up, — are we on amendment No. 165?

Mr. O'Malley

No. 164 is on its own.

Mr. J. Bruton

That is a relief. I wonder about this, because there is something here that I want to explore. The IDA are trying to get companies in here, to get foreigners to invest in Irish companies, to become involved with Irish companies and to bring an Irish company into an international group. That is a way of getting money in here. If that Irish group happens to be mismanaged and the foreign associate has not had much day-to-day control over it, it would appear that section 118 throws the foreign parent open to having to fork up the full amount of the debts. From the point of view of the creditors that is desirable, but from the point of view of trying to attract investment into the country it may be undesirable.

We are moving, in the 1992 context, towards the creation of large groups of companies where one part of a group may not know all that much about or be much involved with the operation of another part of the group. That they should have to pay the entire debts of the company, or be open to pay the entire debts of another part of the group going down, could discourage them from locating or investing in a jurisdiction where that would be liable to happen. I would be interested to know if the Minister has consulted the IDA on this. It seems there would be adverse implications and the amendment we are suggesting would be more favourable from the point of view of retaining Ireland's attraction for foreign investment.

Mr. O'Malley

I think I should say a few general words about section 118 to try to put it into context because it is, perhaps, a bit more difficult to follow if you do not have the context. We are all aware of situations that can or do arise with groups of companies whereby the separate legal identity of each member of the group is really only a facade, with the various group companies being run by the same people, effectively, as one company. The courts have, in recent years, shown an increasing willingness to lift the veil of separate legal identity in such circumstances and all we are really doing here is setting this within a statutory framework. Section 118, therefore, will enable the court, on the application of the liquidator or a creditor or contributory of any company that is being wound up, to order that any related company should pay to the liquidator an amount equivalent to the whole or part of all or any of the debts provable in the winding-up.

Let me say, however, this will not lead to any automatic stripping away of the separate legal identity of related companies. On the contrary, it is clear from the section that the mere fact that the companies are related will not be a ground for an application under the section. The power of the court here will be discretionary, first, whether to make a related company liable in the first place and, secondly, the extent to which it should be made liable. The basic test that the court will apply is the familiar just and equitable one. Subsection (2) follows on from this and gives guidelines for the court to follow in this respect, while subsections (3) and (4) specify various situations where the court cannot make an order.

For the purposes of the present discussion I would focus on subsection (2) in particular, which requires the court to take into account the extent to which the related company took part in the management of the company and the conduct of the related company to the creditors of the company actually being wound up. By tabling amendment No. 164, Deputies Bruton and Barrett effectively want to do more than just require the court to take this into account, they want to positively limit the power of the court to make an order to an amount proportionate to the influence of the related company on the company being wound up. I would suggest to Deputies that the existing wording gives the court the maximum flexibility in regard to the appropriate level of sanction to apply when it has heard all the facts in any given case, but at the same time the parameters are defined in the subsections I have just mentioned.

In these circumstances I am satisfied that it is preferable to leave the section worded as it is, than adopt the proposed wording of the amendment which would have an unnecessarily limiting effect on the freedom of the court to consider each case on its individual merits and facts. Accordingly, my suggestion would be that the amendment would not be proceeded with.

Mr. J. Bruton

The advantage of the amendment is that it would be more certain in the sense that the proportion of the debts that have to be paid would only be in proportion to the actual responsibility for the creation of those debts of the related company. That seems to be equitable — you pay in accordance with the control you had, whereas the Minister is saying that the court shall take into account whether there was a relationship between the two companies and the extent of the relationship, but once it has satisfied itself that there was a relationship it could decide that the related company would have to pay the entire debts, regardless of the fact that it only had a partial involvement with the running of the company.

Mr. O'Malley

No, the Deputy is wrong in thinking that the court would have to decide that the related company would have to pay the entire debts. It would not. It would only have to pay whatever amount or proportion that the court thought in all the circumstances was just and equitable. It does achieve, and it gives full flexibility to the court to achieve, what is set out in the Deputy's amendment. It just gives it more flexibility than the amendment would give it. For that reason it is reasonable.

Mr. J. Bruton

The amendment gives a more objective guidance as to what is just and equitable than does the section as it stands in the sense that the amendment says that the related company should have to pay in proportion to its contribution to the running of the company, whereas the Minister is saying, the judge can decide whatever he thinks is just and equitable up to any limit. In terms of trying to get people from overseas to invest in this country, who are not familiar with our law and practice, anything that defines the liability more exactly is, I think, preferable to leaving it up in the air for a judge to decide what is just and equitable. That is something we will not be too knowledgable about until we have well established precedents in the interpretation of this section.

Mr. Bell

I thought at first that the amendment was a reasonable one, but having watched the Gallagher programme I would have grave doubts about that. I think that the maximum amount of flexibility should be provided. The multiplicity of companies within the company structure is difficult to define anyway and the court should have the amount of flexibility contained in this section. That would be the only reason I would not be in favour of the amendment.

Mr. S. Barrett

That does not arise. Subsection (4) deals with the Deputy's problem. It still would allow for a situation which arose in those circumstances.

Mr. Lawlor

Just a practical comment to turn round the point that Deputy Bruton is making. In regard to the IDA and to my constituency, Hyster failed rather spectacularly. This IDA example is where they are giving substantial capital grants upfront to a small Irish subsidiary, maybe with an unproven product. It is probably desirable that we would have head office guaranteeing linkage to get some potential for recovering a high level of capital grant where the Irish operation would not be capable of repaying it. It is going to be easy for a foreign company to claim they had very little to do with the disaster that occurred, and that, therefore, they should be relieved of some of the responsibility. On the capital grant front, you want the head office or the parent company guarantee to ensure that you will be able to recover substantial grants. Hyster was a very good working example of this. We would have been very exposed to severe criticism if we had not been able to get on to Portland, Oregon, or wherever they were, and endeavoured to get back the grants when they walked away from a big investment here — with a big R and D element. Yet we were very pleased to attract it initially——

Mr. J. Bruton

Some people were.

Mr. Lawlor

——but at least there was a good recovery content. If a company is not prepared to give that guarantee early on that should not deflect it from wanting to invest in this company, particularly where big capital grants are involved.

Mr. O'Malley

In the instance Deputy Lawlor gives, that was not a matter of company law. That was enforced under a parent company guarantee which is a matter of industrial policy and not of company law. It is worth pointing out that this section on the liability of companies within a group for the debts of other companies applies only to groups of Irish companies. You could not make it apply to a related company in the United States unless you had a parent company guarantee. The details, which came to light recently, of the instance to which Deputy Bell referred is an indication of why this section is needed where you have a range of related companies within a group. If in the case he gave there one of those companies had had significant assets and all the others had substantial debts or owned money to depositors, it would have been wrong if the company that had substantial assets did not bear what the court felt was a reasonable and proportionate liability for the debts due by the other companies in the group.

Mr. S. Barrett

Does subsection (4) not exclude that? It says: "Notwithstanding any other provision, it shall not be just and equitable to make an order under subsection (1) if the only ground for making the order is (a) the fact that the company is related to another company, or. . .."

Mr. O'Malley

The mere fact of their relationship is not a good ground and it would be unfair if it were because the companies might be run separately and they might have no influence on one another. In that case that would be unfair but in the instance Deputy Bell mentioned, there is plenty of evidence that they were not run separately. They were all run by one man or one family.

Mr. J. Bruton

If our amendment was accepted, they would not escape. If the companies were run by one man, they would have to meet the entire debts because that would come within the terms of our amendment.

Chairman

As a point of clarification, I understood you were worried about companies coming in whose registered offices were outside this jurisdiction. The Minister has stated that this section only relates to Irish companies.

Mr. J. Bruton

When did the Minister say that?

Mr. O'Malley

No, it is only enforceable against companies that are registered in this country. Irish company law can only apply to Irish companies. If you want to register somewhere else then you are under a different jurisdiction.

Amendment, by leave, withdrawn.

Amendment No. 165 not moved.

Question proposed: "That section 118 stand part of the Bill."

Mr. J. Bruton

I do not want to prolong the debate on this section but I have a feeling, and I know others have, that this section may discourage larger companies from investing in smaller companies. If a smaller company is looking for investment capital it could go to a larger company to get it. There is a fear that if that exposes the larger company to the possible debts of the smaller company if it goes down, it will discourage larger companies from investing in smaller ones. I wonder if they have this provision in the UK or in any other jurisdiction and how it is working in practice in terms of encouragement of that type of venture investment by a larger company in a smaller one, for instance, the sort of diversifications that Carrolls or other large companies might be doing. Will the exposure to all the debts of a subsidiary or even a company in which they have taken a minority shareholding discourage them from that diversification? Perhaps this is a good time to take a break. I would ask the Minister to look at that between now and the next meeting, to come back to us and tell us he has studied it and what his views are on it.

Mr. O'Malley

I will be glad to do that and I can go into the matter in some detail the next day if Deputy Bruton wants, but for his guidance between now and then, I would suggest that he look at section 30 of the Companies (Amendment) Act, 1980 of New Zealand, where a new section 315a is inserted by that section of the New Zealand Act, and it is very similar to this one. This section largely codifies into statutory form, or is intended to, a number of judgments which have been delivered in the High Court and the Supreme Court here in recent years. The chief one is from a judgment of Mr. Justice Costello in Power Supermarkets Limited v. Crumlin Investments Limited and Others, delivered on 22 June 1981.

Chairman

Is the section agreed?

Mr. J. Bruton

No.

Chairman

At our second last meeting, one of the less contentious matters raised was that members were worried about the availability of verbatim reports on the proceedings of the Committee. In this regard, I understand six reports have been published, two are at the advanced proofing stage and the remaining three are at the preliminary proofing stage. I am advised that every effort is being made within current staffing and procedural constraints to have all reports of the Committee proceedings made available to members at the earliest possible date. Reports from Special Committees on Bills are given precedence over other committee reports but must take second place to Dáil and Seanad reports. The question of the application of information technology, raised by Deputy Roche, and other problems is under active consideration by the Committee on Procedure and Privileges. In relation to copies of the draft reports being available for inspection by members, they are available on request. Because of the large volume involved and the work that would be involved in circulating them, any member who wishes to check the draft reports can do so; they are available a week after the meeting. It should be remembered, however, that such drafts are unrevised and their accuracy cannot be guaranteed.

Progress reported; Committee to sit again.

The Special Committee adjourned at 6.35 p.m. until 4 p.m. on Tuesday, 13 March 1990.