Seanad Éireann - Volume 116 - 16 July, 1987

Companies (No. 2) Bill, 1987: Second Stage (Resumed).

Question again proposed: “That the Bill be now read a Second Time.”

Mr. McKenna: I welcome this Bill and take the opportunity to congratulate the Minister on the very open minded attitude with which he introduced the Bill to the House. It is extremely important legislation, updating the 1963 Act and one would have to acknowledge that it is not before its time. I welcome the opportunity to speak on the Bill. I am concerned about the impact the Bill would have on the entrepreneur in small companies. It is a very complex Bill and I would be very anxious that its implementation would not adversely affect those people about whom we are concerned.

The entrepreneur is an essential ingredient in the development of the economy. We have to acknowledge the great effort the Government are making to encourage individuals to get involved in business. I am concerned about the penalties which affect not only rogue directors but also those acting in good faith who wish to get involved in business. Many of the most successful companies were started by people who took a risk. They put everything they had into the business, mortgaged their home, worked 16 or 17 hours a day seven days a week and initially they bore all the risks personally. Many started out as sole traders, shouldering the responsibility of unlimited liability and all that it entails. Many of them failed, but started again and were successful.

I acknowledge the Minister's success in business. I am talking to the converted when I speak about the person who started out in a small way and made a very successful business for himself. Many of those companies which started out as [2514] small businesses, developed into partnerships giving some of the members limited liability and eventually they became limited companies. One of the main sections of the Bill deals with the problem that over the years under the protection of limited liability the fly-by-night individuals saw the opportunity to make a fast buck and walk away leaving a trail of destruction in their wake. It would be very sad that in order to prevent those rogues bona fide hard-working people would be adversely affected. The vast majority of these honest hard-working people who have limited companies still have to give, to a very great degree, personal guarantees to the banks and financial institutions when borrowing for business purposes, so that limited liability to a very large extent does not apply to them.

I am concerned about the amount of paperwork with which small companies, employing one or two people, have to cope. They have a vast amount of paperwork and many of them cannot afford the luxury of modern technology to handle their paperwork. They cannot be viewed in the same light as larger companies who started out when things were not as difficult as they are today.

I want to highlight some of the important aspects of this legislation. One of the objectives of the Bill is to develop the law on abuses and malpractices which occur in the management and direction of companies. Part III deals with transactions such as loans and quasi-loans between directors and their companies. Section 31 prohibits certain loans and quasi-loans by a company or its holding or parent company to its director. Transactions in excess of £2,500 are prohibited. That is a very welcome section to the Bill because it is in that area that rogue and fly-by-night directors can milk companies and then walk away, having made financial gains.

Section 32 exempts loans that do not exceed an aggregate of £2,500 to any director. This part of the Bill also gives more say to the ordinary members of a company with regard to long term service contracts of directors and also substantial [2515] property dealings between the company and its directors. Sections 27 and 28 require the approval of a general meeting before such agreements are authorised by the company.

Part IV of the Bill deals with disclosure of beneficial interests in shares of companies. The idea is to let people who are outside the company know who has interests in the company and it may influence such persons who wish to establish a relationship with the company such as becoming a creditor or a shareholder. This is a very welcome development because it is fair that people who become involved in a company either as a creditor or a shareholder should know exactly where they stand in relation to the company.

Part V of the Bill — probably one of the most significant parts — deals with insider dealings by directors and others in a company. This topic has received a great deal of public comment and publicity because of the Wall Street controversy over Ivan Boesky pleading guilty to trading on insider information. One of the first court cases of insider dealing was brought before the London courts recently and the individual who was found guilty of insider dealing got away very lightly.

The courts in Ireland have developed ways of penalising directors and others who acquire confidential information on the standing of the company because of their position and access to such knowledge and who then use it to make a personal gain, for example, by selling a shareholding in the company immediately and investing the return in something else because they find out before anyone else that the company will have a bad year. Alternatively, they may get insider information that a company's profits will increase or that huge developments will take place and they buy shares at a relatively cheap price and subsequently the price of the shares increases enormously and they sell and make substantial gains. I welcome this legislation to prevent insider dealing.

Section 92 of the Bill sets down the [2516] statutory liability for such activity as well as the already established common law liability. This liability is now twofold: (a) an individual who engages in insider dealing will be liable to compensate any other person in the same transaction; for example, the sale of company shares to a person who was not in possession or had the benefit of the relevant information; and (b) he may be liable to account to the company that issued the securities for any personal profit on the transaction.

Another very significant part of the Bill is the section dealing with winding-up and related matters. I have touched briefly on that area at the outset. Sections 104 and 111 are very important sections in Part IV of the Bill. Section 104 deals with fraudulent preference. This area of company law deals with the situation where a company is in heavy financial difficulty and owes sums to several creditors before winding up. Fraudulent preference is where the company unlawfully give preference to one creditor before another and where the former has his debt satisfied first even though the latter has a prior and a stronger claim. That is a very important development in the Bill. Section 286 of the 1963 Act made invalid such transactions if entered into within a six month period before the company wound up. Section 104 of the new Bill has a significant effect on such invalidity by extending the period to two years before winding up.

Section 111 amends section 298 of the 1963 Act and that provided for the liability of the officers of a company such as a director, auditor, promoter, liquidator etc. for certain wrongdoings referred to as misfeasance. Section 298 of the 1963 Act categorises such misfeasance as breach of trust, fraudulent handling of a company's money, etc. The new section now includes receivers as officers of the company and they are also potentially liable. Misfeasance will now include negligence and breach of duty by such officers of the company.

Part VII, which is extremely important deals with disqualification and restrictions on directors. It is an area where [2517] many demands have been made for Government action to tackle this phoenix syndrome of rising from the ashes. The Bill provides that directors of liquidated insolvent companies who have been directors in the previous 12 months may not now become involved as directors of another company unless that company has a minimum allotted share capital fully paid up in cash of £50,000 for a public company and £10,000 for a private company. It also provides for an automatic five year disqualification where a director is convicted of an indictable offence in relation to a company or involving fraud or dishonesty whether in the company or not and discretionary disqualification by the court in a range of defined circumstances. There are severe criminal and civil liabilities for acting while disqualified.

Section 117 provides that the court may, if it deems it just and equitable to do so, grant relief to a person affected. This is extremely important. It is the one area where, as I mentioned, the bona fide, honest individuals may have a chance of getting protection. I am concerned about the provision in certain circumstances. I accept the need to tackle the problem of these fly-by-night directors and companies. There is, however, a knock-on effect when a company who trades with these rogue directors and who does business with them grants a great deal of credit. The difficulty is that in order to get business they may have to give a lot of credit. When these other companies go into liquidation then the honest individual is caught in a trap. They are, to a very large extent, grouped with these rogue companies and they find themselves in severe difficulties. The result is that they become insolvent and they are caught in a trap that is not of their making. They were acting in good faith in doing business with these companies and they find themselves then at the end of the day in exactly the same position as the rogue companies.

I am a little concerned in relation to part time directors and the advantages that part time directors bring to companies. We know that part time directors, [2518] non-executive directors as they are called, are appointed because of their expertise in business, because they will bring a certain flair, a certain acumen and a certain knowledge of the workings of companies. I fear in the circumstances many non-executive directors who otherwise might become involved in business, because of the provisions in the Bill, might think twice about becoming involved as part time directors. That would be a great loss because of the many outstanding individuals who could make a substantial contribution to different companies. I welcome Part IX of the Bill in relation to court protection and a breathing space to reorganise and construct businesses that get into difficulties.

Again, I welcome the Bill and congratulate the Minister on the method and attitude he has adopted in introducing it to the House. It is extremely important legislation. It is essential in modern times that we update the Companies Bill. I know that the Minister will be concerned in bringing out final legislation to ensure that the small individual, the small companies, will as far as possible be protected. In the final analysis more people will be encouraged to become involved in business knowing they will be protected and will not have to worry to any great degree about the huge problem of fly-by-night directors who have been such a problem and have caused such difficulty and have to the business community in the past.

Mr. B. Ryan: This is an area where a layman walks in foolishly, but the fact that we are all in politics proves that we are foolish anyway. Consequently, I make no apology for speaking on this matter.

We tend to be intimidated by certain areas of legislation, but we all have a certain duty to address issues and not to succumb to this tyranny of the experts which leaves large areas of policy-making to the people who are supposed to have expertise. I have quoted often a favourite statement of Lieutenant-General M.J. Costello about experts. He said that if an expert could not explain something to [2519] him he was not an expert because he regarded himself as a reasonably intelligent individual. I take a somewhat similar view, that Members of the Oireachtas generally are representative of society at large and anything done in the name of society ought to be intelligible to society. Therefore, we should not run away from complex issues like company legislation just because they are complex. The ordinary, common people have an ordinary commonsense that needs to be addressed to all those things.

When I was putting something together on this — unlike my practice yesterday I prepared something for this; therefore I will not walk into some of the mistakes I made yesterday morning — I wondered about the fundamental basis or justification for the concept of limited libility. When you look at it first it appears to be a kind of protective device. There is a certain resentment in ordinary people that people in small businesses particularly appear to be able to protect themselves from many of the vagaries of life by turning the small family business into a limited company and perhaps making the husband or wife or the two spouses partners in the limited company. I think this is a misapprehension. The justification I would see for the whole concept of limited liability is in terms of encouraging risk-taking but doing so within clearly defined parameters. In other words, when people are prepared to take risks in business, it ought to be possible to take legitimate business decisions which are based on proper attempts at legitimate business analysis without threatening perhaps the entire financial base of other companies that a person might be involved in or, indeed, without threatening the security of the personal assets of an individual.

That, of itself, makes the whole area of company law and of limited liability extremely difficult. That explains, to me at least, why the whole area of company law ends up being so extremely complicated. On the one hand you are trying to allow people to circumscribe the risks they take legitimately in business but, at [2520] the same time, you are endeavouring to ensure, as Senator McKenna pointed out, that fly-by-night operators cannot simply use this as a safe and secure way of enriching themselves at the expense of perhaps innocent consumers. Therefore, there is a legitimate community interest in this area which has to be very carefully looked at because the object of all of our activities in the Oireachtas in view of the state of the country must be directed towards the encouragement of enterprise. Coming from me this may sound like a U-turn almost on the scale of the Government's post-election U-turn, but it is not. I have a long-standing commitment to the objective of encouraging enterprise both in the private and the public sectors.

In order to encourage enterprise you cannot expect individuals with ideas for either products or services which can sell internationally to accept total liability for the uncertainties and the vagaries of the marketplace. Enterprise properly understood deserves a considerable amount of legal protection and a considerable amount of guarantee that the risks taken in one area of legitimate business activity do not undermine everything else a person has or does. If that is the view of society — and I do not anticipate that society will change as dramatically as perhaps I might hope in the next two or three years — we have an obligation to sustain that and to define the limitations within which enterprise can operate without being a threat to the whole security of a person who gets involved in it. It is an area which needs to be considered in greater detail than is the case at present.

There are obvious social consequences of enterprise, some of which are positive and some of which are negative. The whole concept of limited liability is, therefore, valid and just. One has to look in that context at the activities of the commercial banks whose No. 1 objective, when they are allegedly assisting in the formation of a new enterprise, seems to be that the individual responsible for the enterprise must accept personal liability [2521] for the risks undertaken by the enterprise. The banks are effectively doing what no other group dealing with a company can do. They are getting around the whole concept of limited liability and saying: “We will not accept our share of the risks of a commercial activity. We will expect you to put up whatever personal assets you have at your disposal as security for your company.” I find this entirely objectionable. The idea of limited liability is to encourage enterprise, to encourage legitimate risk taking by legitimate people in legitimate business.

The creditors of a private or a limited company have no such guarantee. They have to accept the risks of trading. If a company they are trading with fails, they may not have their debts paid. I do not understand why the commercial banks or any of the banks seem to believe they are entitled to a different kind of security in trading from other people who are partners in the marketplace of a particular enterprise. The whole idea that the banks seem to believe they do not have to operate within the same philosophical parameters the rest of the business world has to operate within needs to be addressed. They can circumscribe the whole idea of limited liability.

There is a fundamental immorality in saying to a person who has an idea for business that, in order to obtain funding to develop that idea, he must put the security of his family at risk and must put whatever limited resources he has at risk. That is a problem that needs to be addressed to the extent that companies are largely funded through the lending agencies rather than through the Stock Market. The whole concept of limited liability is undermined by the activities of the commercial banks.

There are good reasons to be very careful about the way in which limited liability operates. When the Irish Congress of Trade Unions produced a memorandum on this subject they issued a number of guiding principles. That memorandum, was submitted to the Minister in June 1987 and no doubt he knows its contents off by heart. Nevertheless it is my duty to emphasise some of their comments [2522] which the Minister perhaps might not choose to emphasise. Congress identified a number of principles. They stated: “The privilege of limited liability should only be extended once to any one individual.” I do not agree with the ICTU on that. It is far too restrictive. The principle underlying it, that limited liability is a privilege which society chooses to give to encourage enterprise, needs to be emphasised to those who are given that privilege. It is not something that can be treated in a flippant or a casual fashion. It is a considerable protection offered to people to encourage enterprise and business activity. It is, therefore, a privilege which must be treated with great care and must be protected. The community are entitled to be protected from abuse of that.

The second principle Congress envisaged is: “Obtaining the privilege of limited liability should be made more difficult.” Congress suggested here that people who have a record of unpaid debts should not be able to become members or directors of a new company until the unpaid debts of the previous company are discharged. That may seem harsh. Even in the area of legitimate risk taking there are serious questions of ethics involved. The fact that somebody can walk away from the debts of one company, whether or not they were incurred in legitimate business, and simply put together the necessary capital and set up another company is a valid concern.

The other very difficult area Congress addressed is the question of the inter-liability of groups of companies. It is an area which cannot be simply demolished by saying that this undermines the principle of limited liability. The Bill contains some provisions in this direction. There has to be a degree of inter-liability between groups of companies where the interests and the activities of the companies overlap and perhaps where the decisions of one company affect the activities of the other company. I know some bodies are not too keen on the concept of inter-liability between companies. It is an important concern that the concept of simply having off activities [2523] between companies with overlapping directorships and so on cannot exclude one company from some liability for the activities of another company.

Congress are also very keen on the idea of minimum paid-up share capital in order to obtain the privilege of limited liability. I would be much more keen on that if I were not aware of the fact that many charities enjoy the status of private limited companies without any paid-up share capital. The intricacies of company law defy me. I am not entirely sure whether it is possible to separate the legal basis on which many charities operate from the proposals of the ICTU. In principle it is a reasonable suggestion that there ought to be a requirement for a minimum paid-up share capital to justify conferring the privilege of limited legal liability.

Another principle, and one that is sadly lacking in this legislation and in the whole area of company legislation, is the legal duty on directors of a company to take account of and act in the interests of employees at all times. It requires almost an ideological leap to presume that creditors and customers can somehow have their rights spelled out in considerable detail. I know certain employee rights are built into other legislation but it would be a proper statement of the obligations of directors of a company that they must at all times consider the interests of their employees in their activities as well as the interests of their creditors and customers. Congress have made a valid and none too revolutionary point in that regard.

I read the views of the accounting profession with great interest and I was surprised at the overlap in many areas in the views of the Irish Congress of Trade Unions and of the accountancy profession which suggests that there is a fairly broad consensus about the areas in need of reform. It has not done society or the image of business any good to have what is described as the phoenix syndrome happening with frightening frequency. The classic one is the huge number of people who had to bail out of their own housing estates when the [2524] builder mysteriously went into liquidation — usually more than half way through construction — and then suddenly surfaced perhaps two miles down the road involved in the same activity. I am not, and am hardly ever likely to become a defender of the interests of business but I do not think that the interests of business or the interests of enterprise — something in which I am far more interested — are served by that sort of abuse of the concept of limited liability which, in any other area of life, would be regarded as blatant criminal activity.

The Bill, therefore, is accepted in principle by all sides in politics as necessary. My first reaction on reading the Bill and the explanatory memorandum was one of astonishment at what appeared to have been omitted from previous companies' legislation. It is astonishing that people can get away with certain things without there being a clear legal responsibility or a clear civil or criminal liability for certain malpractices. The most extraordinary of. all is that insider trading is not and will not be a criminal offence, it will be a civil liability. That raises philosophical questions about our attitude to wrongdoing and crime.

There is much in this Bill about transactions involving directors which, apparently, up to now were legitimate activities which were clearly open to all sorts of abuses. This Bill requires the disclosure of such transactions and makes it obligatory for a company to supply all records that may be required by a liquidator or receiver. The requirement of a disclosure of interest in shares in a company and the disqualification of directors of a insolvent company are obviously welcome and probably badly overdue but one has to express a certain astonishment that they were not always there, explicitly written down, because all these activities — the fact that a person could have the privilege of liability, could be a director of an insolvent company and could walk straight in and become a director of another company — does seem quite astonishing to the ordinary lay person. The fact that something as corrupt as insider trading is not a criminal offence is also astonishing.

[2525] There are, however, deficiencies in the Bill, which merit legitimate consideration. One point made to me on the whole question of investigations was that the security demand of a person seeking an investigation, up to £200,000, would be a major inhibition to seeking investigations into the activities of a company. Both the accountancy profession and the Irish Congress of Trade Unions identify this as a problem and both suggested that a figure of £5,000 would be more reasonable. Perhaps we could talk about that on Committee Stage.

In regard to the whole area of investigation into companies, the investogator's report ought to be made available to employees or to their representatives. It seems a strange omission that people who have such a fundamental interest in the activities of a company, the welfare and the future prospects of a company, should not have a legal right to access to an investigation into the activities of a company. I suggest that it would be a worthwhile improvement. Perhaps there are reasons for qualifying it but I do not know why it should not be available to an employee.

The second area is the question of transactions involving directors and, in particular, the exclusion of small private companies. According to the information available to me, approximately 80 per cent of all manufacturing companies in Ireland employ fewer than 50 people and there are over 2,000 small IDA grant aided companies with fixed assets of less than £500,000. In the Bill's definition, a number of criteria will define a small limited company but it does suggest that the number of private companies coming within the scope of the sections of the Bill dealing with transactions involving directors will be quite small and I am not sure that there is a good and justifiable reason for that sort of exclusion. I would be interested in the Minister's comments.

If one accepts the fundamental principle that limited liability is a considerable privilege to confer on a company, that accountability should extend to a large number of companies, and that society has a right to regulate in [2526] detail the activities of such companies, the exclusion of a large number of companies just because they are small seems to require considerable justification.

Similarly, on the question of the disclosure of interest, it appears that small private companies are excluded. I say “it appears” because it is done in a slightly convoluted way. The accountancy bodies and Congress draw attention to this and the accountancy bodies in particular suggested a rewriting to make this clear if that was the intention. I am not convinced it is in the public interest that large numbers of private limited companies ought to be excluded.

Section 83 makes provision for procedure for disclosure of interest in the case of small private companies. It is a matter of considerable regret that if a court deems certain things to be true it will not permit the disclosure of interest where the disclosure is being sought in contemplation of or in furtherance of an industrial dispute. Unfortunately that wording means that a legitimate employee interest in seeking a disclosure of information about a private limited company will be effectively denied simply because a company can say: “Well, they might be contemplating going on strike; therefore, this information is being sought in contemplation of an industrial dispute.”

Given that the only weapon of last resort available to employees or to a trade union in many of these areas is an industrial dispute, it would be very hard to satisfy a court that any legitimate attempt by employee interests to seek disclosure of section 83 would not be in contemplation of an industrial dispute. That could be rewritten simply to be in furtherance of an industrial dispute and omit the words “in contemplation”. There is a legitimate case that the middle of an industrial dispute is not the time for a trade union to be allowed go noseying around into what is otherwise confidential information. That confidentiality must be preserved. To insist words such as “in contemplation of an industrial dispute” will create a lawyers' goldmine and will inhibit a legitimate [2527] employee interest in the activities of private companies.

On the question of insider dealing it is difficult to understand why this is not treated as a criminal offence. It runs through a lot of things that are said and done in our society. One can only be astonished consistently, not only in Britain but here, at the philosophical distinctions often drawn by the courts between white collar crime and other kinds of crime. Every so often we have spectacular cases. In recent years we had one case involving a major charity, another involving a member of the staff of a large solicitor's practice. People have got involved in the embezzlement of large sums of money — some that would do justice to an armed robbery, being in excess of £100,000 — sentences of the order of one, two or three years are imposed. On the other hand a youngster may steal a car and because society is somewhat in a frenzy about joyriding at the time he is liable to be locked up for three or four years. There is a risk to human life involved in stealing a car but it is not necessarily that youth who puts human life at risk. He is simply the one who got caught but because society has a view on these sorts of things certain offences are treated much more seriously. It seems that somebody who enriches himself or herself by the improper use of privileged information in the stock market is as much a thief as the person who walks away with £100,000 out of a bank, and that person should be treated as such and be subjected to similar penalties.

One of the ironies of life is that those people in society who for reasons of their status in society are most likely to be deterred by the threat of prison sentences are those usually least likely to go to prison because of the sort of offences they may commit. Yet those who because of their social background, domestic experience or life experiences are least likely to be deterred by the threat of a prison sentence are those we try to deter. There is no philosophical, legal or business justification for not making activities [2528] like insider dealings criminal offences because that is what they are. They are attempts to defraud other people of large sums of money on the basis of abuse of privileged information. That is stealing. It should be a crime and I hope, in future, will be treated as such.

On the question of the disqualification of persons from becoming directors, again because of their involvement in an insolvent company both the Irish Congress of Trade Unions and the accountancy profession suggest that a register of such persons should be kept in the Companies Office. It is a legitimate, constructive suggestion, a legitimate proposal to simplify an area so that individuals and society know who has been disqualified.

In the area of the winding-up of companies I still have not figured out why fraudulent trading is regarded as a criminal offence but, in the case of reckless trading — and it took about four readings to figure this out — a person is responsible for civil liability. I cannot understand where exactly one draws the demarcation line between fraudulent and reckless trading. It necessitates the courts becoming involved in the deeper recesses of the human mind. It appears to me that, if a court is satisfied that a person has been deliberately and knowingly involved in reckless trading that ought to be treated as a criminal offence. The demarcation line between what would be termed or deemed to be fraudulent and reckless trading is extremely difficult to draw or identify.

A point that has been made legitimately to me on a few occasions is that it appears we do not have particularly precise qualifications specified for receivers or liquidators. It is both a valid and worthwhile recommendation that some minimum standards of qualification ought to be stated for persons who are regarded as fit to function as receivers or liquidators. I note that both the accountancy profession — who obviously would have a professional vested interest in this — and the Irish Congress of Trade Unions share a common view on that. It is something that should be pursued. I do [2529] not know the ins and outs of it but, from what I have read, there is obviously considerable unhappiness about the activities of certain persons who have acted as receivers or liquidators.

Those are just a few suggestions. There are a number of others I may pursue by way of amendments on Committee Stage though it would be a foolish man who would promise to get involved on Committee Stage on a Bill as complicated as this. However, there are a number of legitimate issues to be raised.

My final suggestion — one which I know will not be accepted by the Minister or the other major party — is a recommendation of the Irish Congress of Trade Unions and one which, incidentally is part of British company law, that contributions to political parties ought to be a matter of public record in the case of public limited companies requiring companies to disclose in their accounts all political contributions in excess of £200. It appears to me that the involvement by companies which have the protection of the law in something as contentious as politics is a matter about which members of the company and employees should be entitled to know. I do not think there is any fundamental reason, other than the fact that many of these companies do not like those sorts of activities to be known. In particular, many of them may not like it to be know that very often they contribute to at least two political parties, both of whom are convinced they are the only one in receipt of funds.

Mr. Ross: Four.

Mr. B. Ryan: Four, I hear Senator Ross suggest. That was only a brief interlude in former Deputy Michael O'Leary's time when the Labour Party were receiving business contributions. I think they got over that. Unless Senator Ross contributes to The Workers' Party, I am not sure anyone else in the business world does but one never knows with Senator Ross. He has a very catholic view — small “c”. I will attempt to introduce an [2530] amendment to that effect — that contributions to political parties ought to be disclosed in company accounts.

The Bill is welcomed. Both the present and previous Governments are to be congratulated on it. For the lay person the whole area of company law and limited liability is a complex one. I repeat that limited liability is a considerable privilege, one that is so taken for granted that perhaps people do not realise the extent to which it is a privilege. It is a protection which extends and guarantees that people can define the limits of their risks. Therefore it is a legitimate area of concern.

The whole area of company legislation is the finest argument I know against the new ideological crusade for deregulation. The evidence in recent years both in London and New York is that deregulation underlines the fact that, fundamentally, capitalism has not changed its spots. Essentially, it is still a greedy get-rich-quick philosophy which, when not regulated in the community interest, operates on a basis of total and complete naked self-interest. On the other hand, legitimate enterprise deserves the encouragement and support of the State. The single biggest inhibition to enterprise by small companies is not anything the State does, is not the past introduction of extra regulation in the area of limited liability, but the activities of the commercial banks who effectively circumscribe the principle of limited liability and insist that they be given guarantees no other person involved in a trading relationship can get. There is a case for making that illegal. It is not part of legitimate business philosophy that people should have to put their personal assets and domestic security, in terms of their homes, in hock to a bank in order to do something that we as a society should be encouraging them to do, that is, to get involved in enterprise.

Mr. Mullooly: I welcome the opportunity to make a brief contribution to the debate on this very important Bill. As the Minister pointed out on Second Stage, this Bill is the most radical overhaul of Irish commercial law since the [2531] Companies Act, 1963, was enacted. Since that time the number of companies registered here has grown from about 11,500 to well over 100,000. Therefore, it is understandable that in recent years growing attention has focused on the inadequacies of the 1963 Act and the need for an up-dating of company law.

This Bill has been in the course of preparation for a number of years and, as the explanatory memorandum which was circulated with the Bill points out, its main purpose is to strengthen some of the existing provisions of the 1963 Act and to introduce new measures to eliminate, deter or penalise certain abuses and malpractices which can occur in the management and direction of companies. The underlying aim of the Bill, therefore, is to create a climate of confidence for business activity in which genuine commercial endeavour will prosper and the prospects for economic development in general will be enhanced.

One can only hope that the provisions of the Bill, which are intended to inspire more confidence among those directly affected by the activities of limited companies, will achieve their objective and, also, that companies which get into difficulties will be encouraged by this legislation, when enacted, to address these difficulties at a much earlier stage.

I agree with the Minister when he says it is vitally important that the Bill should strike the right balance between eliminating malpractice on the one hand and, on the other hand, not being seen in practice as a deterrent to the promotion of enterprise. In our consideration of the provisions of this Bill, it is important to bear in mind that the vast majority of business people and people involved in limited liability companies conduct their affairs in an honest and proper manner. Invariably, their objective is to build up and maintain a thriving and profitable business, conscious at all times that in doing so they are doing what is in their own interest, in the interest of their employees and also in the interest of the country.

There is only a very small minority [2532] who engage in the type of abuses and malpractices which this Bill endeavours to address but, unfortunately, the activities of such people over the past number of years have given rise to a growing public concern, particularly in relation to the abuse of limited liability status. Therefore, it is in the interest of legitimate business and of the many thousands of decent, hard working, honest people who are involved in the business life of this country that every effort should be made to deter and penalise those who engage in reckless and dishonest activities.

If this Bill succeeds in achieving its objective as outlined by the Minister, it will, undoubtedly, result in considerably increased investor confidence and increased investment by a greater number of smaller investors in new business and commercial ventures. Greater investment will, in turn, lead to increased employment opportunities and if there are two things we need more than anything else at present, they are job creation and investment. Therefore, we have a great responsibility to examine every section of this Bill minutely, in order to ensure that none of its provisions will have the effect of inhibiting the type of enterprise and entrepreneurship which this country needs so badly at present.

Equally, we must also ensure that none of the provisions of the Bill will make life more difficult for a legitimate business which, through no fault on anyone's part, find themselves faced with genuine difficulties or problems. All Members of the House are aware that this is the situation in many businesses at the present time. It is not in anybody's interest that such a company should be forced to cease trading if there is the remotest possibility that their problems can be overcome and the business can be restored to viability. For that reason I welcome Part IX of the Bill which introduces a new legal mechanism for the rescue or reconstruction of ailing but potentially viable companies.

Invariably, it is the employees who are the greatest losers when any company or business close down or are closed down. Therefore, we should also look at the [2533] provisions of the Bill from the point of view of what further safeguards might be desirable in order to protect the interests of the workforce in the case of a company going out of business. In particular, I have in mind the question of money which might be owed by such a company to their employees and also the social welfare and pension entitlements of such workers.

I have some reservations about the provision in the Bill which imposes a ceiling of £2,500 in the case of loans made by companies to their directors, to members of their directors' families, or to other companies in which such persons have a controlling interest. I see the need for such a provision but the imposition of a fixed ceiling of £2,500 is not the best way to deal with the problem which is being addressed in this part of the Bill. The section should provide for some flexibility in this regard and it would be preferable if the loan were to be determined by reference to the company's financial position. Perhaps that point and some other reservations which I have about other sections would be more appropriate to Committee Stage debate and, therefore, I will comment further on them on Committee Stage.

I, too, was pleased to hear the Minister say he would be open to any reasonable suggestions as to how the Bill could be improved, or made more effective. I would also like to join in the general welcome that has been given to the broad thrust of the Bill and to concur with the other Senators who expressed their appreciation of the fact that this very important measure has been initiated here in the Seanad.

Mr. Bradford: The Companies (No. 2) Bill, 1987, is undoubtedly the most major legislation that has been brought forward in this area since the original Companies Bill of 1963. Accordingly, it will have a profound influence on the business environment into the next century. The purpose of any company legislation should surely be to provide the best possible business environment, not just for the businessman but for everybody with [2534] whom he deals. Accordingly, we hope that the Bill before us today goes along this road, I would like to deal with parts of it that are related to the insolvency elements.

Section 108 deals with the fraudulent disposal of property and section 109 deals with the responsibility of one company in relation to a subsidiary company. Both of these sections would appear to be quite radical. However, in future years company law lawyers will have a field day trying to sort out the different arguments about these sections and trying to pinpoint what exactly each of them means. It would appear that much litigation will take place before the full effects of sections 108 and 109 can be seen.

The law of limited liability prevented holding companies from being liable for the debts of a subsidiary company unless it could be proved that there was fraud involved. However, as has been said many times in the debate so far as this privilege seemed open to such abuse the courts in recent times have been prepared, after a thorough examination of certain cases, to hold directors personally responsible for the debts of a subsidiary company. However, those instances arose only in cases of clear fraud and it was essentially a matter of judicial legislation. The decision of the Judiciary in these cases showed they are prepared to face up to the very extreme cases of fraudulent intent before them and in that respect perhaps they were covering up for the lack of legislation in this area.

Because of a combination of highly publicised cases in that area together with a very innovative Judiciary perhaps we as legislators have at last faced up to our responsibilities in this field. Unfortunately sections 108 and 109 can still be considered as legal mine fields. Because of this obviously it will take many a day in court until the finer points are finally accepted as standard legislation. Section 107 is full of words such as “honestly” and “responsibly”. Obviously in these circumstances much litigation will take place before the exact meaning is clarified.

The principles behind sections 104 to [2535] 116 are laudable. These sections deal with the type of abuse that the privilege of limited liability had created. Down through the years bigger companies who had access to better lawyers and tax advisers have been able to take advantage of the many loopholes that have existed in company legislation. However, in trying to tackle this problem the Bill has probably created some other loopholes. It is laudable, for example, that section 286 of the 1963 Act has been strengthened by section 104 of the new Bill which provides that fraudulently preferential transactions may be set aside only if effected within the period of six months before the date of winding-up. The new section extends this period to two years in the case of persons connected with the company, for example, directors, shadow directors or close relations.

Part VI of the Act appears to take account of what company lawyers, accountants and ordinary individuals affected by decisions of company legislation have been saying in the past. There should be more accountability on the part of officers of a company to creditors and to the courts on the winding-up of companies. Unfortunately the degree of accountability or the basis of it is still too vague to be quantifiable. The creditor will still have to litigate to know exactly where he stands. Unfortunately under the system of law reporting as it stands at present, potential litigants and their legal advisers can be totally unaware of important and relevant decisions made months or even years previously. Because we are so concerned about the rights of the citizen in this area and the importance of access to the courts, we must consider seriously the long term implications of keeping many of our legal judgments hidden from those whom they may affect.

I should like to refer to the general sanctions on directors imposed by this Bill. Undoubtedly the vast majority of directors of failed companies are no different from any ordinary businessman. They are not frauds or vagabonds who establish their companies with intent to [2536] defraud or make easy money at the expense of someone else. Because of a combination of market conditions, bad luck and at times, perhaps, business misjudgment their businesses have not succeeded. However, the activities of a small number of individuals have made it imperative in the interests of all that sanctions on those unscrupulous directors be increased. In doing that, what we are effectively avoiding is a situation where honest businessmen are prevented from taking legitimate business risks.

Directors can rightly be made liable for the entire debts of a company if it is shown that they have continued the business with intent to defraud creditors. This arises when a company is being wound up and the directors of the company, prior to the commencement of the winding-up knew or ought to have known that liquidation was inevitable. The courts may now declare on the application of the liquidator that the director is liable to make a contribution to the company's assets. The courts may also make a disqualification order against the director who has been made liable to contribute to a company's assets and thereby prevent him from simply becoming the director of a better or bigger company overnight.

The qualification for appointment as a director, liquidator or receiver has quite rightly and quite radically been changed by the Bill. Up to now the scope for abuse in the system for appointing liquidators or receivers has been nothing short of scandalous. In effect, in many cases an application would have to be made to the courts to prevent the managing director from having himself appointed as liquidator of his own company because on many occasions he could control the vote at his creditors meeting. We need a system where only trained, professionally qualified people can act as liquidators and receivers. The Bill prevents persons who are connected professionally or through family relationships with the company from becoming receivers or liquidators. This is a much desired and much needed [2537] change. The relevant provisions are contained in section 114 with regard to liquidators and section 134 with regard to receivers.

I would like to refer to the duties of receivers under section 136. In the past the only duty a receiver had was towards the debenture holders. On the winding up of a company the receiver's sole concern and duty in law was to get the price for the property that was owed to the debenture holders. Potentially, he had the ability to sell company property at gross under value. Section 136 provides that the receiver of the property of a company who sells any of that property shall exercise all reasonable care to ensure that the best price reasonably obtainable for the property is obtained. The court would be looking for at least the market value. This is a much desired change.

The second major area of the Bill I would like to deal with is Part IX which deals with companies under court protection. As I have said, the Bill could be termed an insolvency Bill. The primary objective of insolvency law must be to support the legitimate efforts of directors and shareholders who wish to save an ailing business while at the same time wishing to protect the rights of creditors in the event of it collapsing.

Businessmen are by their nature optimists. It is only when their own company experiences financial difficulties that they realise the shortcomings of the present law in relation to the rehabilitation of troubled companies and the enforcement of the legitimate rights of creditors. I have dealt already with some of the means by which this Bill attempts to protect the rights of creditors so far as fraudulent officers of the company are concerned.

I would like to deal now with the method by which the Bill has dealt with the rehabilitation of troubled companies. We can, in this regard, learn much from other countries that have tackled the problem. In the United States, for example, reorganisation under Chapter 11 of the Bankruptcy Court which was mentioned earlier can be an effective [2538] means whereby a business can come to a suitable arrangement with its creditors so that it can be continued into the future. That however is a procedure which is not very different from what is available here under our law. The main difference is that, under our system at present, it is necessary for the directors to have substantially developed their plans for reorganisation before they approach the courts.

In the United States protection of the courts is available during the period when the plan is being developed. The recent insolvency Act in the United Kingdom took note of this provision in the United States and we at this stage in our Company Law Bill, 1987 are in effect following suit. The 1985 UK Act added another alternative to a receiver in that the court can appoint an administrator. An administrator, under the English law, will be available to continue the business of a company while attempting to formulate a rescue plan. It is envisaged that the administrator will be used in the UK in cases where no receiver could be appointed. In Ireland now under section 144 of the Bill the court has the power to appoint an examiner where a company are unlikely to be able to pay their debts. It is proposed that the company should enter into an agreement with their creditors and no resolution subsists for the winding up.

An application to have the company placed under court protection can be made either by the company or by another interested party. Basically, the examiner will have three months to exercise the powers of a company inspector and of a company auditor regarding the obtaining of information. He will have the power to convene, set the agenda for and preside at board meetings and general meetings of the company. He will have the power to take the necessary steps to halt or prevent the effects of any act or ommission which in his opinion could be detrimental to the company or to any interested party. He will also have the power to make changes in the direction and management of the company and will have access to the court on any [2539] matter arising. Within 21 days of his appointment, or such longer periods as the courts may allow, he will conduct an examination of the affairs of the company and give a two part report to the court. Where his report expresses a view that the company could be wholly or partially saved by reaching agreement on a rescue plan he will be required to formulate a proposal for such a plan and report back to the court within 42 days of his appointment, or such periods as the courts may allow. The courts may then confirm or modify, or refuse to confirm the proposals but where it so confirms them they will be binding on all creditors and members affected by that proposal and on the company and other persons who may be liable for its debts.

In Ireland up to now the alternative to having this scheme of arrangement has been to appoint a receiver. A receiver appointed in time will often sell business assets to a new owner who can continue the viable elements of the business and preserve employment. This has been successful on many occasions. Instances of such successful receiverships would include the recent Murphys' Brewery takeover. However, under the new Bill an alternative has been proposed and that is in effect the appointment of the examiner. In the UK the similar creation of the office of administrator, while apparently attractive, has been considered by many professionals to be incapable of working in practice. The main reason for their concern is that without a major change in attitude on the part of unsecured creditors it is likely that the company will end up under liquidation rather than under court protection. However, for certain companies the idea of rehabilitation as devised in the Bill may work and as such is certainly worthy of consideration.

A third major area affected by the Bill will be the role of accountants and auditors. While much has been said and written regarding the change in the role of directors, liquidators and receivers, there has not been much concentration on the role of the accountant and the auditor. Section 180, in particular, which [2540] deals with the keeping of books of accounts by companies explains the previous position and gives more specific guidelines on the matters to be dealt with in company books and is intended to make for a better degree of account keeping generally.

Similarily, section 176 places a new duty on company auditors if it appears to them that a company are not keeping proper accounts. In such a situation the auditor is required to notify the company and to request them to rectify the situation forthwith. Stringent, criminal and civil liabilities will be imposed on officers of the company who, before they wound up, failed to keep proper books of accounts. Therefore, if a company are being wound up and are unable to pay their debts, and the court now considers that failure to keep proper accounts has contributed to the insolvency, every officer of the company who was in default in this respect will be liable to criminal penalty. This will undoubtedly create major shock waves throughout the accountancy profession. However, those who have been dealing honestly, fairly and to the best of their ability need not worry as this provision is only reflecting the general scheme of the Bill to increase civil and criminal responsibility of officers of the company towards actions which may be considered fraudulent or even reckless.

In conclusion, the Companies (No. 2) Bill, 1987, is a challenging piece of legislation. It is challenging primarily because it attempts to deal with the many changes which have taken place in the financial world since the 1963 Act was passed. It is challenging also because it faces up to the fact that the Legislature as distinct from the Judiciary is primarily responsible for dealing with the abuses which have been created through loopholes. It is challenging also because it appears to have taken account of similar problems in the US and in the UK and of submissions from the CII and the ICTU in regard to the enactment of the Bill.

At this time the Government are considering plans to establish a major financial centre in Dublin with all the spin-offs [2541] which we would hope would follow. We all hope some action will take place in that regard as soon as possible. Concern must be expressed that this major piece of legislation still fails to provide clear-cut guidelines to company law lawyers or to the businessmen who, when setting up business in Ireland want to know exactly and unambiguously what code of law operates in regard to company legislation.

As I have outlined earlier, too many loopholes still exist in this legislation to enable us to say to foreign businessmen that ours is a clear-cut charter, that if you establish a business in Ireland you know your rights, your duties and what your liabilities may be under Irish law. In effect we may be throwing once again some of our responsibilities on the Judiciary and letting them define exactly what the legislation means. I am sure this matter will be discussed again on Committee Stage. If we cannot interpret this legislation in a clear-cut fashion how can we expect many of the foreign businessmen who hope to set up here in this new financial market to be able to interpret it? I request that the Minister keep these points in mind. I am sure they will be dealt with further at the next Stage of the Bill.

Mr. Ross: I welcome this Bill which is long overdue since the Principal Act was enacted nearly 25 years ago. I welcome the Bill because first of all there has been no hesitation on the part of the incoming Government to introduce a Bill which was very obviously not of their own making or drafting. I welcome it also because we have got firm indications that the Second Stage debate which has taken a very long time will not be the final arbiter on what goes into the Bill. I feel the Government will have several constructive amendments on Committee Stage as a result of this debate. It has been an extremely enlightening and nonpartisan debate. I look forward to the autumn when on Committee Stage we will have not only from the House but from the Government side an obvious [2542] response to the suggestions and reactions we have made during this debate and from various groups outside.

The Bill has been described both by Opposition and Government speakers as a balanced Bill. I am not sure it is a balanced Bill, balanced in the sense that it tends to attack abuses on the one hand and to encourage business enterprise on the other. Its weighting is in the attack on abuses but the balance arises in that simply by attacking these abuses you increase confidence in business and you encourage investment as a result.

There are and have developed over the past few years in the business world certain serious abuses and certain worrying exploitation of laws or loopholes in the law. On the whole the injustices which have been inflicted are righted in this Bill. It would be a pity if the whole business community, as Senator Manning said, was blackened by the fact that there are bad apples in the business world who tend to grab the interest and the headlines of the media. It is true in every organisation that there are bad apples who tend to paint the whole community of that organisation as bad and this is true also in the business community. I think this Bill contributes to stem the tide of opinion which is flowing in the direction of believing that business standards are declining.

I do not want to skirt over all the ground that has already been covered by the 23 or 24 hours discussion on this Bill but to concentrate on the subject of insider dealing which is something in which I have a professional interest. I welcome the willingness of the Government to tackle what is an obvious international problem but I find that there are very real difficulties in defining insider dealing. We know it is in some way people dealing on the back of privileged information and making money out of it. It is obvious that in certain circumstances insider dealing is apparent and is going on.

If a director of a company who is in possession of sensitive information buys or sells shares on the back of this information he is obviously engaged in insider [2543] dealing. If an accountant, a solicitor or anybody who is in possession of such privileged information deals, buys or sells, on the back of that information he is certainly engaging in insider dealing and that should not be allowed to happen. But what happens if he tells somebody about it? According to the Bill that person is committing an offence if he deals on the back of that information. But what happens if he tells someone who tells somebody else who tells somebody else? At what stage does it become a rumour and at what stage is it fact? We run into serious difficulties when we try to say at what stage this stops.

From my experience in the Stock Exchange most people believe when they are dealing on the Stock Exchange that they are ahead of the posse even if they are not dealing on the back of privileged information. It is normal practice for stockbrokers, analysts and commentators on particular companies to go and visit companies and to try to find out for their clients and for institutions who have invested with the company how that company is trading at present. That seems to be a perfectly normal, moral and sensible thing to do. If they talk to a director who gives them an indication of the latest news from the company, and they pass that information on, are they passing on information which is not available to the general public? I submit they are. I submit also they are not doing anything immoral but I submit that they are in possession of information which has not come in the form of a press release or in the form of a release on the Stock Exchange but which has been privately given to them in pursuit of a profession which they follow.

I am not trying to justify insider dealing but when people in the pursuit of their. profession acquire that information and pass it on to a specialised group of people who would happen to be their clients or their friends, information honestly acquired from a director, that possibly under this Bill they could be prosecuted for what is a criminal offence. We need to be far more exact in our definitions if [2544] we are to make this Bill effective and meaningful. Otherwise the result would be that the pursuit of those engaged in insider dealing, far from being rigid would be very lax and they would drive right through this Bill unobstructed, and the Bill would be unenforceable.

It is a very high profile problem at present and it is certainly something which the Goverment are right to look at and right to tackle. In the wake of the Boesky affair in the United States, of the Guinness affair — which incidentally was not a matter of insider dealing — in the United Kingdom, and the deregulation of the Stock Exchange, the whole image of the Stock Exchange is rightly under fire. Insider dealing is certainly the biggest problem. I do not think there is any doubt in this House about the opinions of people on whether they think it is wrong or immoral. I have heard people outside the House express the view that it is no different from a trainer having a bet on his own horse. That may or may not be true — and perhaps the Government would like to look at the morality of the trainer having a bet on his own horse? We have reached a consensus that it is wrong and fraudulent and should be tackled but I do not think the remedies in the Bill will satisfy the House.

Personally I had certain difficulties in tackling this problem before as a stockbroker in that the Stock Exchange does not welcome the Bill and has made it quite clear to me by making public statements on this matter. They feel I am not doing the Stock Exchange any good in this matter. I should add that I am not going to contain my remarks as a result of that partly because I believe the introduction of such a law will only do the image of the Stock Exchange good. One of the problems of the Stock Exchange in Ireland and overseas is that it is seen as some sort of a casino for rich people where they make a great deal of money and with which ordinary people with smaller amounts of money do not identify. If insider dealing were outlawed it would help to portray what has been described as a rarefied body — and it is a rarefied body — more as a body which [2545] is there to raise money for industry and not as it is seen at present a rich man's club.

I do not want to mention any particular companies, firms or anything like that bar one. I think there is absolutely no doubt that insider trading has gone on in Dublin, is going on in Dublin and will continue to go on on the Dublin Stock Exchange so long as there is no law against it. We cannot pretend that we are different, more honourable or more honest than the US or the UK where several cases have been proven recently. We are a very small business community, we are a small Stock Exchange with a limited number of companies and rumour and word travels very fast around this market. Sometimes the rumours are obviously false but very often information which has not been released is circulating among investors in the stock market. One has only to see — and you do not have to be in the Special Branch to come to this conclusion — the pattern of price movements on the Stock Exchange before sensitive information is released to conclude that those who are in possession of privileged information are dealing. I refer to takeover bids, to acquisitions, to major diversifications in the activities of public companies. Time and again over the years prices have moved dramatically upwards or downwards prior to this information. That is not the way it ought to be. It is, quite simply that people have heard what is going to be released before other people have heard it and they are dealing on the back of it. I do not need to mention specific cases. Any cursory examination of these movements before the information is released will tell you that this is the case.

I will quote one case. I am not implying necessarily that insider dealing was going on, but only because it happened this week I will quote the case. Yesterday at 7.30 a.m. an announcement was made that an approach had been made to the Rowan Group which might or might not lead to a takeover bid: 7.30 a.m. is an unusual time for a press release to come out. The night before in an after hours [2546] deal the price of the Rowan Group shares had risen from 210p to 250p. Even in the buoyant market conditions in which we are at the moment that is an unusual and large percentage price rise. I am not abusing privilege by saying that there was insider dealing there. That could well have been a leak which had done the rounds, but it is an indication of what happens before price sensitive information is released. It is only one, and it has happened with far more blue chip companies than the Rowan Group. It is happening all the time and it is just a historical fact on the Dublin Stock Exchange. The reaction of people in the market to seeing dramatic price rises is not that that information has been released but that an announcement which is good is inevitably by somebody who knows something. That is the depth of cynicism to which things have plummeted on the Dublin Stock Exchange. I welcome the effort to tackle this area but I do not believe that effort is strong enough yet.

There is a big contrast on the stock market between various categories of shares and the ways they operate. The market in Government stocks, where information can be just as valuable and have just as dramatic an effect on price movements, is a far calmer market which to a far greater extent reacts to information after it has been released. I do not know, for instance, of a case where stockbrokers were in possession of the economic yardsticks which move the markets in advance. I am talking about things like trade figures, inflation rates, consumer price index, interest rate falls of a dramatic sort and SIF cuts by the Central Bank. Such information, almost inevitably in my experience, is not leaked in advance. The civil servants and those in possession who are acting for the Government have an impeccable record on this. However, in the markets in unlisted stocks, exploration stocks, speculative stocks, stocks of that sort, inevitably the large and spectacular price movements come before information is released. That is why there is, rightly, disquiet among the public on this issue.

[2547] There is a major problem which has been recognised in the Bill and by the Government and by speakers on this about proving that people are insider dealing. It is extremely difficult to prove because sensitive information, information which moves the value of securities, is almost by definition very widely held. In a situation like a takeover bid many professionals are in possession of exact information. I refer to solicitors, stockbrokers, accountants, merchant banks, bankers, all of these are in possession of such information. That does not mean one person in each profession, it means a whole group of people in each. As a result information will leak out as through a sieve to people who should not be in possession of it. It is very difficult to prove that they are in possession of hard, concrete information rather than that they are in possession of rumours. It would be wrong to say that directors are dealing in their own names in the securities of the firms in which they are directors. Insider dealing is not as unsophisticated as that. If a dishonest or rogue director of a company is to tip off a friend of his who is then going to tip off another friend of his who is going to deal, it is very difficult for the authorities, either the Stock Exchange or the legal authorities, to prove that the third person or the second person involved is dealing on privileged information and I understand that difficulty. I do not think the Bill tackles it but I do not know how it can be tackled. We must do as well as we can in tackling that difficulty but to criminalise passing on information by word of mouth is probably ineffective.

I suggest that the first remedy to this problem is that all nominee accounts should be disallowed. Recently I have seen at least one large purchase of a significant percentage of the equity of a public company by a nominee company, the identity of whose beneficial holders nobody knows. That is completely wrong. I see nothing wrong in full disclosure of the identity of those who are buying and selling shares because if they have nothing to be ashamed of they [2548] should declare their identities. I see nothing wrong with me or you or anybody else if they are buying shares declaring their identity, going on the register as themselves and as nothing else. The existence of nominee accounts tends only to underline and fuel the distrust of the Stock Exchange, of dealings and of business among the general public when they see significant transactions going on and they do not know who is involved.

I also suggest that the Minister should consider putting a certain obligation on stockbrokers to curtail insider dealing. I do not believe that self-regulation in the Stock Exchange has been a great success. Otherwise we would not have this problem with insider dealing. I ask the Minister to consider that stockbrokers should be made by law to satisfy themselves when they are dealing for someone that they are not dealing on the back of privileged information. Every deal that goes through the market, every deal that is done in any company, has to go through a stockbroker. If he was obliged by law to satisfy himself — and he can never be fully satisfied, but he should take steps to satisfy himself — that this was not the deal of an insider, either directly or by proxy, it would go a long way towards preventing people from trying to deal on the back of inside information.

The Stock Exchange responded recently, slightly more actively, to the accusations about insider dealing. It must be pointed out that the Stock Exchange has very little power to curtail insider dealing. It can only summon a director. If a member of the general public is suspected of insider dealing the Stock Exchange can ask him to come for an interview — it is a bit like the semi-State bodies — but if he does not feel like coming for an interview there is nothing the Stock Exchange can do about it. The Stock Exchange has no teeth in curtailing insider dealing. I find it a little bit disingenuous of various spokesmen for the Stock Exchange, in their attitude to this problem, on the one hand, pooh-poohing the idea of insider dealing and saying it does not really exist and, at the same time, in their annual report this year, [2549] calling for a law against insider dealing. It is difficult and has been difficult for the Stock Exchange to make up its mind about whether this goes on, but it would be good for the image of the Stock Exchange if it were to encourage this law that the Minister has put before the House.

A lot has been said about whether insider dealing should be a civil or a criminal offence. I do not understand why this Government and the last Government decided to publish a Bill which makes insider trading a civil offence only. There have been cases in the United States and Great Britain recently where insider dealers have been prosecuted for criminal offences. It is a highly immoral offence. I think the reason for making insider trading a civil offence only, is that the Government feel it would be difficult to prove. I hope that by making it a civil offence only they are not in some way saying it is a lesser crime than other sorts of fraud because I do not believe it is. I hope also that on Committee Stage we will see a Government amendment on this. Otherwise they will see one from the House.

The idea, as expressed in the Bill, of paying compensation to an injured party is quite ridiculous. I do not know who the injured party in an insider deal is going to be. It is not a victimless crime. If the Bill means that the person buying shares on the back of insider information must compensate the person from whom he bought the shares, it is completely unworkable because the person from whom he bought the shares had decided already to sell those shares. If he had not sold them to the person who was dealing with privileged information, he would have sold them to somebody else and the price might have been marginally different. How much is the insider dealer supposed to compensate the injured party? Is he supposed to compensate him for the difference between his buying and his selling price? The measure is not explicit; it is not workable; it is clumsy; it is a nice theoretical idea which will have no bearing in practice.

The other thing I object to is that it [2550] will encourage people to deal on the back of privileged information. The person who has privileged information will have a free shot. If he is caught, all he has to do is pay the money back. It is the most marvellous opportunity which has ever been given to a punter on the Stock Exchange. He will say: “Insider dealing is illegal. I am going to buy so and so shares. I am not going to be caught but, if I am, it does not matter because I just have to give the other punter the money back.” It is haywire. It is crazy. It will encourage people to deal on the back of privileged information. At the moment they are discouraged from doing so by public disapproval, by the Stock Exchange and by the possibility of criminalising the activity. If the Bill goes through they will not lose anything except the gain which they have made illicitly.

A system such as the one operating in Britain should be introduced whereby this practice would be criminalised. I do not like jail sentences being imposed but they should be included. The emphasis should be on very heavy fines. Those who are indulging in insider trading are very greedy people. The best way to hurt greedy people is to take a lot of money away from them. It is not to put them in jail but to hit them in their pockets. I would like to see this Bill amended to include measures to try to prevent this practice and to stop it at source. Heavy fines should be inflicted and it should be made a criminal offence. I hope the idea behind the thinking of this Bill, that insider trading is in some way a victimless crime, will be removed. It is not a victimless crime. It is very difficult to identify the victim but that does not make it in any way less of a fraud.

I would like to say a few words about the rest of the Bill. Under the Bill directors' loan transactions are to be eliminated, withdrawn or limited to £2,500. I do not see any good reason why loans to directors from a company should be allowed. It is a classic case of directors putting their own interests before the interests of a company. I do not see why directors should have this sort of hidden perk — high interest free loans, many of [2551] which are never repaid. If directors feel they should have higher salaries, bigger cars or other perks, they should declare them to shareholders and to other people who are interested but to give themselves what are, in effect, tax free salaries is very wrong. There is no need to limit the loan to £2,500; it should be abolished altogether unless a very good case is made, which has not been done, for giving directors these perks.

It is essential that the disclosure of nominee accounts at a certain level should be revealed. It is very important that the 5 per cent disclosure level in this Bill should be reduced. I do not see why any shareholder should surreptitiously or in an underhand way want to build up a stake in a particular company. For the image of business, for the image of shareholders, for the image of the Stock Exchange, openness and full disclosure should be the thinking behind this Bill. This should apply also, obviously, to people who are acting in concert. It is difficult to prove that people are acting in concert but if they are acting in concert with a view to taking over a company or building up a stake in a company, this should be revealed, not at 5 per cent but at the initial stage. There should be no restrictions on this sort of revelation.

I should like to congratulate Senator Manning on his speech; for a man who is not involved in this sort of activity he made an extraordinarily well briefed, well informed and well researched speech. He rightly said that there would be serious difficulties in policing the measures included in this Bill. There will be real difficulties, not only on limited liability but also on insider dealing. You only have to look at the restrictions which were imposed in 1979 on exchange control, which is not policed properly, to see how difficult it will be to police this company legislation. As far as I know — and I am open to correction by the Minister — since 1979 there has not been a single prosecution for breach of exchange control which means it is not being properly policed. While there are very worthy aims motives and clauses in [2552] the Bill and the whole thinking behind it is right, it could fall down if its measures are not enforced or are not enforceable.

I want to refer briefly to the examiner because a group of accountants have asked me to do so. The idea of putting an examiner into ailing companies is a very good, novel and sensible one. It is certainly true that too often creditors have been happy to call in liquidators to eliminate companies and put them out of business; they just come in, put the workers out of business and liquidate the company. The idea of sending in an examiner to rescue the company, to freeze the debts, the assets, the lot and put them under the protection of the court is a very healthy one indeed. Setting up a system under the court's protection whereby the creditors are compromised with should be looked at more closely. Those in the accountancy profession to whom I have talked about this feel that this in its present form will not work. They believe that the limits of the times for the examiner to report are far too short and totally impractical because according to the Bill, the examiner has to produce a two part report within 21 days of being called in to the company. In that report he has to make a full statement of the company's affairs, assets and liabilities. He has to express an opinion within 21 days about whether the company can be saved. In the first part of the report he also has to make a recommendation as to how the company can be saved. I presume accountants would be called in to do this. The accountants whom I have asked about it regard that as totally impractical within 21 days. This would be an extremely complicated business. It is a very good idea but no accountant could do all that in such a short time. While the idea is correct — I loathe bureaucracy and delay and I criticise it time and time again, especially in Government and Civil Service circles, accountancy and the law — in this case to produce such a comprehensive report within 21 days would be absolutely impossible.

The second part of the report will deal with how the business was conducted, [2553] in other words, a deep analysis of the company's difficulties and how it got into those difficulties. You are asking the examiner to write a full historical report on the company, to give a full statement of the company's affairs, regardless of the size of the company, to write an opinion about how it can be saved and to write a report on how it was conducted and why it went wrong. It is quite simply not possible in 21 days. To investigate some of these companies which run into difficulties is extremely complicated and takes a very long time. One of the reasons, evident in this Bill, they run into difficulties is that they do not keep proper books of account and it would be those sort of companies an examiner would be brought in to look at. The first thing he will find is that there are no books of account for him to look at or, if there are, that they are meaningless. He would have to construct a whole new picture of books of account before he writes an opinion.

While I commend the Minister and the Government for this very constructive idea, I ask that the time extension be greater. However big the staff the examiner brings with him he will not be able to do it in this time limit. I also ask the Minister to consider whether the examiner can be sued for expressing an honest opinion and whether indemnities will be necessary under this section. If the examiner has to say he believes there was fraud in a case, will he be indemnified for libel and for slander? The reaction I have to this is that there would be very few people prepared to do this work unless they are protected by some sort of privilege or indemnity and unless they are also given an extension of time.

I should like to refer to liquidators writing their own fees. Senator McGowan quoted the case of a company — he was referring to a small company — where a liquidator wrote his own fees. According to Senator McGowan the liquidator put in bills in that company for one year for £90,000 for travelling expenses and £140,000 for salary for himself. I do not know whether that is typical but it seems to me to be fairly excessive. [2554] What I think should be looked at in this Bill is the whole principle of receivers and liquidators writing their own fees, charging their own fees, getting preference and being priority creditors of a company. It seems that this principle is open to abuse and has been abused in the past. While we are looking at examiners we should look also at the way that receivers and liquidators operate. Liquidations are extremely lucrative for the accountancy profession. I have no quarrel with the accountancy profession making money but the blank cheque which they are given when they go into liquidation is wrong and a system should be legally devised for the charging of their fees.

There was a matter raised earlier by Senator Norris and this morning by Senator Ryan about the contributions of companies to political parties. Senator Ryan expressed his intention to put down an amendment about companies' contributions to political parties, to make them open to the public; in other words, to make them reveal their contributions to political parties. I think Senator Norris has already put in an amendment to that effect. While Senator Ryan said this morning that he does not think either the Government or the Opposition will accept such a suggestion, I do not understand why they should not.

It is my belief that contributions by companies to political parties are and can be made for one reason only. They are made only for the very simple reason that they are a subterfuge type of bribe to that political party. No company would give money to a political party unless they expected to get something back from that contribution. It makes sense; they are in business. I believe that companies involved in the commercial world should either not be allowed to make contributions to political parties — because of the possibilities that exist for corruption — or that they should be made to reveal their contributions to political parties. It may not be that the Minister wishes to accept this but such revelations would make very interesting reading and [2555] would probably alter the pattern of companies' contributions. Of course, my suspicion is that they give money to several political parties, to back all horses and to hedge their bets. My suspicion is that if this had to be revealed it would cause them acute embarrassment and they would probably withdraw their contributions completely from political parties.

Mr. Daly: I should like to welcome the Minister of State, Deputy J. Walsh, to the House although, I suppose he should be welcoming me to this House because it is somewhat by way of a freak that we are in this Chamber. I regret the Minister for Industry and Commerce had to leave to attend to other business this morning. I should have liked to congratulate him on the speed and manner in which he introduced this Bill, one I understand that was initiated by the then Minister, Deputy Frank Cluskey. I am sorry to say that once Deputy Cluskey introduced it the Bill was left on the shelf by our Government. I am glad it is being debated here now. It is long overdue.

The Society of the Irish Motor Industry requested their auditors, Reynolds and McCarron, for an opinion on this Bill. Their opinion is that they regard the Bill as a step in the right direction. However, they point out that it has been accepted for some time that legislation was needed to give greater protection to the public against dishonest or incompetent directors and for an overhaul of insolvency procedures generally. They say, however, that it will take time and litigation to determine whether the Bill will achieve its objectives. Their general view with regard to the Bill is summarised on the back page of the bulletin they issued which has been read here already by my colleague, Senator Bulbulia.

Senator Ross dealt at length with insider trading. I shall deal with the question of outside trading now for a change, something about which I know more. I should like to deal with Part VIII, section 117 of the Bill dealing with disqualifications and of restrictions on directors and other [2556] officers and, of course, companies going into liquidation. Unfortunately some companies, through no fault of theirs — in times of recession and for other reasons — have gone into liquidation, genuine liquidation. Some such people have lost a lot of money and personal property as a result of having gone into liquidation. There was a case recently of a group of companies in this town involving a man, now deceased, God be good to him, who sold his house for a considerable sum of money and, on the advice of his accountants, put it into the company in order to save it. However, that action did not save the company. He had made a further investment in big insurances which he sold and put that money into the company. Yet that company went down the tube. That happened as a result of his having been given bad advice. He had whole-time accountants and auditors employed.

The greatest trouble with companies today is caused mainly by the Revenue Commissioners. I know that at times the Revenue Commissioners sit on the horns of a dilemma because, if they act too quickly in regard to a company they can put it out of business. If a company's taxes have not been paid and if the Revenue Commissioners monitor it and establish that the company is solvent and can overcome a temporary difficulty they give it a chance. Unfortunately, that is not always the case. There are examples of cases where the Revenue Commissioners sit on a company. It is all right to sit on the horns of a dilemma when they do not want to move too quickly or damage a company's prospects. But when they sit or go to sleep on the case that is a different story.

I want to talk about the motor trade about which I know most. I heard recently of a company that was trading — I am not going to mention names — all of the details of this company were published in The Phoenix. It really was a scandal because that company owed in the region of £3 million, £1 million of which was due to the Revenue Commissioners. If the Revenue Commissioners had been doing their job they [2557] could have foreseen long before that company went into liquidation when they were not paying their VAT, that they should have taken action. The Revenue Commissioners did not take action. The result was the company ran a bill of £3 million, £1 million of which was due to the Revenue Commissioners and the remaining £2 million to the banks, finance companies and some others, perhaps people who could ill afford to lose. That company closed on a Friday evening and on the following Monday morning it opened up for business again in another town adjacent to the one in which it had traded. That is a scandal.

Section 117 (5) states that the nominal value of the allotted share capital shall in the case of a public limited company be at least £50,000 and in the case of a private company be at least £10,000 to set up in business again. That is ridiculous, because if we take the case of the private company, the sum of £10,000 is only the cost of a very low priced motor car. If I wanted to go into liquidation, which I hope I will never have to do, I would be very foolish, realising my company was in difficulty, if I did not provide at least £10,000 so that I could start up a company again.

This is completely wrong and I would ask the Minister to consider, instead of a company paying any fixed amount, that the company be bonded as travel agents are. When some travel agents went to the wall many people found themselves stranded in other countries, and if they had not left Ireland found that their tickets were not honoured; they could not go on their holiday and lost their money. Then wisely the Government albeit at a late date, moved in, at a late date, and asked for bonding of the companies. Now there is no trouble at all. If a travel company go bust the customers are at least protected. That would happen in this case if all companies were bonded and if they were monitored as they went along. To my knowledge the Revenue Commissioners have allowed a company to owe money for up to two years which resulted in a loss for another company. When people are believed to be paying [2558] their debts to the Revenue Commissiones, to Bord Telecom, to An Post, CIE and other bodies, it is believed that these companies are trading successfully and that they are companies to be given credit. Nothing could be further from the truth. I went to a meeting of creditors of one liquidated company. The office equipment, the chairs, on one of which I was sitting, did not belong to the company; they were all leased. The company had nothing. They owed the then Post Office, now Telecom Éireann, something in the region of £3,000 for a telephone bill going back 12 months. If my bill goes one week over, I get a second notice and then I get a final notice. I cannot see why the same criteria are not applied to everybody in business. I would welcome that because if companies were caught in time the damage caused by accumulated debts would not occur.

It is crazy that this is the only country in the world, to my knowledge, where you can become a millionaire in one year if you are dishonest. You set up your company, you trade, as a truck company did, at a cut price which is driving other people out of business if they have to compete with you. You are not looking for any profit, only looking for a turnover, leaving big sums of money due to the Revenue Commissioners. One day you can walk away with that in your pocket. Great damage is done by those people, not only to the company for which they have responsibility but to other companies.

The truck company that went into liquidation in the midlands for about four years were forcing other traders in that area to undersell and in some cases they had to sell below cost to compete with them. Their competitors did not know how they were doing this, were losing the business and were letting employees go, all because this company were building up to walk out owing £3 million. That is a scandal and the Bill will have to go a lot further than it goes. Maybe I could talk about that again on Committee Stage because I would like to get an assurance from the Minister that he will change these sums of £10,000 and £50,000 and [2559] put in their place the bonding which I seek.

It would appear that the Revenue Commissioners should have full power and should always exercised that power to ascertain where an individual gets the resources to start a new business. With regard to the provisions in the Bill, a director of an insolvent company cannot become involved in a new company unless that new company have a share capital fully paid up in cash of £50,000, or £10,000 in the case of a private company. Obviously, the Revenue Commissioners should inquire where the cash has come from, they are entitled to do that. The sums of £10,000 or £50,000 are only chicken feed to these companies.

Senator Ryan, who is on the outside of trading, like myself and unlike Senator Ross, made a few comments, one being that the Irish Congress of Trade Unions wanted to have included in the Bill that once a company went into liquidation they could never start up again. That is wrong, too, because companies through no fault of their own, through a recession, or through a change of trading, or for any reason may have to liquidate. Perhaps the directors of the company were not agreeing and wanted to buy out their fellow directors but if they were not in a financial position to buy them out, they would have to liquidate the company. If that company had no debts and if the remaining directors wanted to stay in and start business again, they should be allowed to do so.

There are other cases, on the death intestate of a director of a company or otherwise where people could be placed in a position in which they never intended to be, nor did not want to be, through no fault of their own. It would be completely wrong for the Irish Congress of Trade Unions to try to stop those people from coming back into business again. It would be very foolish to do so.

Much time has been spent on this Bill, about 22 hours as Senator Willie Ryan said this morning, and that must be the longest time since we had the Bill on Bula before this House. They will go into the [2560] history books as the two longest Bills and I should not add any more time. I may have to come in on Committee Stage.

Mr. McDonald: I will indeed be very brief, but not because I do not have much to say on this. This Bill is so comprehensive and so important to the economy that I would prefer to take the option of dealing on Committee Stage, with many of the problems that need a policy change at present. This is the first occasion the Oireachtas has had for a debate of this kind since the consolidation of the Companies Act of 1963, which was a long time ago. That also was a huge Bill and it went to a joint committee of both Houses. It has served the country reasonably well.

Reading through this Companies (No. 2) Bill, 1987 I wonder whether the Minister and the Department have taken sufficient time and perhaps put sufficient thought into bringing about the groundwork and the seed bed to improve manufacture and trading in this country, perhaps in a more determined way. I should like to ask the Minister if he can give the House an assurance that after this Bill becomes an Act he will be able to say that as a result of this Bill we are going to have significant improvements in our competitiveness as a trading nation by virtue of companies having to conform to the new regulations.

Will this Bill improve, for instance, our labour relations; will it improve our strike record or eliminate strikes? Is there anything in this Bill which will guarantee quality control from our manufacturers? Will the great agricultural sector be still sitting back and just selling into intervention? Is there anything in this Bill to encourage the primary producers, the co-ops who are now turning into multinationals, to get back the point where “Deanta in Éireann” will mean something to somebody? Is there anything to encourage the co-ops, whether they deal in milk, beef or whatever, to force their sales people to sell primary Irish products under the heading first class quality? Is there anything to encourage our salesmen to sell under the [2561] heading of quality, quality of service, durability and perhaps delivery on time? I do not think there is because the vast majority of people involved in production are taking the easy option. During the past few years even the strongest companies appeared to be in trouble, everybody threw their hands up to heaven. The groundwork is not being put in and I am disappointed that this Bill will not be the key to getting this country back to being an industrial nation. I am not saying we were an industrial nation, but we had strong industrial and export potential.

It is not sufficient, particularly in the agriculture sector, to say the only outlet people in authority and power have is to depend purely on EC intervention. There is no great drive to go after markets. Many of our markets, whether they are in beef or whatever, outside the EC depend solely on MCAs. What will we do if the policy of MCAs is changed or dropped? Where will it leave the agricultural sector? If there is a change in MCAs over the next couple of years, what will happen to the price of cattle? Are the farming sector able to take a 45 per cent or 50 per cent drop in the price of cattle?

This was an opportunity for the Department of Industry and Commerce to amend the legislation so as to force people who are exporting to change and compete. The only way we can change is to sell on the basis of quality and excellence, which we have in our agricultural products. If I were to deal with agricultural products only I would be dealing with a huge proportion of our exports. The potential of our primary exports and those with added value is not being tapped. Most people are mesmerised when they read about the millions of pounds that are being spent on the provision of new facilities for beef while, at the same time, if a farmer rings up a factory and asks them to sell some bullocks he can be told that they are on a two day week or closed altogether. Obviously there is over-capacity. I would not like to dampen anyone's spirits or say that money should not be invested or spent, but it is difficult to know exactly where we stand or what is going on.

[2562] I would like to refer to companies who have gone into liquidation. It is a great shame to see how many great family firms have gone into liquidation during the past few years. It has been said that some of them have been forced into liquidation by financial institutions at a time when they were able to pay more than 20 shillings in the pound. There should have been a stronger section in the Bill updating the legislation dealing with receiverships and liquidators.

Strong family firms are the best employers any provincial town can have. During the years industrial development committees and local councils have worked hard to attract multinational firms to establish industries in their localities sometimes taking over traditional family brand names. These people come in with absolutely no allegiance either to the locality or the workforce. They are there either to make a quick buck and get out or to spend their IDA grant and get out. That is frightening and I should like to see drastic changes in the IDA policy incentives. It is a nonsense that the IDA can put many millions of pounds into a multinational company and when that company closes with very little or no notice they can export the machinery that had been grant-aided up to 40 per cent of the cost or in some cases up to 60 per cent, by Irish taxpayers.

The IDA should change their system of aid to interest free loans, thereby leaving the onus on the companies concerned so that their grants will be in the form of interest subsidies, or else take equity or shares in the ownership of the company. Therefore, if a company cease trading there will be something left and the State will have some hope of getting back the grants and moneys they have put into these companies. I do not think every pound the IDA invest in any company should be gilt-edged. If we are to make progress there must be an opportunity for the executives of the IDA to invest and to give the benefit of the doubt as far as possible to people who have ideas and who would like to establish companies. The success rate achievable should be slightly higher than it is at present. The [2563] IDA have done marvellous work over the years but sometimes it is difficult for the ordinary lay person to look with anything other than suspicion at companies who have ceased trading because they are able to export fixed assets such as machinery as soon as they have drawn the grants. It would be nice on Committee Stage to get an understanding of the Minister's philosophy and ideas on the concept of industrial development over the next number of years.

Provision is made in the Bill to curb the activities of directors who sometimes may be classified as rogue directors. It is true that quite a number of companies, especially family companies, have failed because of bad debts from other companies. In penalising directors of companies who have failed, as has been advocated, we must differentiate between the people who failed because of their own policy, or some deficiency in the management of their own company, and companies who were pulled down because some of their customers with whom they had been trading went to the wall and were not able to pay for the services rendered. There is a difference there. People who are blatantly dishonest should be debarred from setting up other companies after closing without meeting their liabilities. We should look at that section very closely again. I do not wish to delay the House but I hope during Committee Stage of this Bill we will be able to have a fairly close examination of the Bill. I hope the Minister will be open to accepting some amendments on this section.

This is very important legislation. It is extraordinary that it is one of the few pieces of legislation to come through the Oireachtas of late on which we have had very little representation or briefs or interest from outside. I would have thought that semi-State organisations such as the ICC and Fóir Teoranta would at least have reissued an annual report to update the Members of the House on the actual situation and the problems they are facing. I do not know if the Confederation of Irish Industry are aware [2564] that the legislation is going through. I was surprised because we have had many requests over the years for such legislation. I look on this as most important legislation.

The Minister has introduced the Bill in a very determined effort to improve the position. I am slightly disappointed that it does not have sharper teeth and it does not address itself to some of the areas which worry many people. It does not get to grips with the problems and the rules and regulations governing liquidators and so on. One of the great problems so far as receiverships are concerned is that the lending institutions seem to have been able to pull the rug from under many companies. There is one such company in the south midlands. The allegation in the public press a couple of years ago was that they were forced into receivership even though they were able to meet their commitments. That is a nonsense. I hope the Minister on Committee Stage of this Bill, will be able to allocate adequate time so that we can have a full examination of the entire Bill.

An Cathaoirleach: I know it is completely out of order but I must say I feel frustrated at times, at not being able to contribute to the debates. I am breaking all rules of the House now. I agree with the Leas-Chathaoirleach that we get a marvellous, tremendous and intense representation on legislation coming to the House but I was amazed at how little we got on this legislation. Perhaps it was because all interested bodies were not aware that the Seanad is now taking legislation of this importance before it goes to the Dáil. There is nobody here to correct me now that I am breaking the rules of the House; therefore I break them.

Minister for Industry and Commerce (Mr. A. Reynolds): Somebody must know that the Bill is being debated in the Seanad because while there was a very disappointing lack of response in the earlier stages, when the Bill was published, in the past ten days there has been a marked increase in representations [2565] coming into my office from various bodies affected. I am delighted to see this — although there is not enough — and I hope that the opportunity is taken between now and Committee Stage to get those representations in because it is a very important and complex Bill. I will be dealing with all the points raised in my reply on Second Stage.

Again, I take this opportunity to say the time for making representations is now. We have had quite a number over the past ten days but not enough. I took the opportunity since the Bill was published at any time I was speaking to people who might be interested to give the message that this legislation should be examined. This Bill is a major updating of company law in Ireland since 1963 and people should not miss the opportunity which is being given to them now to get the balance right. That is basically what I and the contributors to the Bill are concerned about.

I thank all the Senators who contributed to the Second Stage debate. There, were almost 30 contributions and approximately 28 to 30 hours debate. It has got a very good examination here in the Seanad. I thank Senators for the quality of their contributions and the amount of data they researched. I think we have all benefited from this discussion. I said when I introduced Second Stage that I would be very open to suggestions from the Members of the House and from outsiders, provided it was not seen as coming from a specific pressure group or a special interest lobby. We are here to get the balance right and that is the approach I will take when I get down to examine all the various contributions and representations.

I also think the House has accepted, as I hoped it would, that this Bill is necessary and that its general approach is correct. Of course there are areas that could do with a little more thought and refinement — indeed, I said so at the start of this debate. I can only repeat that I am more than willing to consider reasonable suggestions as to how the nuts and bolts of the Bill could be improved.

On that score, I am glad to say that [2566] submissions have already begun to arrive in the Department from various interested parties, in response to my earlier invitation for comments. I can assure the House that these will be examined with the same care that went into the preparation of the Bill. I have no doubt that I will be bringing forward a number of amendments on Committee Stage arising from this examination and, indeed, arising from our own internal continuing examination. I am determined to make sure that when the Bill reaches the Statute Books it will be a well-balanced, well thought out, but above all, a workable Bill.

At the same time, I want to make it clear — and I am sure the House will accept this — that, when we are talking about amendments, I will want to be convinced that any changes we make will not simply serve to make life easier for the cowboys. For example, I would not be particularly interested in representations or suggestions that smacked merely of special pleading for some particular interest group, particularly if this had the effect of undermining what we are setting out to do here. I just wanted to put this on the record and I am sure the House will agree with my approach.

Turning to the debate itself, most Senators made wide ranging comments of a general nature on the Bill, as well as many points of detail on the actual provisions themselves. I will try to deal with the general areas first.

Some Senators pleaded for a single Act which would consolidate all the provisions of the 1963 Act along with other recent amending Acts and indeed this Bill as well. Incidentally, Senators will, I am sure, not be too pleased to hear that there are at least three EC Directives in the company law area queueing up to be implemented into Irish law in the next year or so.

I have to point out, too, that if we were to consolidate, we would be talking about a Bill of somewhere around 800 or 900 sections. Not alone would I not wish that on the House, but I am afraid there is no way the Department would currently have the resources to undertake such a [2567] massive job. At the same time, where we are, in this Bill, amending a section of the 1963 Act, we have tried, where we could, to reproduce the whole section in its amended form. The sections mentioned by Senator Fitzsimons, sections 94 and 97, are examples of this.

Senator Manning wondered whether, and to what extent, the thinking behind the Bill was prompted or stimulated by our membership of the EC. I should say straight away that the Bill as it is stands is very much a product of our own research into the problems we are trying to tackle. At the same time, I suppose it is true that our Community membership has, in general, prompted us to be a bit more willing to bring forward novel legislation, and indeed to be more conscious that other countries have been facing the same kind of problems we are addressing. I should mention, too, that in their research, the Department did not confine themselves to looking at European solutions, but took account of approaches taken in places like the USA, Australia and New Zealand.

Speaking of the EC, by the way, some Senators particularly Senator J. O'Toole wondered whether we had implemented all current EC company law directives in the country. The answer is that we have; just a month ago we implemented the Third and Sixth Directives by way of regulations under the European Communities Act. The most important, in recent times, of course, was the Fourth Directive on company accounts, which was implemented here by the Companies (Amendment) Act, 1986. Therefore, although there are further directives in the pipeline, we are completely up to date in our EC commitments in that area.

Several references were made to the Companies Registration Office and con cern was expressed about their expertise and efficiency; for that reason I would like to say a few words about the office generally. A few years back it was, perhaps, true that they were not in a proper position to enforce the law. However, assisted to a very substantial extent by our computerisation programme in the [2568] Companies Office, some 13,000 companies, which were seriously behind in the filing of returns, have now been told in no uncertain terms that this default will no longer be tolerated. Indeed a total of 2,000 companies have been struck off the register, a first step in my aim to clear the register entirely of defunct companies, which are estimated to account for as much as a quarter of all the companies registered.

I would like to take the opportunity at this stage to express my appreciation of the outstanding efforts of the staff of the Companies Office who have, I think, done an exceptional job in difficult circumstances in the very recent past. I can only repeat my determination to bring the information filed in the office up to date.

Senators asked whether the Bill would be enforced. I can only say that I am determined that it will work and that I will do everything in my power to make sure that it does. At the same time, it is worth drawing attention to what I think is an evolving philosophy of company law in recent times. The idea is to try, as far as possible, to draw up a workable companies code which will enable the commercial community to settle their own problems, with minimum interference from the State. Of course, I am bound to say that the State will always continue to have a strong regulatory role in these matters. Thus there are a significant number of new criminal penalties in the Bill. I feel confident that the courts will use these powers judiciously when cases are brought before them.

Several Senators raised the issue of donations by companies to political parties. I should say, first of all, that the reason the subject is not addressed in the Bill is quite a simple one. The Bill was, as Senators know, on the stocks when I took office, to tinker around with it in any specific or indeed general area would only have had the effect of further delaying a Bill which was, and is, urgently needed to address various identified problems.

More importantly, however, I tend to agree with Senator Fitzsimons that this is [2569] not really an issue that is properly in the company law area. As Minister for Industry and Commerce, I would be concerned if the provision of such contributions had adversely affected the trading performance of companies or indeed resulted in company failure. However, I am not aware that any evidence whatever has been produced in recent receiverships or liquidations which indicated that the company's difficulties were caused, or worsened, by any such contributions, or indeed any other kind of sponsorship.

Finally, it could be said that the question of political contributions is really part of the broader issue of the funding of political parties generally and, if it needs to be looked at, it would be in this broader context.

For all these reasons, I do not think the issue is appropriate to be raised in this context. It does not apply to this Bill.

Apart from these issues of principle, individual Senators urged that the Bill should be expanded to cover other, perhaps worthwhile, subjects not already covered in it. For example. Senator Doyle wanted us to provide for rotation of auditors and for stricter guidelines as to what constitutes a “true and fair view” of company accounts. In the course of a wide ranging contribution. Senator J. O'Toole referred, among other things, to the payment of taxation by off-shore companies, the position of workers as interested parties vis-á-vis companies, and the question of special insolvency courts. Senator Cullimore suggested the creation of an office of official receiver, and a licensing system for insolvency practitioners, while Senator Bulbulia referred, among other things, to the creation of a “fighting fund” from a levy on secured creditors, to enable liquidators to pursue dishonest directors.

I can honestly say that most of these issues were considered at one time or another while the Bill was being prepared. However, the House has already commented at length on the size and complexity of the Bill as it stands, running as it does to almost 200 sections. Therefore, decisions had to be made along the [2570] way to include this, not include that, and so on. In other words, we had to reach a cut-off point somewhere, otherwise the Bill would be completely unmanageable. I would appeal to Senators to agree with me on this — I repeat the undertaking I gave in my opening speech, that I will consider reasonable amendments. Let me stress, however, that I am happy with the general thrust and balance of the Bill, and I would not want to make wholesale changes which would totally upset that balance. However, you can be assured that any points specifically made here will get long and detailed consideration in our approach to the Committee Stage of the Bill.

It was obvious from listening to, and reading over the debate that Senators had read the Bill closely and had thought carefully about it. By our count, there were at least 100 specific points raised on the various provisions and I hope the House will understand that I could not possibly reply at this stage to all of these. We can, I am sure, pick many of them up again on Committee Stage. Many of the points made by Senator Lydon, for example, would fall into this category. What I will do is to pick up some of the more important points now and undertake to consider the rest carefully between now and the Committee Stage.

Senator Robinson wondered why there had been so few company investigations up to now. The main reason for this is simply that there have not, in fact, been very many requests to the Minister to have particular companies investigated; and of the requests that have been made, only a handful have been regarded by the Minister of the day as warranting a full investigation. While there is no particular reason for expecting an increase in the number of cases after the enactment of the Bill, the hope is that those that do take place will not be frustrated by legal procedural difficulties.

The big problem with ministerial investigations in the past, as I understand it, has essentially been that inspectors have been regarded as carrying out a quasi-judicial function. Thus, while they have been allowed, under company law, to [2571] question witnesses under oath and so on, a central problem has been that those being investigated have no way of knowing whether serious allegations are being, have been, or will be, made against them. It follows that they have no means of refuting such allegations, no facility for cross-examination etc., which would be features of a judicial inquiry. These and other allied problems have led to recent investigations becoming bogged down in constitutional arguments, with little chance of firm and successful conclusions being reached.

We consider that moving the function of appointing such inspectors to the High Court should remove these problems, since the inspector would, in effect, be an officer of the court, and those investigated would not be able to frustrate inquiries, as they have been able to do in the past.

I should also say to Senator Robinson that we are not just moving the role of appointing inspectors from the Minister to the High Court and leaving it at that. We are also clarifying, and indeed expanding, the powers of the inspectors themselves in those investigations that do take place. As I have already said, I do not really expect a significant increase in the number of investigations undertaken. What we are trying to do is to make sure that those that do happen will be successfully concluded in future.

One specific point on this Part is that section 7 may require an applicant for a company investigation to give security to an amount not exceeding £200,000 for payment of the cost of the investigation. Some Senators felt this might be an onerous requirement on a person who has already been aggrieved by the actions of a company or their directors. However, it is important to remember that the court is given the discretion as to whether it will require security for the payment of the cost of the investigation. I should point out too that £200,000 is a maximum figure, not a standard one. I have no [2572] doubt that the courts will be very conscious of the circumstances of any application before requiring security for the payment of costs.

The subject of trafficking in share options, the abuse of which is tackled in section 29, was referred to by Senator Fallon and, I am sure by Senator Ross; I had to leave before he made his contribution. It is most certainly not the intention to prohibit executive share option schemes. May I explain that the purpose of this section is to ensure that directors do not engage in sideline speculation in “options” in relation to their own publicly listed companies? However, I will look again at the wording in the section to see whether it is possible to make it more precise.

Senators Mulroy and Fallon, among others, referred to the limit of £2,500 on loans to directors and wondered whether this and some other provisions of Part III would make life unnecessarily difficult for companies on a practical level. A significant number of companies make loans to directors and senior executives for legitimate, practical reasons such as hotel and other expenses and so on. Of couse I would not want to put unreasonable restrictions on such normal commercial practice. While I am fairly satisfied that £2,500 is the right kind of figure, I am prepared to listen to reasoned arguments on the subject and will examine them. What we want to do, of course, is to guard against abuses which, after all, is what this Bill is all about.

Senator Manning was puzzled about sections 82 to 89 which provide for the disclosure of shareholdings, in exceptional circumstances, in the case of private companies. He rightly suggested that this would only rarely arise. The fact is, however, that the real ownership of private companies can be enormously difficult to establish, given the availability of the nominee shareholding system.

Thus, there may be situations where someone with a crucial and direct financial reason to establish who owns the company is not in a position to do so. Such a person could be a major creditor, such as a bank or, indeed, the Revenue, [2573] somebody who may be concerned that he no longer knows whom he is dealing with. It could be the liquidator of the company or of a related company. It could even be a State company such as ICC or Fóir Teoranta having a role as a creditor.

I am sure the courts will be very cautious in providing these orders. The court may make a disclosure order if it deems it just and equitable to do so and if it is satisfied that the financial interest of the applicant is or will be prejudiced by the non-disclosure of any interest in the shares of debentures of the company.

As regards insider dealing, I think most of us, like Senator Robinson and Senator Ross, find it hard to pin down the extent of the problem. However, there have been so many suspicious share price movements in recent years, in advance of takeover announcements, good annual company results and what have you, that I think we are clearly entitled to say that the abuse does exist here. In a sense, of course, the size or extent of the abuse is not so important — what is especially important is the public perception of what is happening, and the fact that no one seems to be successfully doing anything about it.

At all events, the House clearly agrees that this abuse must be curbed, and quickly. Although the approach in the Bill is to provide a civil remedy to those affected, many Senators wanted to make it a criminal offence. I must say I am not totally convinced by this. To provide for criminal penalties would, I fear, require cast iron evidence after prolonged and intensive investigation. If overseas experience is anything to go by, the success rate in criminal prosecutions is not encouraging. However, I know we all agree that something has to be done, and I am considering how Part V of the Bill could be strengthened to deal with this abuse more effectively.

While doing this, I also take the opportunity to renew my call to the Stock Exchange authorities and ask them to do what they can to root out the insiders. They have a responsibility in the running of the Stock Exchange to ensure that they do what they can in relation to it. I [2574] certainly will do what I can. In relation to the criminal offence I may or may not have mentioned on the introduction to the Bill here in the House that in the UK, where it is a criminal offence, something like 25,000 situations were investigated, some six criminal prosecutions were brought and only three were brought successfully. In America it is civil and criminal. We will have a look at it, but there is a responsibility on the Stock Exchange as well to do what they can about it.

On Part VI, Senator Bulbulia quoted extensively from a recent newspaper article which dealt with fraudulent trading. The main suggestion was that fraud was very difficult to prove and, accordingly, was being replaced by the concept of reckless trading in section 107. However, this is not quite the case. We are, in fact, retaining the concept of fraudulent trading as a criminal offence but also, quite separately, making it a civil offence as well. I accept that it is difficult to prove, involving questions of intent and so on, but the effect of separating the civil and criminal aspects of fraud should, I think, make it easier for liquidators to seek declarations of personal liability against company directors in appropriate cases.

In addition to clarifying the law of fraudulent trading, we are, as Senator Bulbulia mentioned, introducing the new concept of reckless trading. This will not require proof of fraudulent intent, and should make it easier for liquidators, or other interested parties, to pursue company directors in appropriate cases. I stress “appropriate cases”, since some people seem to be worried that “honest failure” in business could be penalised by this provision. I do not accept this, and a close reading of the section shows that this fear is not justified. I think it is a perfectly reasonable approach to say that, if you knowingly run your business in a reckless way, without, in effect, caring whether you can pay your debts or not, then you run the risk of personal liability. I also think a close reading of the section shows that there are enough safeguards built in to it to protect the honest businessman or woman.

[2575] A number of Senators mentioned the question of preferential payments in a winding-up. As far as the Revenue Commissioners are concerned, I agree wholeheartedly with those who said that withholding tax payments, PAYE, VAT and the rest, legally due is nothing short of scandalous. However, I am not so sure that the solution to that is to reduce the level of preferential payments to which Revenue are entitled under the Companies Act. This is a tricky area and one I am very conscious of — I think the House will agree that the issues involved are considerable and have wide-ranging implications. I would just repeat that the Bill's primary aim is to tackle abuses. Since reducing the Revenue preference does not really fall into this category, we did not contemplate any change in the existing position. However, I will take on board the points made. I will read them in detail because I have a certain view in that regard myself, and we will see what comes out at the end.

As far as employees are concerned, I would like to assure Senator O'Toole that the Bill will not worsen their preferential position as regards wages arrears, pension contributions and so on which, of course, is enshrined in the Companies Acts already.

A large number of Senators spoke on Part VII of the Bill and most, I think, were happy with the underlying ideas involved, subject to a number of detailed comments, mainly on section 117. Many felt that the minimum capital sums mentioned in this section were too low and should be increased significantly. In the light of what has been said, I have some sympathy for this view, and I will look at this point again before Committee Stage.

On the same point, Senator Cullimore thought that the minimum capital required could, perhaps, be related to the size of the unpaid debt of the liquidated company. I do not really think that would be practical, since it often takes some time for the actual level of debt to become clear, whereas what we need in section 117 is some kind of legal certainty. At all events, we will, as I said, [2576] be coming back to this later. Incidentally, could I say to Senator O'Toole, who suggested a “certificate of fitness” requirement for directors of failed companies, that the minimum capital requirements we speak about in section 117 are, in fact, a kind of financial “certificate of fitness”.

Some Senators, while endorsing the underlying idea of minimum capital requirements in section 117, were concerned that the restrictions applied in a general way to all directors of the company concerned. The suggestion was that some “way out” should be found for certain types of directors, for example, those appointed by Fóir Teoranta, who might not, as it were, be “guilty” of anything. While of course I understand the point being made, I have a basic difficulty of principle with it, in terms of distinguishing between one kind of director and another.

I see the practical problem that is involved in relation to State companies, accountants or solicitors taking positions on small companies' boards who might feel that in this new situation perhaps they should not risk the reputation either to themselves or their company. It is a basic difficulty in how to differentiate between one kind and another. We will try to clear it up before we come to Committee Stage.

As Senators will know, we could, if we wished, talk about many different classes of directors; for example, directors appointed by Fóir Teoranta to an ailing company or by a bank as part of a credit agreement. We have worker directors and non-executive directors. We have financial directors, personnel directors and so on.

However, in company law terms, the collegiality of directors is a pretty basic principle. In other words, while a director may have been appointed for a specific reason to a company board, he is, nevertheless, regarded, rightly in my view as having the same rights, duties and obligations as all the other directors. I would not like to start departing from that principle in this Bill. That could be a very slippery slope indeed for us to get onto. [2577] There is a practical situation to be considered. We do not want to take away the opportunity of the contributions that directors can make in certain situations, and not for any great financial return.

I should point out, at the same time, that there is, in section 117 (8) scope for a director to be excused from the minimum capital requirements in the section, by seeking relief from the court. I am sure the court would take a sympathetic view in appropriate cases. However, because of its importance in the context of what we are trying to do in the Bill and in view of what has been said here I will pay close attention to section 117 to see if any improvements can be made.

One last point on Part VIII, Senator O'Toole suggested the creation of a black list of directors of companies that go into insolvent liquidation. I must say I am a bit wary of black lists generally. Indeed, in this particular case, as I have said already, I do not regard it as a crime to fail in business, provided, of course, that the failure has been an honest one, as it were. In America people sometimes fail two and three times before they make the grade, but in Ireland there seems to be a stigma attached to the first failure. If it is an honest failure we should recognise it for what it is and ensure that a person has the opportunity of getting up and going again. A person can fail through no fault of his own. The market can change and the product can change. There are various reasons for failure. We should do all we can to keep the good name of enterprise in business alive.

However, I would draw Senator O'Toole's attention to section 132, under which the courts will inform the registrar of companies of cases where a person has actually been disqualified from being a director. I would have no problem with a list in those circumstances. I think this provision, along with section 188, which deals with the classification of information by the CRO, goes a long way to meet the Senator's point.

I think it is fair to say that Part IX of the Bill, dealing with company salvage, [2578] has also received a fairly universal welcome. I am delighted about this since I think it is a great leap forward in helping companies to survive in worthwhile cases, rather than simply sliding irrevocably towards liquidation. However, a number of Senators felt that the tenancy of an examiner in a company under Part IX might be too short, at three months. I have to say that we thought long and hard about this.

The provisions in this Part are all about balance. By obtaining the protection of the court, a significant shift in the operating environment of companies will occur. Creditors, temporarily, will not be entitled to proceed for their due debts. Therefore, I feel it necessary that this period of examination be as short as possible. However, under section 150 the 21-day period in which the examination is to occur can be extended by the courts. Courts will use this discretion judiciously where there are unusual or complex issues involved. On balance, I think that imposing tight time limits on court protection under this Part will serve to concentrate the minds of all concerned on rescuing the company. We must guard against allowing these arrangements to drag on endlessly, as has often been the experience elsewhere.

I am very eager to see that these arrangements will be practical and workable in practice. For that reason, we are keeping our eyes and ears particularly open for ways of improving Part IX, and indeed I already have some changes in mind for Committee Stage. I will be looking closely at some worthwhile suggestions to that effect that were made during this debate.

While on Part IX, I would like to mention the role of the State agencies, a point specifically raised by Senator Hillery. As Senators will know, I am very concerned at ensuring that effective support is given to industry by the various State agencies. In my own area of responsibility I have undertaken a study to ensure that there are neither gaps in services nor duplication of functions. Fóir Teoranta are the agency that have prime responsibility for providing or enabling the provision of [2579] financial support for industrial firms in financial distress, and I am happy that Fóir, in providing such support, work closely with a number of State agencies and Departments, including my own.

A weekly meeting takes place between representatives of my Department, the Industrial Development Authority, Fóir Teoranta and the ICC. There is what I call a fire brigade service in existence. There is an early warning system and signals are given in time. One of the weaknesses that was there for too long is that everybody found out too late that a company was having serious financial problems and had it been know in time in quite a number of cases a lot could have been done. We are trying to correct that weakness by this reporting system. There is a list drawn up weekly and the companies that are heading in that direction are continually monitored. I hope that will save some of the companies that otherwise would go under if it was found out too late that they were in difficulty.

I have presumed upon the time of this House to give a lengthy reply to the debate. I felt it was appropriate to do so, to give full credit to the excellent contributions that were made. However, even at that, I fear that for reasons of time I had to leave many questions unanswered for the time being. I trust that the House will understand my position on this. I got the feeling that many Senators were keeping their powder dry until Committee Stage. I have no problems with that approach, since the individual provisions in the Bill are necessarily complex ones, and we were, at this stage, really debating the general principles involved.

Finally, while some have argued that in some aspects we go too far and in others not far enough, nobody has argued about the fundamental need for this kind of measure. Indeed, some Senators in this House have spoken of their own personal experiences of abuse. If anyone still doubts the need to take strong action on these questions, I think they could hardly do better than to read carefully the short [2580] contribution of Senator Fitzgerald to this debate, which had all the eloquence born of direct personal experience.

An Cathaoirleach: Is Second Stage agreed to?

Mr. Manning: In agreeing to Second Stage I would like to thank the Minister for his very full reply and for the spirit with which he has approached this debate. We all look forward to Committee Stage.

Question put and agreed to.

An Cathaoirleach: When are we taking Committee Stage?

Mr. Lanigan: On the first sitting day in September.

An Cathaoirleach: What is it intended to do now?

Mr. Lanigan: We will break until 2.30 p.m. and we will take the Adoption (No. 2) Bill from 2.30 p.m. to 5 p.m.

Sitting suspended at 1.50 p.m. and resumed at 2.30 p.m.