Billy Kelleher (Cork North Central, Fianna Fail)

I move: "That the Bill be now read a Second Time."

I am pleased to bring the Companies (Amendment) Bill 2009 before the House. This is a targeted and focused Bill which deals with a small number of company law issues that require immediate attention. The Bill arises from recent experiences in the enforcement of company law in the banking sector in particular. In response to these developments, the Government decided earlier this year to introduce a small number of important changes to company law and determined that these should be put into action immediately.

Deputies will be aware that a major project is ongoing to consolidate and reform all existing company law into a single text. Work on this project is well advanced and it is my intention to publish a significant Bill containing some 1,250 sections early next year. However, the Government considered it necessary to implement the focused changes in today's short Bill in advance of that. I thank Deputies for facilitating the early consideration of this legislation.

The objective of this short Bill is to provide in primary legislation a framework to support the Director of Corporate Enforcement in his efforts to enforce compliance with company law by ensuring he has the range of powers required to support him in this task. It will improve the transparency of loans made by licensed banks to their directors and persons connected with them. In addition, it will amend certain existing provisions relating to Irish-registered non-resident companies to deal with concerns of the European Commission.

In drawing up the amendments contained in this Bill, extensive consultation took place with the Director of Corporate Enforcement. His experience of the operation of company law on the ground and of the issues that arise when conducting investigations of possible breaches of these laws was a source of vital and practical feedback. His advice was that recent experience led him to conclude that company law could be enforced more effectively if a number of targeted legislative amendments were made.

I will elaborate on each of the amendments proposed in the Bill shortly but, in summary, the Bill will improve enforcement of company law through a range of measures that will either clarify or amend existing law. It includes provisions that clarify the right of the Office of the Director of Corporate Enforcement, ODCE, to access certain company and third party records; it provides for extensions to search warrants granted to the office; it introduces a mechanism, together with appropriate safeguards, for an extended power of seizure so that large volumes of paper or electronic information that may contain relevant material can be removed for later examination; it lightens the evidential burden on the Director of Corporate Enforcement when taking action against companies in default of existing provisions regarding loans to their directors; and it amends existing requirements relating to the disclosure of loans to directors in the annual accounts of licensed banks.

With regard to the last provision, I must point out that while company law governs the disclosure of directors' loans in the annual accounts and elsewhere, it does not extend to regulating bank lending and other banking activities. This task falls to the Financial Regulator, which is also empowered under the Central Bank Acts to make rules to change conditions attaching to bank licences. I understand the regulator is currently proposing to amend its rules on the disclosure of loans by banks to their directors and connected persons - areas that are at present covered by the Companies Acts. My proposed changes to the Companies Acts take account of the rule-changing powers of the Financial Regulator but do not seek to duplicate its role in determining how best to oversee prudential supervision of the banks.

To put just one of the measures contained in this Bill into a practical context - namely, the mechanism for determining legal professional privilege of records seized during an investigation - I will refer briefly to the ODCE's experiences during one recent large investigation. This led to a court application, the outcome of which was covered by the media at the time. The company in this case was Anglo Irish Bank, and the ODCE reports that this has been the largest and most complex investigation it has undertaken since it was set up in late 2001. However, Deputies will appreciate that the issue that gave rise to this court case has general application and could be relevant to any large investigation.

The issue in question arose from the fact that during the ODCE's investigation into Anglo Irish Bank on the bank's premises, large numbers of documents and computer records were seized by the Garda. Before examining the seized material, the Garda must establish its legal professional privilege status. With this objective, the parties agreed a mechanism for determining such privilege, and on 13 March last the ODCE sought High Court approval for this. While the High Court judge stated that the mechanism proposed was "eminently sensible", he did not believe that section 23 of the Companies Act 1990 as it stands gave the court statutory authority to outsource a function currently reserved to it. The judge could not therefore approve the proposed mechanism. As I will explain shortly, section 6 of the Bill will give legislative underpinning to an appropriate mechanism which is similar to the one proposed to the High Court.

I will now turn to the provisions of the Bill and explain what each is designed to achieve. Section 2 is a provision affecting the generality of companies and not simply the small number of companies that hold banking licences issued by the Irish Financial Regulator. Subject to certain restrictions, existing company law allows a director legitimately to have a private interest in contracts or proposed contracts with his company. However, he must declare any such interests to his fellow board members. Failure to do so could make him liable for a fine and oblige him to account to the company for any profits he has gained. The company is obliged to keep a record of directors' declarations of interests in a book that is kept for this purpose. The amendment being proposed in section 2 will give the Director of Corporate Enforcement a specific right of access to this book. It will also provide a sanction in any case in which a company fails to allow the director to access this information. This will assist in enforcing compliance with the provisions of the Companies Acts.

Sections 3 and 4 are linked and deal with the powers of the Director of Corporate Enforcement to require the production of records from a third party where these records relate to a company under investigation. This power is vital to the director when he is investigating companies whose books are incomplete, for whatever reason. The third party might typically be a director, auditor or employee of the company being investigated. However, it may be the case that other individuals possess relevant documentation and, if so, this provision could be relevant to them.

The right of the Director of Corporate Enforcement to access third party records has been already provided through section 19(3) of the Companies Act 1990 and the director has informed me that he has already used it successfully in a number of cases. However, he has requested that the provision be reworded to provide greater clarity and to avoid doubt in the future about what records can be sought from third parties. For the avoidance of doubt, the Bill stipulates that the clarification being introduced here will not invalidate any previous requests for access to third party records. This is important for the continuity of any ongoing investigations that rely on material discovered through the use of the existing powers.

Section 5 is another provision with general application. It deals with the entry and search of premises by the director or authorised officers of the Office of Director of Corporate Enforcement on foot of a search warrant issued by a judge of the District Court. At present, the Companies Act 1990 provides a limit of one month on the lifetime of such warrants. While this will be sufficient in some investigations, it may not allow sufficient time to conduct large and complex searches or where substantial amounts of information are contained in electronic format.

The amendments in the Bill provide for situations where an extension of the period of a search warrant can be sought from and granted by the court. This will allow the court to take account of the grounds given for seeking an extension and to use its discretion in deciding whether to allow the extension. This section of the Bill also makes provision for the removal of paper and electronic information from premises being searched, for subsequent examination elsewhere, to determine their relevance to the matters under investigation. This is referred to in the Bill as "extended power of seizure". Appropriate detailed safeguards are also provided in the Bill to ensure this extended power is only used when appropriate.

For example, the Bill stipulates the issues that should be taken into account by the director in deciding whether it is reasonably practicable to determine the relevance of something on the company's premises. It also provides for the arrangements he or she must put in place before the extended power of seizure can be used. These include the maintenance of confidentiality of seized information and granting the owner reasonable access to it. The Bill also provides for arrangements to be adopted in cases where the director considers it necessary to avoid possible concealment, falsification, destruction or disposal of relevant material.

The Bill as originally published required the director to deal as expeditiously as possible with the material seized and to return any material that proves not to be relevant to the owner as soon as possible. No specific timeframes were included on the basis that the Office of the Director of Corporate Enforcement fully intends to return any such records to their owners as quickly as possible. Furthermore, the Bill already included ministerial regulation-making powers that could be used to impose timeframes at a later date if this were found to be necessary.

However, having considered this matter further and also taking account of the debate in the Seanad, the Tánaiste and I decided to strengthen the safeguards in this section by including prescribed timeframes within which determinations and separations of immaterial information must be made. Our Seanad-approved amendment also introduces a mechanism where the parties can apply to court, before the expiry of the prescribed time limits, seeking a direction on various issues. These are outlined in the new subsection 2G which is being inserted into section 20 of the Companies Act 1990 and provide maximum flexibility to the court in the directions it can give.

For example, the direction might result in a lengthening or shortening of the time available to the Office of the Director of Corporate Enforcement to conduct its determination. It might compel the office to alter the arrangements it has put in place on foot of its new powers of extended seizure and even require it to return seized material to its owner. The court direction could also, if it deemed appropriate, provide that the Office of the Director of Corporate Enforcement could retake possession of such returned material at a specified subsequent period. The amendment also includes an ability for the court to hear matters other than in public. This could be particularly important when the content of confidential company information is being discussed. In drafting the Bill, every effort was made to provide for all situations that might arise during the course of an extended search. However, should any new or unforeseen issue arise, the Minister for Enterprise, Trade and Employment is being empowered to make appropriate regulations.

Section 6makes several amendments to section 23 of the Companies Act 1990 which at present protects a person from having to disclose certain information under Part II of that Act. The protected information in question is that which, in the opinion of the court, the person would be entitled to refuse to disclose on grounds of legal professional privilege. While the 1990 Act allowed for a blanket prohibition on the seizure of such material, the Director of Corporate Enforcement reports there are sometimes difficulties in deciding during a search whether privilege pertains to specific documents. The situation becomes even more problematic given the prevalence of electronic data storage. A legal solution is necessary which recognises the inevitability of legal privileged data being mixed up with information not enjoying that privilege.

The arrangement provided for in this Bill will permit the seizure of information, whether privileged or not, on a sealed basis. It will then be a matter for the court to decide on matters relating to privilege. Application to the court for such a ruling must be made by an officer of the Office of the Director of Corporate Enforcement or a court appointed inspector. It may also be made by any person from whom disclosure is compelled or material taken. The amendments also provide for the introduction of a mechanism where the court can be assisted by the appointment of an independent person with suitable legal qualification to examine the information and prepare a report with a view to assisting or facilitating the court in making its determination. This amendment addresses the concerns expressed by the High Court during the hearing on 13 March 2009 to which I referred earlier. To preserve confidentiality of sensitive information, the Bill provides that the court hearing can be held otherwise than in public.

Section 7 relates to the important provisions contained in section 31 of the Companies Act 1990. The section prohibits companies from making loans to their directors other than in certain defined circumstances. This limitation on the personal use of a company's assets by directors and persons connected with those directors is to ensure the company has the available resources to pay its creditors as their debts fall due. This prohibition is an important safeguard in company law and is applicable to all 180,000 companies incorporated in Ireland. For this reason, breaches of the provisions have been a particular focus of the work of the Office of the Director of Corporate Enforcement since it was established in late 2001.

Concerns were expressed that the success in prosecuting offending directors or companies might be affected by the current wording of section 40 of the Companies Act 1990, which puts an onus on the Director of Corporate Enforcement to prove a company director was aware that he or she was in default of the company law prohibition on loans to directors. Section 7 of the Bill, therefore, substitutes section 40 of the Companies Act 1990, which sets out the penalty for breaches of section 31 of that Act. The substituted provision will provide, in future, that if a company enters into a transaction or arrangement that contravenes section 31, every officer of the company who is in default will be guilty of an offence. This aligns the offence with numerous similar offences under the Companies Act, and replaces the existing requirement for a successful prosecution to prove wilful default. It also preserves a mechanism whereby an accused officer can defend his or her actions in appropriate circumstances.

Section 8 amends sections 41 and 43 of the Companies Act 1990 and deals with the disclosure in the annual accounts of loans, that is, transactions, arrangements or agreements, made by a company to its directors and to persons connected with them. To remove any doubt, the amendments include appropriate penalties for failure to disclose such loans and defences that can be made. Section 8 also makes amendments that relate solely to companies that are licensed banks. As section 9 also deals with this subject, I will address both sections together.

In providing for a disclosure regime for company loans to their directors and to those connected with them, the Companies Act 1990 treated companies that are licensed banks differently from the generality of companies. This different disclosure regime took account of the fact that lending is part of the day-to-day operations of a banking company and, unlike most other companies, the business of the banking sector was regulated and supervised. While most companies must disclose in their annual accounts details of loans to their directors on an individual named basis, the accounts of companies licensed as banks require a lesser degree of disclosure. Specifically, the banking company's accounts can disclose such data in aggregate format and only include information on amounts outstanding at the end of the financial year. The banking company disclosure requirement is supplemented by a requirement to keep a register of relevant loans, details of which must be disclosed to shareholders in advance of the bank's annual general meeting.

This Bill amends the disclosure requirements for banks in several ways. In future, loans to directors of companies that are licensed banks will be treated in the same way as non-banking companies. Specifically, all loans above a de minimis threshold to each individual named director must be disclosed separately in the annual accounts, as opposed to in aggregate format. The maximum amount outstanding during the year will also be disclosed, not simply the amount outstanding at the end of the financial year.

In so far as connected persons are concerned, the Bill provides for additional disclosure, but this is not as detailed as is required for directors. It retains the existing aggregate disclosure of favourable loans in the case of connected persons, but provides that the maximum amount outstanding during the year must also be disclosed. The Bill recognises that licensed banks may be required to make more detailed disclosures in their accounts under rules, directions or requirements imposed by the Financial Regulator.

The Bill retains the requirement for a statutory register because of its value as a source of up-to-date data on current loans, but provides that information that will be required to be published in the accounts - as a result of the Bill or other requirement, such as the Financial Regulator's rules - need not also appear on the pre-AGM statement. The Bill provides a specific right of access for the Director of Corporate Enforcement to the statutory register of loans to directors and connected persons, so that he or she can take enforcement action if necessary.

Section 10 amends sections 43 and 44 of the Companies (Amendment)(No.2) Act 1999 in order to meet the concerns of the European Commission that certain elements of the current provisions are not compatible with the EC Treaty. A company law amendment introduced in 1999 sought to deal with Irish-registered companies that were controlled and managed from abroad and were treated as non-resident for tax purposes. The 1999 Act required an Irish-registered company to have a director resident in the State or, alternatively, through a process involving the Revenue Commissioners and the Companies Registration Office, to show that it has a real and continuous link with economic activity being carried on in the State. The amendment proposed in the Bill replaces the necessity to have at least one Irish resident-director with a requirement that one director must be resident in the European Economic Area.

The Government is committed to supporting the work of the Office of the Director of Corporate Enforcement in every possible way, including through the provision of appropriate statutory powers and resources to the office. The Government's objective in proposing these legislative changes to the Oireachtas is twofold. First, as we observed recent events unfold in the banking sector, the Tánaiste and I were anxious to ensure the Office of the Director of Corporate Enforcement has available to it an up-to-date suite of enforcement powers that are fit for purpose. Second, we wish to ensure, from a business perspective, that our body of company law is relevant, transparent and proportionate both as regards the facilitation of the conduct of business in Ireland and as regards good governance and penalties. Having a strong, transparent and proportionate legal framework is critical to our competitiveness and to our international reputation as a place in which to invest and conduct business. I look forward to hearing Members' views in what I hope will be a wide-ranging debate. I commend the Bill to the House.

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