Richard Bruton (Dublin North Central, Fine Gael)

I thank Deputy Walsh for raising this matter. As the Deputy recognised, company failures while unwelcome are a normal part of business and entrepreneurship. I suspect he will be aware of some of the information I propose to impart in that I will set out what are the restrictions under company law.

Company law is based on the essential structure that a company is a separate legal entity from its members and the directors who manage it. This means a company's profits or losses are its own and are not transferable to the individuals within the company. This framework means that persons involved in an insolvent company which has been liquidated may lawfully establish another company without the debts of the previous company following them into the new corporate entity. The importance of this framework is that it encourages investment and entrepreneurship which can lead to the creation of jobs. Section 56 of the Company Law Enforcement Act 2001 provides that the liquidator of an insolvent company must submit a report to the Office of the Director of Corporate Enforcement, ODCE, on its demise, together with information on the conduct of any person who was a director of the company during the 12 months preceding its liquidation. The liquidator must also proceed to apply to the High Court for the restriction of each of the directors of the insolvent company, unless relieved of that obligation by the ODCE.

While there is no definition of the term "phoenix company" in Irish company law, in general it is considered to be a scenario in which directors of a company restart a business in disregard of their duties under company law and their financial and other obligations to one or more of the stakeholders in a previous failed company. This may occur, for example, by failing to liquidate the previous company and ensuring the payment of debts that can be paid by the previous company.

Phoenix practices are an abuse of separate legal personality and may result in competition in the applicable business market being distorted because the phoenix company enjoys lower than market costs and, therefore, has the potential to achieve an unfair competitive advantage in the marketplace; creditors suffering financial consequences, some of whom may themselves fail in consequence; and directors not bearing any personal liability or otherwise escaping accountability for the failure.

The Company Law Enforcement Act 2001 established the Office of the Director of Corporate Enforcement and strengthened the legislative provisions dealing with insolvent companies. The director has powers to initiate company investigations, prosecutions, restrictions and disqualifications with a view to curbing relevant abusive practices by directors. The ODCE has been also conferred with certain powers to address unliquidated insolvent companies, namely, those companies which are not in liquidation and have not yet been dissolved. The legal powers include applying to the High Court for the restriction of the company's directors. This power has been successfully used to sanction directors.

The effect of being disqualified is that when such a disqualification order is imposed the person concerned is disqualified from acting as a director, auditor, officer, receiver, liquidator or examiner or being involved in the promotion, formation or management of a company for a period of five years or such other period as the court may direct. A restriction declaration, if made, prohibits an individual from acting, either directly or indirectly, as an officer of a company or from being involved in its formation or promotion for five years, unless the company is adequately capitalised. In the case of a private company the capital requirement is €63,487 in allotted paid-up share capital, which must be paid for in cash. The equivalent figure for public companies is €317,435.

As the Director of Corporate Enforcement stated in his recently published annual report, insolvent companies abandoned by directors which come to be struck off the register of companies for a failure to file their annual returns continued to receive the attention of his office in 2011. This category refers to companies which are not in liquidation but which have been dissolved having been struck off by the Registrar of Companies for failing to file annual returns with the Companies Registration Office. The companies in question may be solvent or insolvent. In the case of insolvent struck off companies the directors are eligible to be disqualified from acting as company directors. It is open to the Office of the Director of Corporate Enforcement to apply to the High Court for the disqualification of the directors of these struck off companies. However, the law also provides that the court cannot disqualify a person who demonstrates to the court that the company had no liabilities at the time of strike off or that the liabilities in question were discharged before the initiation of the disqualification application. In considering the penalty to be imposed, the court may instead restrict the directors where it adjudges that disqualification is not warranted. In other cases, the former directors are able to satisfy the ODCE that all liabilities had been settled at the time of strike off or prior to the issue of the intended court proceedings.

The giving of credit by one business to another is an essential part of normal business life and facilitates entrepreneurship. However, creditors must also bear responsibility for protecting their own commercial position and for bringing to account the persons involved in phoenix activity. The Office of the Director of Corporate Enforcement complements these efforts by selecting those cases where particularly serious phoenix behaviour has taken place or substantial public interest may be at stake. The office welcomes any complaints from members of the public concerning the activities of phoenix companies.

In a nutshell, a wide range of powers is available to address the issue of phoenix companies. Deputy Walsh referred to indications of collusion between directors, creditors and perhaps liquidators and alluded to the possibility of having independent audits. As his proposal was not anticipated, I will seek a response from my officials to ascertain whether the carrying out of such independent audits in respect of the debts of companies would be practicable.

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