Mick Wallace (Wexford, Independent) | Oireachtas source

The Bill represents a massive body of work and is to be welcomed.

I note that Part 5 of the Bill contains a codified version of the fiduciary duties of company directors, which require them to act in good faith, honestly, responsibly and with due care, skill and diligence, and to avoid conflicts of interest. Currently, directors are subject to these obligations through a combination of common law and statutory provisions. The principle effect of listing directors' duties in the Bill will be to act as a signpost to directors on the standards of conduct the law requires of them. Will the Minister consider expanding on the provisions by examining ways in which the information they contain could be widely disseminated to existing and new company directors to educate them fully on their responsibilities and, more broadly, promote a culture of corporate responsibility? The provision of a new pack setting out directors' duties could be issued by the Companies Registration Office to all directors on the incorporation of a company. It could alternatively be issued by the Office of the Director of Corporate Enforcement, which happens to have a clear text on directors' duties on its website. Those agencies could organise the distribution of a leaflet setting out the provisions of the relevant section of the Act to the registered offices of companies for the attention of all current directors.

Currently, the practice is that directors of companies with means available are advised of their duties by solicitors. However, many start-up companies do not have the means to provide such legal advice. There are also voluntary directors in the property management sector who are subject to additional requirements under the Multi-Unit Developments Act 2011 who may not have the means to seek legal advice on the duties owed by them. I would welcome the insertion in the Bill of a recognition of the general duty owed to employees and shareholders in addition to the primary duty owed to the company itself.

I welcome, broadly, the proposed reform of the examinership process. I note that in accordance with the recommendations of the Company Law Review Group, section 5(10) of the Bill will provide for small and medium enterprises to apply directly to their local circuit court for examinership where they satisfy two of the following conditions: fewer than 50 employees, a turnover of less than €8.8 million and a balance sheet not exceeding €4.4 million. It has been estimated that the new provision could cut the legal cost of examinership by up to 50%, making the process more accessible and affordable to small and medium enterprises, in contrast to the current requirement that all companies, regardless of size, apply to the commercial courts in Dublin with the attendant cost of doing so. Protection provided by the courts from creditors' actions for three months can sometimes give enough breathing space for a company to recover and survive its difficulties. Ultimately, examinership can save valuable jobs in small and medium-sized enterprises.

While the reform is very welcome, will the Minister consider separating and fast-tracking the enactment of the relevant provisions to ensure they commence as soon as possible? The Bill may be the largest tranche of legislation ever enacted in the State, with the result that it may not be passed until 2014. Commencement of its provisions may occur at an even later date. Currently, thousands of small and medium-sized enterprises are struggling and in distress and may not survive until 2014. They would benefit greatly from a lifeline in the form of three months' protection from the Circuit Court, which would allow them to restructure debts and trade out of difficulty. Realistically, it will be a year before this significant body of legislation is passed. One can imagine how many people will fall through the cracks in the next 12 months. I ask the Minister to consider bringing these provisions in a little sooner.

I welcome the removal of the audit requirement for voluntary organisations provided for in section 121(4). It is a welcome reform which will reduce the administrative and financial burden on not-for-profit community development organisations. Many small management companies will also be exempted from the audit, which is welcome. The regime was overly bureaucratic previously.

I welcome the absence of the nebulous "place of business" concept in respect of unlimited companies from Part 21 of the Bill as it relates to external companies. This gives greater clarity to third parties dealing with such companies. They will now deal either with a branch of an external company which has a CRO number and a filed account or an unregistered company. However, I have concerns about the use of unlimited holding companies in corporate structures in Ireland and the use of offshore limited companies as shareholders within that structure. I am disappointed that these issues were not addressed in the Bill. I ask the Minister to clarify whether he attends to address these issues. One can start an unlimited company in Ireland and bring in shareholders who have limited liability. If the company is based offshore, it reduces the unlimited liability of the company that was established. It is a loophole the Government should examine. Most people assume, when dealing with an unlimited company, that there is no upper limit on the personal liability of its shareholders for the company's debts if it were to become insolvent. Approximately 4,000 Irish companies are unlimited and, as a result, escape the stricter filing and disclosure companies to which private limited companies are subject.

The usual filing and disclosure requirements allow a creditor to apprise himself of a company's solvency before trading with it. Many large corporate structures are, however, using unlimited liability companies with limited shareholder liability by ensuring that some or all of the shareholders are limited liability entities. They may also reorganise company structures to transfer trade to a limited liability company at a later date. While it is always open to the courts to look through the corporate character of unlimited companies to see for themselves if its members include limited companies - in other words, to lift the corporate veil to examine the underlying members - it can only be done via an expensive court application. This general principle was approved by the Supreme Court in the case of Bray Travel Ltd, but, as the High Court remarked recently in Goode Concrete v. CRH plc and others, this approach is not possible when the limited company is an offshore company. This happens where the subsidiary limited company of an Irish holding company with unlimited status is registered in a country outside the EU which has limited disclosure requirements. This includes the Isle of Man.

I could name three of the more serious players in the development game in Dublin, with problems in the region of €2 billion, who were availing of the structure. The Acting Chairman would be less than impressed if I did. This Minister might indicate whether and how he intends to deal with such unacceptable situations and whether by additional legislation or discussion in a different forum. One possibility is to introduce legislation requiring all private unlimited companies to notify the Companies Registration Office, CRO, of any shareholder company that might limit its liability. The unlimited company could be required to update information every year when filing an annual return or any abridged financial information required. In this way, a creditor may check the CRO records of an unlimited company at the outset of contractual negotiations and is alerted to the fact that, although registered as unlimited, the company's liability may be limited. Failure of an unlimited company to notify the CRO of any limited liability shareholder could result in the imposition of limited liability status on the company immediately or in respect of a particular transaction as the courts see fit, within the limits of reasonableness and proportionality.

I wish to discuss the thoughts of Ha-Joon Chang, a South Korean economist based in the University of Cambridge. He advocates a strong hands-on approach by government in dealing with companies to ensure better long-term outcomes. My philosophy is that bureaucracy and red tape are negative for companies but good regulation is positive. A major problem in the business world, which is also a problem for government, is that many decisions are based on short-term thinking. There is not enough long-term planning or investment. The logic is that management and shareholders are not mobile and will not be around forever. They are more interested in turning a quick buck than the firm's long-term prospects. Ha-Joon Chang states:

The corporate sector is very important to any economy but allowing firms the maximum degree of freedom may not even be good for the firm themselves, let alone the national economy. In fact, not all regulations are bad for business. Sometimes, it is in the long-run interest of the business sector to restrict the freedom of individual firms so that they do not destroy the common pool of resources that all of them need, such as natural resources or the labour force. Regulations can also help businesses by making them do things that may be costly to them individually in the short-run but raise collective productivity in the long-run - such as the provision of worker training. In the end, what matters is not the quantity but the quality of business regulation.


By the end of the Second World War, GM was the biggest car-maker in the US and had become the biggest company in the country. It was perceived that what was good for GM, was good for the United States, and what was good for the United States was good for General Motors. The logic behind this argument seems difficult to dispute. In a capitalist economy, private sector companies play the central role in creating wealth, jobs and tax revenue [or a central role]. If they do well, the whole economy [benefits]. Especially when the enterprise in question is one of the largest and technologically most dynamic enterprises, like GM in the 1950s [and 1960s in America], its success or otherwise has significant effects on the rest of the economy - the supplier firms, the employees of those firms, the producers of the goods that the giant firm's employees may buy and so on. Therefore, how these giant firms do is particularly important for the prosperity of the national economy.


However, between the Great Depression and the 1970s, private business was viewed with suspicion [in most quarters ]even in most capitalist economies. Businesses were seen as anti-social agents whose profit-seeking needed to be restrained for other, supposedly loftier, goals, such as justice, social harmony and protection of the weak. As a result, complicated and cumbersome systems of licensing were introduced in the belief that governments need to regulate which firms do what in the interest of wider society. Large firms were banned from entering those segments of the market populated by small farms, factories and retail shops, in order to preserve the traditional way of life and protect 'small men' against big business. Onerous labour regulations were introduced in the name of protecting worker rights. In many countries, consumer rights were extended to such a degree that it hurt business [in some way].


These regulations, pro-business commenters argued, not only harmed the large firms but made everyone else worse off by reducing the overall size of the pie to be shared out. By limiting the ability of firms to experiment with new ways of doing business and enter new areas, these regulations slowed down the growth of overall productivity. As a result, since the 1970s, countries from all around the world have come to accept that what is good for business is good for the national economy and have adopted a pro-business policy stance. This was at the heart of neoliberalism [but we have learned much since then].


In the summer of 2009, GM went bankrupt. Notwithstanding its well-known aversion to state ownership, the US government took over the company and, after an extensive restructuring, launched it as a new entity. In the process, it spent a staggering $57.6 billion of taxpayers' money. It may be argued that the rescue was in the American national interest. Letting a company of GM's size and inter-linkages collapse suddenly would have had huge negative ripple effects on jobs and demand, aggravating the financial crisis that was unfolding in the country at the time. The US government chose the lesser of the two evils, on behalf of the taxpayers. What was good for GM was still good for the United States.


But what went wrong? When faced with stiff competition from imports from Germany, Japan and then Korea from the 1960s, GM blamed 'dumping' and other unfair trade practices by its competitors and got the US government to impose import quotas on foreign, especially Japanese, cars and force open competitors' home markets. In the 1990s, when these measures proved insufficient to halt its decline, it had tried to make up for its failings in car-making by developing its financial arm, GMAC (General Motors Acceptance Corporation). GMAC moved beyond its traditional function of financing car purchases and started conducting financial transactions for their own sake - all leading to the $57 billion bailout on the part of the taxpayers. Things would have been so much better, had GM been forced to invest in the technologies and the machines needed to build better cars, instead of lobbying for protection, buying up smaller competitors and turning itself into a financial company.


More importantly, all those actions that have enabled GM to get out of difficulties with the least effort have ultimately not been good for GM itself - unless you equate GM with its managers and a constantly changing group of shareholders. These managers drew absurdly high salaries by delivering higher profits by not investing for productivity growth while squeezing other weaker 'stakeholders' - their workers, supplier firms and the employees of those firms. They bought the acquiescence of shareholders by offering them dividends and share buybacks to such an extent that the company's future was jeopardized. The shareholders did not mind, and indeed many of them encouraged such practices, because most of them were floating shareholders who were not really concerned with the long-term future of the company because they could leave at a moment's notice. What is good for some stakeholders of a company, such as managers and short-term shareholders, may not be good for others, such as workers and suppliers. Ultimately, it also tells us that what is good for the company in the short run may not even be good for it in the long run.


Sometimes regulations help business by limiting the ability of firms to engage in activities that bring them greater profits in the short run but ultimately destroy the common resource that all business firms need. For example, regulating the intensity of fish farming may reduce the profits of individual fish farms but help the fish-farming industry as a whole by preserving the quality of water that all fish farms have to use. For another example, it may be in the interest of other individual firms to employ children and lower their wage bills. However, a widespread use of child labour will lower the quality of the labour force in the longer run by stunting the physical and mental development of children. In such a case, child labour regulations can actually benefit the entire business sector in the long term. For yet another example, individual banks may benefit from lending more aggressively. But when all of them do the same, they may all suffer in the end, as such lending behaviours may increase the chance of systematic collapse, as we have seen in the 2008 global financial crisis. Restricting what banks can do, then, may actually help them in the long run, even if it does not immediately benefit them.


It is not just that regulation can help firms by preventing them from undermining the basis of their long-term sustainability. Sometimes, regulations can help businesses by forcing firms to do things that may not be in their individual interests but raise their collective productivity in the long run. For example, firms often do not invest enough in training their workers. This is because they are worried about their workers being poached by other firms 'free-riding' on their training efforts. In such a situation, the government imposing a requirement for worker training on all firms could actually raise the quality of the labour force, thereby ultimately benefiting all firms. There are many regulations that are pro- rather than anti-business. Many regulations help preserve the common-pool resources that all firms share, while others help business by making firms do things that raise their collective productivity in the long term. Only when we recognise this will we be able to see that what matters is not the absolute amount of regulation but the aims and contents of those same regulations.

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