Brian Walsh (Galway West, Fine Gael)
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I thank the Ceann Comhairle's office for allowing me to raise this matter, which is of some importance to small businesses, ordinary workers and the Revenue Commissioners. Recent years have witnessed the proliferation of what could be described candidly as an underhand and damaging practice by which viable companies deliberately accumulate debt before winding up and starting again as a new entity, leaving a trail of unpaid creditors in their wake. The companies that engage in this practice, in which a debt-free business arises in a new guise from the ashes of a failed entity, are commonly referred to as phoenix companies.

Necessarily, business ventures entail an element of risk. It is inescapable that some businesses will fail. For those who try in business but fail, it is important that supports are in place in order that the risks associated with such ventures do not become so great as to constitute a deterrent against the entrepreneurial spirit which helps to drive and grow our economy. A clear distinction must be made, however, between companies with a genuine inability to pay their debts and those which deliberately contrive to avoid paying debts. I am aware of some cases in which companies have closed for business on one particular evening, owing significant amounts of money to the Revenue Commissioners and small businesses among others. However, the following morning the same directors have opened under the guise of a new company in the same premises debt-free, leaving small suppliers to suffer and leaving the taxpayer to pick up significant bills. The prevalence of this practice and the extent of its impact on the Exchequer should not be underestimated. Last year, the business monitoring agency, BusinessPro, calculated that as many as one in 20 new companies showed classic phoenix characteristics, such as common directorships with their failed predecessors. In many of these cases, pension contributions, wages and moneys owed to small suppliers are left unpaid while accumulated tax bills are left outstanding at considerable cost to the taxpayer. The problem has been identified to the Revenue and approximately 700 phoenix companies are currently the subject of risk focused monitoring to ensure enforcement measures can be taken expeditiously should issues of non-compliance arise again. However, monitoring a phoenix company after it has re-formed and jettisoned its debt is to close the stable door long after the horse has bolted. It is of little consolation to the Revenue Commissioners, unpaid employees who are out of pocket or small suppliers that the unscrupulous directors of a company will find it more difficult to get away with their actions a second time.

Other regulations that purport to safeguard against the activities of phoenix companies include the requirement under company law of a liquidator to report on the conduct of company directors. I am aware of cases of collusion between directors and amenable creditors whose debt is exaggerated to secure greater voting rights in the appointment of co-operative liquidators. In some cases, bogus creditors are created to give stronger voting rights to those who wish to appoint a friendly liquidator. Such practices could be prevented if, for example, an independent auditor were required to verify the authenticity of invoices pertaining to debts in certain instances.

What is certain is that strengthened regulation is required to prevent phoenix type activity by companies in the first instance in the interests of small businesses, employees, ordinary workers and the taxpayer. In these circumstances, I ask the Minister to consider what legislative options may be open to him to strengthen safeguards against this costly and inequitable practice.

Richard Bruton (Dublin North Central, Fine Gael)
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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.

Brian Walsh (Galway West, Fine Gael)
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I thank the Minister for his comprehensive and helpful reply. The main loser in the circumstances I have described is not the small suppliers, although they also incur losses, but the Revenue Commissioners to whom VAT, PRSI and PAYE remain unpaid. It is galling to see the directors establish new companies immediately after closing phoenix companies. I am aware of several cases in my constituency of companies closing on one evening and re-opening under a different guise the following morning. The powers available are clearly not restrictive enough and the provisions of the Companies Acts clearly not sufficient to deter unscrupulous company directors from engaging in the types of behaviour I have described. The current provisions must be strengthened. In that regard, it may be necessary for the Minister for Finance to introduce legislation to strengthen the hand of the Revenue Commissioners in dealing with the individuals involved in such companies.

As I noted the main loser in the case of phoenix companies is the taxpayer who incurs losses as a result of the non-payment of taxes. Some of the examples referred to me indicate that the moneys not collected by the Revenue Commissioners could amount to tens of millions of euro, which is a significant amount of money. Steps should be taken to address this issue more comprehensively.

Richard Bruton (Dublin North Central, Fine Gael)
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As Deputy Walsh noted, the Revenue Commissioners are monitoring approximately 700 cases. In 2011 around 70 cases involving more than 100 struck off companies were investigated by the ODCE. At least 50 were deemed not to be suitable for legal action and remain under investigation. In the remaining 20 cases disqualification proceedings were initiated or being actively contemplated at year end. The ODCE obtains a lot of co-operation from many bodies, not just from the Revenue Commissioners, but also from the Construction Industry Monitoring Agency which investigates complaints of non-compliance with registered employment agreements in the construction sector, from the Pensions Board and the Office of the Pensions Ombudsman in respect of unpaid pension contributions, and from the Department of Social Protection in respect of outstanding redundancy liabilities. Information is gathered by the ODCE in an attempt to identify unliquidated insolvent companies or cases of abuse. The liquidator has the obligation to report company directors within six months of his or her appointment.

The system is designed to catch these cases, but if the Deputy has specific information or proposals that will help to tighten this up, I will certainly have it or them examined. I will certainly examine whether a role for auditors would help. Obviously, we have to be conscious of regulatory burdens and obligations; therefore, we would have to assess whether the measure would confer more benefits in catching wrongdoing over the cost that might be imposed on those who are doing their business according to the books.