Mary Coughlan (Donegal South West, Fianna Fail)

I thank the Members of this House for facilitating the early discussion of this legislation. I am very pleased to bring the Companies (Amendment) Bill 2009 to the House. Irish company law is a significant part of the infrastructure underpinning the development of Irish business. It provides the framework that governs how Irish companies conduct their business, communicate with shareholders and other investors and deal with creditors. To remain fit for purpose, company law has to be, and has been, updated and refined regularly since 1963 in response to dynamic changes in the Irish and international corporate environment. The Bill being introduced in this House today is the latest proposed revision of the sophisticated and interrelated suite of Acts and regulations that make up the Irish companies code. Arising from recent experiences in the enforcement of company law in the banking sector in particular, I consider it necessary to introduce a small number of important changes to company law.

As the House is aware, a wide-ranging analysis of current company law is well advanced and it is my intention to publish very significant legislation containing 1,250 sections next year. In the meantime the intention 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 companies that are licensed banks to their directors and to persons connected with them. It will amend certain existing provisions relating to Irish registered non-resident companies to meet European Commission concerns.

On my initiative, extensive consultations took place with the Director of Corporate Enforcement in drawing up the amendments contained in this Bill. His experience of the operation of company law on the ground and of the issues that arise when carrying out investigations of possible breaches of these laws are a source of vital and practical feedback. Recent experience has shown that compliance with company law could be enforced more effectively if a number of targeted amendments were made to existing company law.

I will explain each of the amendments proposed in the Bill in greater detail later but, in summary, the Bill will improve overall enforcement of compliance with company law by, inter alia, providing for the ODCE's right of access to certain company and third party records and allowing for extensions to search warrants granted to the office. It will introduce 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 will lighten 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 will amend existing requirements relating to the disclosure of loans to directors in the annual account of licensed banks.

One of the issues the Bill addresses relates to the large amount of documents and computer records seized by gardaí as part of the ODCE's investigation into Anglo Irish Bank on the bank's premises. This issue has general application and could be relevant to any large investigation. Before examining the seized material, its legal professional privilege status must be determined. To this end, on 13 March last, the ODCE applied to the High Court for its approval of a mechanism agreed by the parties whereby such privilege could be decided.

While the High Court judge stated that the method of resolving difficulties in the manner outlined to the court was "eminently sensible", he did not believe that section 23 of the Act as it stands provided the court with a statutory authority to outsource a function currently reserved to it. The judge therefore could not approve the proposed procedure. As I will be explaining shortly, section 6 will give legislative underpinning to an appropriate mechanism similar to the one proposed to the High Court.

The ODCE reports that the Anglo Irish Bank investigation is the largest and most complex investigation it has undertaken since the office was established in late 2001. According to the director, a substantial amount of further work needs to be done to complete the examination which he proposes to conclude by the end of this year. 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 who is also empowered under the Central Bank Acts to make rules to change conditions attaching to bank licences. The Financial Regulator is proposing to amend its rules on disclosure of loans by banks to their directors and connected persons - areas that are also 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.

I turn now to the provisions of the Bill and explain what each is designed to achieve. Section 2 affects the generality of companies and not simply the small number of companies that hold banking licences issued by the 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 or her company. However, a director must declare any such interests to his or her fellow board members. Failure to do so could make him or her liable to a fine and to have to account to the company for any profits 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 where a company fails to allow the Director of Corporate Enforcement to access this information. This will assist in enforcing compliance with the Companies Act provisions.

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 of Corporate Enforcement 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 the 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 already been provided through section 19(3) of the Companies Act 1990 and the director has informed me 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.

With regard to 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 would be important for the continuity of any ongoing investigations that relied 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. Although this can 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.

The Bill also provides 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 that this extended power is used only 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 must put in place before the extended powers 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 believes it necessary to avoid possible concealment, falsification, destruction or disposal of relevant material. It requires 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. 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 6 makes a number of amendments to section 23 of the Companies Act 1990 which protects a person from having to disclose certain information under Part II of the Companies Act 1990. The explanatory memorandum inadvertently referred to this as Part III. The protected information in question in Part II is that which, in the opinion of the court, the person would be entitled to refuse to disclose on grounds of legal professional privilege.

Although the 1990 Act allowed for a blanket prohibition on the seizure of such material, the Director of Corporate Enforcement reports that 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, 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 whereby 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 that were expressed by the High Court during the hearing on 13 March 2009, to which I referred.

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 very important provisions contained in section 31 of the Companies Act 1990. This prohibits companies from making loans to their directors, except 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 that the company has the available resources to pay its creditors as their debts fall due. This prohibition is a very important safeguard in company law and it 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, ODCE, 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 that a company director was aware he was in default of the company law prohibition on loans to directors.

Section 7 of this Bill therefore substitutes section 40 of the Companies Act 1990, which sets out the penalty for breaches of section 31 of 1990 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 effectively prove wilful default.

Section 8 amends sections 41 and 43 of the Companies Act 1990 and deals with the disclosure in the annual accounts of loans, namely, 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 some amendments that relate solely to companies that are licensed banks. As section 9 also deals with this subject I intend to 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. Most companies must disclose such data on an individual named basis in their annual accounts but the accounts of companies licensed as banks require a lesser degree of disclosure. This was supplemented by a requirement to keep a register of relevant loans, details of which had to be disclosed to shareholders in advance of the banks annual general meeting. 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.

The generality of companies must disclose in their annual accounts prescribed details, as set out in section 42 of the Companies Act 1990, of all such loans to named individuals. To date, the annual accounts of companies that are licensed banks were obliged to disclose aggregated data on such loans, where amounts were still outstanding at the end of the financial year. Given this different disclosure regime, companies which are licensed banks are also currently obliged to keep a statutory register of loans to named directors and connected persons. Particulars from the register are also included in a pre-AGM statement.

The Companies (Amendment) Bill 2009 changes the disclosure requirements for the banks in the following ways. The Bill provides that 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 will have to be disclosed separately in the annual accounts, as opposed to in aggregate format. The maximum amount outstanding during the year will also be disclosed and 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 will also have to 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 the statutory register because of its value as a source of up-to-date data on current loans. However, it provides that information which will, as a result of the Bill or other requirement such as the Financial Regulator's rules, be required to be published in the accounts, need not also appear on the pre-AGM statement.

The Bill provides a specific right to access for the Director of Corporate Enforcement to the statutory register of loans to directors and connected persons, so that he can take enforcement action if necessary.

Section 10 amends sections 43 and 44 of the Companies (Amendment) (No. 2) Act 1999 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 a company wishing to register in Ireland to have a director resident in the State, or alternatively through a process involving the Revenue Commissioners and the Companies Registration Office, to show it has a real and continuous link with economic activity that is 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 Director of Corporate Enforcement in every possible way, including through the provision of appropriate statutory powers and resources to that office. My objective in proposing these legislative changes to the Government and the Oireachtas is twofold. As I observed recent events unfold in the banking sector, I was anxious to ensure that the Director of Corporate Enforcement had available to him or her an up-to-date suite of enforcement powers that were fit for purpose. I wanted to ensure that from a business perspective our body of company law was relevant, transparent and proportionate as regards the facilitation of the conduct of business in Ireland and for reasons of 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. On that basis, I commend the Bill to the House.