The Gazette 1981

INCORPORATED LAW SOCIETY OF IRELAND

ML

Vol. 7 5,

No. 7

September 1981

Companies: Lifting the Veil?

I T is not surprising that in a time of recession with Company failures and personal bankruptcies at a high level that calls for added protection of the public are on the increase both in Ireland and in the U .K. What is interesting is that among those calling most firmly for reform are many leading academics. Within recent months. Professors R. M. Goode and L. G. Sealy together with Mr. Michael Whincup have offered criticism in legal journals of various unsatisfactory aspects of the Company Law system which the U.K. and the Republic of Ireland share. Two of those aspects are inter-linked, the protection against personal liabilities in a "one-man" company and the unhappy position of creditors of an unsolvent company, particularly one that is in receivership. The privilege of Incorporation is too lightly given in Ireland. For an outlay of some £ 2 0 0 . 00 to £ 3 0 0 . 00 in duties and fees of one kind or another, and without investing more than £ 2 . 00 of capital, a person can establish a Company with an apparent share capital of £ 1 0 , 0 0 0 , 0 00 and conduct a business through the medium of that Company, successfully avoiding ordinary trade creditors in the event of the failure of the venture. Only if there is blatant fraud, particularly on the Revenue, is a Court likely to "lift the veil" of Incorporation and nail the principal. The theory that the public can be sufficiently informed about the present status of a Limited Company, because of the obligation imposed on Companies to file various documents on the Company's file in the Registry of Companies, is one which does not stand up to serious examination. Even if this system worked, which it does not, there being a current delay of over a week between the lodgment of a document in the Companies Office for registration and the appearance of that document on the file, which files are frequently unavailable for considerable periods and there being no satisfactory up to date monitoring of the obligation to file documents, the range of information required to be disclosed on. the file is quite inadequate. The deficiencies of the Companies Office have received sufficient attention elsewhere recently. If further finance is required to make it efficient can this not be raised by imposing annual charges for maintaining a Company on the Register? To suggest that before giving credit to a Company a trader will check the Company's file, and note the

existence of a Debenture or other encumbrance and wil! realise that he is taking a risk in dealing with that Company on anything other than a cash basis is impracticable. Apart from the commercial reality that anything from 30 to 9 0 days credit will be the norm in that particular business, a trader is likely to find that all his prospective customers are Companies with such encumbrances. Either he trades with them on a credit basis or he does not trade at all. The position of the unscrupulous individual who acquires the cloak of Incorporation is parallelled by that of the established Company which sets up a subsidiary to operate in a particular geographical area or to deal in particular products. Such a subsidiary will frequently be described as a "Company within the X Group" leaving the unknowing layman under the not unreasonable impression that the financial strength of the established parent Company — of indeed all the Companies in the Group — is available to the creditors. Nothing of course could be further from the truth. It is over twenty years since the Jenkins Committee in the United Kingdom recommended that parent Companies should be made liable for their subsidiaries' debts and although there have been a number of notorious cases where substantial Companies have abandoned their subsidiaries, and their creditors, without a backward glance, no legislation to remedy this defect has been introduced either in the United Kingdom or in Ireland. The "Group" is treated as a unit for most, if not all taxation categories and usually to the benefit of the Companies within the Group. Surely the obverse of this favourable treatment should be the acceptance of the concept of Group Liability for each Companys debts. The whole area of floating charges or Debentures gives rise to further criticism. The floating charge itself is a concept unknown to most of the great European trading nations (and indeed was to Scotland until 1972). Following on the four fold increase in receivers in 1 9 80 over 1979 the anomalous position of the receiver appointed under such floating charges or Debentures is attracting mounting criticism. There is increasing evidence that the powers conferred on the Debenture Holder, usually a Financial Institution, over a Company by the Debenture, lessens the attention which the Debenture Holder pays to the day to day financial position of the Company. Secure in the (Continued on page 177)