The Gazette 1981

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INCORPORATED LAW SOCIETY OF IRELAND
ML
Vol. 7 5, No. 7 September 1981
Companies: Lifting the Veil?
IT 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)