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GAZETTE
JULY/AUGUST 1985
How do we clamp down on the
problem of Company Fraud?
by
John Bermingham
This article written by a student on the Journalism Course at the College of Commerce, Rathmines, Dublin, has been
selected for the Law Society's Journalism Award 1985.
Students are required to write an article for a newspaper or periodical on some matter of legal interest. The Award is made
by a Committee representative of the Law Society and the Director of the Journalism Course.
O
VER 200 frauds are reported every week to the
Gardai. And there is evidence to suggest that this
middle-class crime is growing fast. The Fraud Squad is
greatly overstretched in handling the scores of suspected
offences reported to it daily. Convictions are only secured
in a small number of cases.
Frauds range from using somebody else's credit cards
to siphoning millions out of a multi-national company.
They can begin when a company runs into difficulties
meeting its liabilities.
Fraud is not confined to individual thefts by deceit. It
includes companies trading fraudulently, i.e. buying,
selling or gaining credit when the company is insolvent.
And the present company law offers generous oppor-
tunities to "cowboys" through its many loopholes.
The Companies Act of 1963 protects the privilege of
limited liability and covers the areas of the formation,
behaviour and winding-up of both private and public
companies.
Limited liability means that the liabilities of share-
holders in a limited company are limited to the extent of
its assets. So if a company goes broke, then the share-
holders do not have to dig into their pockets to make good
the deficiency. This has enabled many companies to
flourish but it is a privilege that has so often been abused
by crooked companies.
All that is needed to form a company is two share-
holders, two directors holding two shares, a registered
office and a company name cleared by the Registrar. In
all, it costs about £200 for a person to set himself up as a
"company director".
While the system has many advantages and is
democratic, it allows companies to flout the rules which
they are likely to do in a recession.
This piece of legislation is twenty years old and what is
more is based on U.K. legislation which was implemented
in the 1940s. Overhauling the law on insolvency has been
promised many times before but John Bruton, the
Minister for Industry, Trade, Commerce and Tourism, is
about to introduce a substantial Bill on the subject
shortly.
This would put dishonest company directors in jail and
debar them from holding directorships for some years.
The legislation would also allow the courts to appoint
investigators to companies and to make directors
personally liable if they fail to keep proper books.
The kernel of the proposed Act is the removal of the
privilege of limited liability in cases where certain actions
by company directors contributed to a company
insolvency.
But at a time when the country needs all the new ideas
and entrepeneurs that it can get, the proposed Act puts
unprecedented shackles on business and details severe
penalties for infringement of any of the proposed laws.
The measures are considered by most of the Irish business
community to be draconian and some of the measures
could be damaging for business.
When John Bruton and his civil servants sat down to
frame the Bill, it is likely that they first examined the
major U.K. insolvency report from Sir Kenneth Cork and
also the White Paper which was born out of that report.
Cork recommended that the court's responsibility
should be widened from dealing with just fraudulent
trading to wrongful trading. "A company would be
trading wrongfully if being insolvent or unable to pay its
debts as they fell due to its incurred liabilities without a
reasonable prospect of meeting them in full," he said.
The Law Society's Company Law Committee agrees
that this new civil liability should be included in the Act
and believes that compensation should be available to
sufferers of loss as a result not only of fraudulent trading
but also of unreasonable behaviour.
The Government's failure to introduce a law requiring
companies to make financial information available to
employees and the public has led to them being brought to
the European Court of Justice by the Irish Congress of
Trade Unions. This Fourth EEC Directive on company
law should have been applied by July 1980, but the
Minister, Mr. Bruton, has said that "the details are
extremely complex and under personal study". Yet he has
refused to meet ICTU representatives to discuss the
Government's apparent reluctance to apply the Directive.
The process of overhauling the law dealing with the
disclosure of information to employees and other aspects
of company law was started two years ago by the then
Minister for Trade, Commerce and Tourism, Frank
Cluskey. But a year after his resignation over the Dublin
Gas deal the prospects of reform are still with John
Bruton.
The Government were forced to go in front of the
European Commission in Brussels in October last and
failed to give a good enough excuse as to why they hadn't
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