The Gazette 1985

GAZETTE

SEPTEMBER 1985

Serious Capital Loss in Companies

Gerard McCormack, LL.M.

.40 of the Companies (Amendment) Act, 1983

contains an important new provision which is

proving troublesome and contentious. On the other hand,

it has been described as an invaluable early-warning

system in the case of companies which are in financial

difficulties.

S.40 is of such significance that it deserves to be quoted

in extenso:

40.

— (1) Subject to sub-section (4), where the net

assets of a company are half or less of the amount of

the company's called-up share capital, the directors

of the company shall, not later than 28 days from

the earliest day on which that fact is known to a

director of the company, duly convene an extra-

ordinary general meeting of the company for a date

not later than 56 days from that day for the purpose

of considering whether any, and if so what,

measures should be taken to deal with the situation.

(2) If there is a failure to convene an extraordinary

general meeting of a company as required by sub-

section (1), each of the directors of the company

who—

(a) knowingly and wilfully authorises or permits

that failure; or

(b) after the expiry of the period during which

that meeting should have been convened,

knowingly and wilfully authorises or permits

that failure to continue,

shall be guilty of an offence . . . .

(4) This section shall not apply where the day

mentioned in sub-section (1) is before the appointed

day.

The Second Directive

The terms of section 40 were largely dictated by the

E.E.C. Second Directive on Company Law. There are,

however, some major variations. In particular the

application of the Second Directive is confined to public

limited companies whereas section 40 applies also in

relation to private companies. In the course of the Dáil

Debates the Minister for Industry, Trade, Commerce

and Tourism explained the rationale of the section and its

extended ambit. He said that in the present economic

climate there was a growing number of company failures

and it was now widely accepted among persons and

financial bodies closely involved in such matters that

most of these failures had a common factor: that

company directors and managers do not take appropriate

action when financial difficulties first appear on the

horizon. The provision was being applied to all

companies to bring home to persons the magnitude of

their responsibilities.

These aims are laudable. The

question arises, however, as to whether the section will go

any appreciable way towards achieving the ends set out by

the Minister.

At this point it is worth mentioning that Article 17 of

the Second Directive on which section 40 is substantially

based received a rather hostile reception from the Joint

Oireachtas Committee on the Secondary Legislation of

the European Communities. In their 42nd report they

expressed the fear that Article 17 might precipitate the

disaster it was intended to avert because such a meeting

might lead to disagreement about the extent of the loss

which might in any event be temporary.

The proposed

meeting could also hamper negotiations with third

parties. This general attitude seems to have informed

some official thinking on the topic.

Article 17, in referring to the purposes for which an

Extraordinary General meeting is to be convened,

includes the words "whether the company should be

wound up, or if any and, if so, what measures should be

taken". S.40 does not accurately reflect the wording of the

Directive on this point. However, the words "whether

any, and if so what, measures should be taken to deal with

the situation" include the consideration of winding-up.

During the Seanad debates the Minister refused to accept

an amendment intended to substitute the exact wording

of the Directive.

It was argued in favour of the

amendment that it would act both as a powerful stimulant

and threat in that it would add a thrust and force and

could concentrate wonderfully the minds of the people

calling the Extraordinary General Meeting to discuss the

serious situation. On the other hand, as the Minister

pointed out, if a winding-up was specifically referred to as

being the chief purpose of the section it could frighten

creditors and employees thereby hastening the demise of

the company. The positive aspects in the existing wording

were conducive to a better psychological climate at the

meeting.

It seems, however, that a meeting convened under this

section may be a purely consultative or advisory process.

S.40(3) provides "that nothing in this section shall be

taken as authorising the consideration at a meeting

convened in pursuance of sub-section (1), or any matter

which could not have been considered at that meeting

apart from this section". Absenting appropriate notice of

particular resolutions, it appears that any instructions to

directors passed by resolution at the meeting would have

no legal status.

It was also proposed during the Dáil Debates to make it

obligatory on the directors to convene an Extraordinary

General Meeting where the net assets of a company had

fallen to 75% or less of its called-up share capital

Article

17 permitted national laws to make a meeting compulsory

even if the company's net worth had fallen by less than

50% of the called up share capital. Needless to say, the

Irish Government baulked at the opportunity of making

the provision more stringent, having the view that the

concept behind section 40 was new to Irish law and it was

necessary to minimise the possible dislocation the section

might cause.

285