The Gazette 1985

GAZETTE

SEPTEMBER 1985

Serious Capital Loss in Companies

by Gerard McCormack, LL.M.

S .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. 2 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. 3 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. 4 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 5 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