The Gazette 1985

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 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.

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.

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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