Liquidation rules will crack down on criminality

BUSINESS OPINION: Limited liability has been central to much of the business done in this part of the world during the past century.

Entrepreneurs and business people generally have availed of a mechanism designed to encourage risk-taking by ensuring that if a venture should go disastrously wrong, those behind it lose their investment but not their homes, their clothes and anything else disgruntled creditors might look for.

A problem with limited liability here has been that some rogues have been happy to use it as a cover for acting irresponsibly and even criminally. They did so safe in the knowledge that the chances of their being brought to book were all but non-existent.

There are numerous company law offences on the statute books, some of which carry prison sentences, but the law has been unenforced. Up to recently there were one and a half civil servants in the Department of Enterprise, Trade and Employment charged with overseeing the workings of company law, something they were expected to do while keeping up with their other duties.

It was an extraordinary and scandalous situation. People formed companies, traded, ran up debts to suppliers and the Revenue, and then walked away with whatever they could carry. This was fraud and theft, crimes which in some cases led to job losses in affected supplier companies. If the theft had involved climbing in windows and stealing, then the garda would have immediately become involved, and properly so. However because the thieves had had the sense to incorporate companies, no such inquiries occurred.

Now the State is doing something about the whole matter. The Office of the Director of Corporate Enforcement (ODCE) has been established and the director, Mr Paul Appleby, is hoping that by June of this year a new legal provision will be invoked concerning the obligations of liquidators. In a nutshell it will mean that liquidators will file reports to the OECD and - unless Mr Appleby relieves them of the obligation - must apply to the High Court to have directors of liquidated companies restricted in their future use of the limited liability privilege.

Of course the potential downside of this is that people who in good faith start up a business which eventually goes wallop, might find themselves being dissuaded from re-entering the fray. If not properly managed it could act to dampen entrepreneurship, something the State would certainly not like to see happen. Mr Apply has been at pains to point out that he does not see it as his role to hammer the directors of companies which fail. IBEC, the employers organisation, is happy that Mr Appleby is pro-business and has the right feel for what is required. Time will tell.

Liquidators, being for the most part human, may feel less than enthusiastic about shouldering new responsibilities, especially ones involving legal fees, but most agree that something needs to be done. Practitioners are familiar with the provisions which already apply in Northern Ireland and Britain. No-one argues that the current state of affairs here should persist.

The law already allows liquidators report certain matters to the High Court but very few such reports are made, primarily because the legal costs involved would eat into the resources available for distribution to creditors. (The final call on whether to report a matter to the courts is usually taken by the creditors' committee, not the liquidator.) This absence of a compulsory reporting requirement has meant that a large number of company law offences have not come to light. A large area of criminal activity has over the years been concealed and ignored.

Mr Appleby's office will be able to apply to the High Court for an order allowing him to examine the books of a company in liquidation, to examine on oath directors of the company, to seize money and property, to arrest directors and to restore money or property taken from the liquidated company. Use of these powers, if they are ever used, will constitute something of a sea change in business affairs here.

For many rogue directors restriction might not be the most scarifying development which could occur. However the applications for restriction brought to the courts by liquidators will bring misconduct to light which heretofore has remained hidden. This then should form the launch pad for the policing, by the ODCE and for the first time, of whole swathes of company law offences or, more colloquially, white collar crime.

At present liquidations are running at about 400 per year. Most involve no bad faith. The UK experience has been that about one in three lead to applications to the courts - again many of these would not involve any criminality.

The UK provisions have existed since the 1980s. Undoubtedly the most extraordinary aspect of the new measures being introduced here is that they were not put in place years ago.

The decision to introduce the measures is part of the overhaul of company law affairs put in place by the Tanaiste, Mary Harney. The PDs are a reformist party, one which pleases its small base by making ground-breaking decisions. (Taxi deregulation being another case in point.) Fianna Fail tries to keep its much larger base happy by trying never to upset anyone. Long may the PDs remain a small party!