MP calls for tougher legislation to deter abuse by directors, auditors

Labour MP Josè Herrera yesterday called for tougher legal provisions against accountants and auditors in cases where a company's accounts were shown to be doctored to give a misleading picture.

Speaking during the debate on the Set-off and Netting on Insolvency Bill, which also amends the Companies Act and several financial laws, Dr Herrera also called for directors to be held civilly liable for their actions.

Dr Herrera said there was no doubt that Maltese law was currently lacking with regard to protection for creditors. What had happened in Malta a year or so ago, when a supermarkets chain and other companies had collapsed, had focused attention on the existing legislative shortcomings, not least over the picture presented by their accounts.

The government was now trying to address the problem, re-establishing the duties of directors and introducing a company recovery procedure.

His view, however, was that the obligations of the directors as listed in the bill were not very different from existing legislation, except for the provisions on insider dealing. What was needed was not only to describe the duties of the directors but to raise directors' civil, and not just criminal, liability.

As for the actions of accountants and auditors, following allegations made last year of documents having been doctored, the bill laid down that accountants and auditors were to respect international accounting standards and international standards on auditing. But this existed already and only amounted to lip service.

What was needed was that where abuses took place and documents were doctored, the accountants and auditors would be held personally liable for their actions.

Dr Herrera welcomed the provisions of the bill introducing set-offs in cases of insolvency or bankruptcy. What needed to be clarified was the grading of creditors, he said.

Turning to the Company Recovery Procedure, Dr Herrera said this element too was welcome. In terms of the bill, a court could appoint a Special Controller to temporarily take over the running of a company in difficulties following a request by the company itself, the directors, or creditors of the company "representing more than half in value of the company's creditors".

He felt that this threshold was far too high and did not afford protection to small creditors, even though they were the most at risk of going under when they were not paid promptly. He felt the threshold should be reduced to 10 per cent. The courts could, after all, dismiss applications for the appointment of a Special Controller when such requests were seen as frivolous.

Notary Joe Cilia (MLP) said financial and business regulation needed to be constantly updated, not least to protect the country's credibility.

Regulatory authorities needed to take initiatives to protect consumers, creditors and others when companies were wrongly, or abusively, run.

Referring to the new set-off and netting arrangements being introduced for creditors who were also debtors, Notary Cilia said the arrangement made sense and one hoped it could also be adapted to the civil service, particularly with regard to taxation.

Referring to the Priceclub case, Notary Cilia said hundreds of companies had been affected by this case. How had a company with an annual turnover of Lm24 million reached this stage? What had the regulatory authorities been doing?

The presentation of abridged accounts was clearly not enough to present a clear picture of a company's performance.

The regulatory authorities needed to ensure that they afforded the necessary protection to all involved before companies ran into serious difficulties.

Some people had a history of abuses, forming one company after another, causing a string of problems for many people while they operated under limited liability companies. Why were such actions allowed to go on?

How did such people, despite their history, even manage to get what they wanted from the banks?

Did legislation include some form of blacklisting of such people?

Unfortunately this bill did not include provisions on credit term limits.

The bill also did not change much regarding what would happen when there were disagreements among directors, particularly in small companies. There were situations where even the annual accounts were not presented after one of two directors refused to sign them. A mechanism was needed to protect companies from such situations.

Notary Cilia said the bill was seriously lacking in that it did not make reference to the accountability of chief executive officers, chief financial officers and chief operating officers.

Earlier in the sitting, Mr Noel Farrugia (MLP), resuming his speech from Monday's sitting, said a bill such as this had to be seen against the background of EU membership, particularly the dependence on imports. EU membership would mean higher import costs and, hence, a loss of competitiveness, which could lead to the collapse of many companies. Companies which received state aid would have problems to export to the EU.

It would be better for Malta to stay outside the EU and have the flexibility to source its imports from the most favourable markets.

Ms Marie Louise Coleiro (MLP) said the opposition disagreed with the way the bill was removing incentives given to industry in terms of the Business Promotion Act, which this bill also amended. This removed the flexibility Malta needed to attract and retain investment.

There was more to attracting business than simply building up on the legal framework. There also needed to be the right environment for industry.

It was important that Malta could compete on a level playing field with other countries. This was true not only for the entrepreneur but also for his workforce, but in fact a level playing field did not even exist in Malta itself. Some entrepreneurs observed the law in every detail, while others somehow got away with much less. A good law was useless without a proper enforcement structure.

This bill, Ms Coleiro said, had serious implications and needed to be further explained for the sake of workers.

Labour MP John Attard Montalto observed that this bill was also amending the Malta Freeports Act so that the companies which operated within the Freeport - OilTanking and Saybolt - would no longer enjoy the financial (tax) incentives they currently enjoyed. They would however be eligible for incentives under the Business Promotion Act.

Dr Attard Montalto said he wanted to declare that he had worked for such companies as legal adviser.

For the sake of national credibility as well as for those companies, he felt the provisions of this amendment should not apply to existing companies.

Removing those financial incentives could be detrimental to them, even though they would be eligible for incentives under the Business Promotion Act.

These companies had decided to come to Malta and had invested millions of liri here, because they were promised the tax incentives. To now remove those incentives would send a very bad signal to potential investors because this amounted to shifting the goalposts.

Indeed, one of the existing companies, OilTanking, had a high international profile and was currently considering further major investment running into many millions of liri.

The proposed amendment, however, was a disincentive.

He felt that the two companies should be given a choice of either remaining under the existing laws or shifting to the Business Promotion Act. The government, he stressed, should consider this suggestion and not risk the loss of investment running into millions of liri.

Winding up, Finance Minister John Dalli said the situation of the two companies had been actively considered in the accession talks with the EU. The package of the Business Promotion Act included tax exemptions up to 2011, after which they would enjoy incentives in the sense that 60 per cent of their investment would be considered as tax credit. They would thus effectively enjoy a tax holiday for a very long time.

He had had talks with OilTanking last week and could assure Dr Attard Montalto that the proposed investment, which would double the company's capacity, was well on stream.