Committee Reports::Report No. 02 - Irish Shipping Limited::03 April, 1985::Report

The Joint Committee was in the process of completing a report on Irish Shipping Limited when the Minister for Communications announced on 14 November, 1984, that the Government had been informed of the decision of the company to petition the High Court to appoint a Liquidator on the grounds that the company was unable to pay its debts, including both contingent and prospective liabilities. Notwithstanding this development the Joint Committee decided to continue with its examination and, in particular, the examination of those matters which it considered significant in relation to the demise of the company. It decided also to make recommendations concerning aspects of its examination which not only had specific relevance to Irish Shipping Limited but, in the broader context, have relevance to the operational policies of other commercial State-sponsored bodies.

I. BACKGROUND

1.Irish Shipping Limited was established in March, 1941. Its primary objective was the provision of sufficient shipping capacity to ensure the availability of vital supplies during the Second World War. The company had been incorporated with authorised share capital of £200,000 and it had borrowing powers up to £2m. It operated 15 vessels during the war years, nine of which were purchased outright and six were taken on long term charter, and the aggregate carrying capacity was 77,851 deadweight tons (d.w.t.). After the war the Government decided that the company should remain in existence and maintain a strategic fleet of 250,000 d.w.t. In 1963 the strategic fleet requirement was reduced to 155,000 d.w.t. It was stated in the Second Programme for Economic Expansion published that year that additions to the company’s fleet would be considered when commercial considerations so justified.

2.The company recorded losses of £2.3m in the period 1963 - 1967 because of the depressed state of the international market with the result that its’ capital and reserves had practically disappeared. In 1966 it defined its detailed objectives for the first time together with its major operational policies. The cumulative profits before taxation and extraordinary items were £27.7m in respect of the period 1967 - 1982. It was during this period that it undertook a significant diversification programme in order to secure a profitable company which could not be attained on the basis of shipping activities alone.

3.In January, 1973, the company and the Reardon Smith Line, Cardiff, by Memorandum of Agreement, decided to form a pool of shipping whereby both companies would trade together as Celtic Bulk Carriers. Subsequently, Celtic Bulk Carriers found itself with more business than it could service from the partners’ pooled ships and it chartered in vessels for short and long term durations. In December, 1982, the Reardon Smith Line informed Irish Shipping that they were no longer able to meet their obligations arising from the chartered in agreements.

4.Irish Shipping recorded a deficit totalling £48.237m for the financial years ended 31 March, 1983 and 31 March 1984. In 1984 the Government provided a guarantee of $12.5m in respect of the purchase of two vessels and a guarantee for short term borrowings of approximately £12m to meet the company’s projected cash deficits in the period up to the end of 1985.

5.In 1981 Oceanbank Developments Limited was incorporated as a subsidiary company in which Irish Shipping owned 75% of the shares and the remaining 25% were held by Allied Irish Holdings Limited. Oceanbank purchased three major investments from Irish Shipping early in 1982. In 1983 Belfast Car Ferries became a subsidiary company and in January, 1984 Oceanbank sold its shares in the Insurance Corporation of Ireland for which Irish Shipping received £9.525m.

II. HOLDING COMPANY

(a) Own Fleet

6.Details of the dead weight tonnage (d.w.t.) of the company’s own fleet and the number of ships involved are given in Table 1. The number of ships in the fleet varied from 21 in 1963 to six in 1984 reflecting both a decrease in the number of ships and an increase in the individual tonnage of ships over the period. References were made repeatedly in the company’s annual reports to the volatile nature of the international tramp shipping market because of the supply/demand imbalance. In 1966 the company defined its objectives as follows:

“within the framework of a profitable company to provide, maintain and operate efficiently and economically a basic fleet of vessels under the Irish flag together with the necessary organisation, management and personnel to run this fleet. The aggregate size and composition of the basic fleet to be reviewed and agreed from time to time with the Minister for Transport and Power.”

The company subsequently embarked on a diversification programme as it recognised that a profitable company could not be attained on shipping activities alone. An analysis of the operating surplus of the company (Table II) shows that in the period from 1976 to 1984 the company’s own fleet operation recorded only a minimal operational surplus on two occasions while the aggregate losses for the period were £15m. This highlights the financial weakness of the company relative to its own fleet operations and its very real dependence on the financial results of its other activities to sustain its overall operations.

7.In the 1970’s it was apparent that there were poor prospects of profit from a Western style deep sea operation which was capital intensive and which generated low returns, if any, on the investment. Western ship owners were unable to compete with the low operating costs which were particularly associated with Far Eastern vessels flying a flag of convenience and it was recognised in shipping circles that the profits obtained on the disposal of ships enabled a number of Western international tramp shipping companies to continue to trade. In the period 1973-1982 Irish Shipping realised a profit of £3.9m on the sale of deep sea ships. Between 1970 and 1979 the company built eight dry cargo ships at a total cost of £33m and purchased two car ferries at a cost of £17m and this capital investment of £50m was financed by the company without recourse to the Exchequer. During this period there were considerable oscillations in the Tramp Time Charter Index reflecting the supply/demand imbalances in the international tramp shipping market (Table III). From mid-1981 onwards the speed, severity and duration of the recession created chaos in the tramp shipping market and the operational results associated with the company’s own fleet for the financial years 1982, 1983 and 1984 showed an aggregate loss of £12.8m.

(b) Strategic Fleet

8.In 1946 the tonnage of the strategic fleet was established at 250,000 d.w.t. and it was revised to 200,000 d.w.t. in 1959. It was acknowledged in the Second Programme for Economic Expansion, 1963 that the then dry cargo fleet totalling 155,000 d.w.t. was adequate to meet strategic requirements and the company was relieved of the responsibility of expanding the fleet until commercial considerations justified such action. In 1984 the tonnage of the company’s fleet amounted to 246,411 d.w.t. consisting of two panamax and four handysize vessels, although the company was still subject to the strategic fleet requirement established in 1963. A comparison of the company’s own fleet tonnage with the strategic fleet requirement is given in Table 1.

9.The Joint Committee was informed that the strategic fleet requirement established in 1963 had not been reviewed formally since that time. It questions the relevance of such a requirement in the absence of formal reviews. It believes that it was unreasonable to expect the company to operate to an objective which had not been reviewed over a 21 year period. In the light of this disclosure the Joint Committee recommends that every commercial State-sponsored body be obliged to carry out a review of its objectives every three years and that a statement of these objectives be incorporated in its annual report and accounts.

10.In June, 1980, the Government, decided that the company should place an order with Verolme Cork Dockyard for the construction of a 71,000 tonne bulk carrier at a cost of £14.2m to the company and that the balance would be paid by way of voted moneys. The Joint Committee’s predecessor, in the course of its examination of the company in 1981, heard evidence that the company had not proposed to build such a ship at that time as it maintained that the purchase was “somewhat out of phase” with its plans. However, in the company’s annual report for the financial year ended 31 March, 1981, it was stated that “the placing of the order will not unduly limit the commercial prospects of Irish Shipping.” It was expected that the placing of the order at Verolme Cork Dockyard would help with the dockyard’s potential unemployment problem. In the light of the company’s poor operating profit from its own fleet, the Joint Committee considers that it was unlikely that the company would have been able to generate sufficient profits to service the borrowings associated with the purchase of the vessel even at a substantially subsidised cost.

11.The Joint Committee deplores the fact that the Board of directors of Irish Shipping did not inform the Department of Transport until September, 1982, of the details of the substantial chartered in contracts entered into by the company on its own behalf and in conjunction with Celtic Bulk Carriers between September, 1979, and July, 1981, notwithstanding the fact that two Bills to accommodate the purchase of the Irish Spruce (i.e. the Irish Shipping (Amendment) Act, 1980 and the Irish Shipping Limited Act, 1982) had been enacted during that period. The Joint Committee concludes that -

(a)the absence of this information left the Minister and Members of the Houses at a severe disadvantage when enacting the legislation;

(b)failure to inform the Minister of the situation should have merited a request for the resignation of the Chairman and the Board of directors of the company;

(c)independent assessors should have been appointed to report on the financial situation of the company as a matter of urgency.

The Joint Committee believes that if the investment assumptions on which the decision to purchase the Irish Spruce had been reviewed jointly by the company and the Department on a regular basis, the significant factors associated with the chartering in agreements would have become apparent much earlier. It recommends that, on the implementation of a major investment or reorganisation decision by a State-sponsored body, a report on the validity of the investment assumptions on which the decision was based should be prepared by the body in each of the following three years. This report should be submitted each year to the sponsoring Minister on the anniversary of the decision.

12.The Irish Spruce was purchased by a Japanese finance company and leased to Irish Shipping on a “Bareboat” charter and the Government gave a guarantee of the liabilities arising from the charter. At 25 July, 1984, the Government’s liability was £38.9m which represents the amount of the early termination payment at that date and the certified cost of the vessel to August, 1984 was £32.3m including delivery incentives. The Minister for Communications when announcing in the Dáil the decision of the company to petition for the appointment of a Liquidator stated that “the position in relation to the Irish Spruce requires separate consideration.” The Joint Committee sought to ascertain from the Department of Communications what the Government’s proposals are with regard to the vessel but that information was not made available to it. However, the Minister informed the Dáil on 14 February, 1985, that the Irish Spruce formed part of the Irish merchant fleet and that he would make an announcement if there was any change in that status.

(d) Slaney Venture and Celtic Venture

13.The Slaney Venture and the Celtic Venture were purchased by Irish Shipping in June, 1984. In the debate in the Dáil on 11 April, 1984, on the Second Stage of the Irish Shipping Limited (Amendment) Bill, 1984 the Minister for Communications stated that “faced, therefore, with an increasingly critical financial situation Irish Shipping Limited recently (i.e. January, 1984) entered into negotiations with the foreign owners of the nine chartered in vessels with a view to seeking some reduction in the financial burdens of the longterm charters....................... It was part of the agreement with the largest ship owners concerned from whom the greatest of concessions were obtained that the company would purchase for $42m two of the chartered in vessels, the Slaney Venture, a panamax vessel of about 62,000 tons deadweight, constructed in 1982 and the Celtic Venture, a handysize vessel of about 32,000 tons, constructed in 1983. The Company’s position is such that it had little choice but to purchase the two vessels under long term financing arrangements if its short term financial commitments, which are at present extremely onerous, are to be reduced to tolerable levels.” The two vessels were purchased by way of loans of £35.5m of which $12.5m was guaranteed by the Exchequer. The Joint Committee heard evidence^* from officials of the Department of Communications that the Slaney Venture cost $23m and the Celtic Venture cost $19m. It is understood that the Celtic Venture was sold at auction in January, 1985, for $7.5m.

14.The Joint Committee fails to understand the rationale for the purchase of the Slaney Venture and the Celtic Venture in the light of the following -

(a)a report of the Commission of the European Communities on the State of the Shipbuilding Industry in the Community [Ref. COM(84) 550 final] disclosed that the contract price for orders of new vessels as charged by Japanese and Korean yards in 1983 for two similar vessels was $30m;

(b)it was generally recognised that there was an oversupply of international tramp shipping tonnage in the market place;

(c)the low level of international tramp shipping rates could only have meant poor earning prospects;

(d)it was doubtful whether the target rate of return^** as required by Government guidelines would have been achieved by the investment;

(e)the purchase had the effect of increasing the company’s own fleet to 246,000 d.w.t., almost 100,000 d.w.t. in excess of the strategic fleet requirement.

In the Joint Committee’s view the chartering of the vessels was ill advised. While there may have been short term advantages in purchasing the vessels because of the related concessions obtained rather than chartering them, the Joint Committee considers that no significant solution to the company’s long term problems could have been achieved by their purchase. The Joint Committee sought unsuccessfully to obtain from the company clarification of the purchase price of the two vessels and the related concessions obtained in the chartered in rates. In these circumstances the Joint Committee was not in a position to fully evaluate the expenditure of $42m by a commercial State-sponsored company which was supported by State guarantees of $12.5m.

III. CHARTERED IN OPERATIONS

15.The objects for which Irish Shipping was established are stated in its Memorandum of Association to include the following: “..... to build, construct, purchase, take in exchange, charter or otherwise acquire..... ships and vessels, or shares or interests in ships and vessels.....”. During the initial years the company operated 15 ships, nine of which were purchased outright and six of which were taken on long term charter. By Memorandum of Agreement dated 10 January, 1973, Irish Shipping and the Reardon Smith Line decided to form a pool of shipping consisting of seven vessels from Reardon Smith and four vessels from Irish Shipping and with this pool of shipping both parties traded together as Celtic Bulk Carriers. The agreement provided for the sharing of profits and losses in the same proportion. The Joint Committee understands that the agreement was joint and several i.e. in the event of one of the parties being unable to discharge its liability the other party would have to accept full responsibility. From 1973 onwards Celtic Bulk Carriers found itself with more business than it could service and it chartered in vessels for short and medium/long term periods. These vessels were chartered in on behalf of the pool by one or other of the partners but this could not be done without the consent of the other. Table IV gives details of the long term chartered in vessels from 1973 to 1991.

16.The directors Report and Statement of Accounts of the company for the financial year ended 31 March, 1973, gives a brief outline of the setting up of Celtic Bulk Carriers and it includes the following statement: “This is our first venture into this sort of arrangement and there is every indication that it will be highly successful.” The Joint Committee would have expected that, on disclosure of the 1973 Memorandum of Agreement between Irish Shipping and the Reardon Smith Line, the Department of Transport and Power would have -

(a)sought the terms of the Agreement and provided for periodic reviews of it; and

(b)satisfied itself with regard to the implications of the joint and several clause incorporated in the agreement.

It recommends that every commercial State-sponsored body be obliged to give prior notice in writing to its sponsoring Minister with regard to -

(a)the signing of agreements which would have the effect of creating significant off balance sheet liabilities;

(c)the establishment of substantial or potentially substantial joint ventures and subsidiary companies

and that details of significant off balance sheet liabilities, which, inter alia, would include leasing, guarantees and other commitments, should be incorporated in the annual reports of these bodies.

17.In 1977 it was decided that the Reardon Smith Line would withdraw three of their ships from the pool and subsequently the profits and losses resulting from the operation were split on a 50/50 basis. When Irish Shipping’s share of the responsibility for the profits and losses was increased from 4/11 ths to 50 per cent the board of the company should have been informed by its representatives on Celtic Bulk Carriers, and when informed, should have approved or rejected the increase. The Joint Committee has no evidence to suggest that the matter was considered by the board of the company. In this connection it recommends that the directors appointed to boards of subsidiary companies or representatives appointed to partnership type agreements by the main board of the company should be given clearly defined guidelines with regard to their authority and responsibility. Furthermore, the minutes, or a resumé of them, incorporating the major decisions of subsidiary companies should be circulated to the main board.

18.The following statement was included in documentation submitted by Irish Shipping to the Joint Committee:

“CBC^* ever anxious to increase its contract business which had proved so lucrative in the past decided to compete for contracts to carry coal ................. To compete for coal contracts CBC had at its disposal vessels suitable for the purpose i.e. the larger bulk carriers known as panamax vessels, 50,000/70,000 d.w.t. The question of building some of these vessels was considered, but the cost of building, financing and operating these vessels from a base in Western Europe was much higher than the cost at which such vessels could be chartered from an owner based in the Far East, flying a flag of convenience. Chartering by itself would make no contribution to the solution of the problem of fleet replacement which both partners faced at the time. Consequently, the question of securing equity rights in some of the chartered vessels was explored.”

The Joint Committee heard evidence^* that for approximately an additional 10% of the quoted chartered in rates a 50% equity interest could be acquired in some of the vessels at the end of their chartered in period. It was informed that the decision to charter was influenced by -

(a)the rampant inflation prevailing in Ireland at that time would have pushed the cost of operating purchased vessels to an unacceptable level;

(c)the fact that the company was anxious to maintain an Irish merchant fleet without recourse to the Exchequer.

Because of the cyclical nature of the shipping industry regard was taken of the downside risk involved. It was considered that if the rates (i.e. $9,500 a day for a handysize vessel and $17,000 a day for a panamax early in 1981) fell during the period of the charters by 33⅓% or even by 50% the charters would not pose any great problem for the company as it would have been responsible for only 50% of the losses incurred.

19.Between September, 1979 and July, 1981 the company directly and indirectly entered into nine chartered in agreements. Seven of these were in association with Celtic Bulk Carriers and two (the Slaney Venture and the Shannon Venture) were directly chartered in by Irish Shipping. It will be seen (Table IV) that a number of ships chartered in in the early and mid 1970’s were reaching the end of their chartering in periods in the early 1980’s. All these vessels were of the handysize type (28,000/32,000 d.w.t.) and the charter periods ranged from four to nine years. The new charter arrangements entered into between September 1979 and July, 1981 represented a total of 393,000 d.w.t. of which 31% related exclusively to Irish Shipping. The chartered in vessels were phased in as other vessels were phased out on reaching the end of their chartered in term as the company was disposing of some of its own fleet. Details of the delivery and re-delivery dates are given in Table V.

20.The Joint Committee does not have available to it details of the specific chartered in rates negotiated. However, the company informed the Joint Committee that the panamax vessels which were chartered in were taken at an average daily rate of $15,000. The two panamax vessels chartered in by Celtic Bulk Carriers were for an aggregate period of approximately 16 years which is equivalent to forward payment commitments of $87m approximately and the two panamax vessels which Irish Shipping chartered in exclusively were for an aggregate period of 13 years which is equivalent to forward payments of $71m. The Joint Committee estimates that the average chartered in daily rate for the handysize ships was $6,500 a day. The five handysize ships chartered in were for an aggregate period of 29 years and, therefore, represented forward payments of $69m. At the end of the chartered period Irish Shipping would have a 25% equity interest in three of the vessels and a 50% equity interest in another two. The following table gives the estimated extent of the cumulative liabilities entered into arising out of these chartered in agreements.

Aggregate of chartered in financial commitments entered into between September, 1979 and July, 1981

21.Details of the chartering in arrangements were not disclosed in the company’s annual report and accounts until 1979 and the then schedule of chartered in ships respresented an aggregate of 201,399 d.w.t. (Table VI). The Joint Committee was informed^* that the Department had assumed that the charters were short term arrangements. Representatives of Irish Shipping informed the Joint Committee^** that the company believed that the Department was aware in general terms of the company’s involvment in chartering but specific details were not supplied to or requested by the Department. With regard to the question of the Department’s awareness of the company’s commitment to long term charters the Joint Committee believes that the situation arose that the company did not inform the Department and the Department did not request the information. Both the company and the Department would have to accept responsibility for this situation. The Joint Committee was surprised at the magnitude of the forward financial commitments arising from the chartered in agreements. The effects of the agreements was that Irish Shipping was directly or indirectly committed to the charter of 393,000 d.w.t. This was a very significant amount of tonnage and the financial commitments associated with it were extremely onerous.

22.The following statement by the Chairman of Irish Shipping was included in the annual Report and Accounts dated 31 May, 1979:

“The international tramp shipping business has been in a state of depression for twenty three of the last thirty years ..... Tramp time charter rates improved slightly during 1978 from the totally uneconomic level to which they had fallen in 1975 but they remained so low that at the 31st December, 1978, 30,000,000 deadweight tons were laid up for lack of employment.”

Notwithstanding this disclosure representatives of the company within a number of months signed an agreement in association with Celtic Bulk Carriers to charter a handysize vessel. The Chairman’s statement in the annual Report and Accounts dated 30 May, 1980 included the following comments:

“Further improvements in freight rates will be needed before shipowners can achieve a break-even level on purely shipping activities.”

Nevertheless, the company signed five long term chartered in agreements in 1980, three in association with Celtic Bulk Carriers and two solely on behalf of Irish Shipping (Table VII). When the Joint Committee sought information from the company about the approval procedures which were operated by the Board within the company it was informed that “the Minutes of the meetings of the Board do not record any decision by the Board of Irish Shipping Ltd. to enter into these nine Charter Party agreements.”

23.The Joint Committee considers that a major cause of difficulty for the company and one which ultimately contributed to its liquidation, was the failure of the Board to lay down strict parameters within which its representatives who negotiated the long term chartered in arrangements would operate. This fundamental and serious breach in the management practices of the company is highlighted by the incompatibility of the actions of the representatives and the statements of the Chairman of the company published in the annual reports for 1979 and 1980. The Joint Committee cannot comprehend why the Board of the company abdicated its responsibilities in transferring its authority to its representatives involved in Celtic Bulk Carriers without providing for control procedures, and how such long term financial commitments were entered into without the minuted approval of the Board of the company. It considers that the long term chartered in agreements, particularly from 1979 onwards, were a major mistake because -

(a)the commitments were disproportionate to the company’s resources and size; and

(b)the chartering developments were of a parallel nature to the company’s own deep sea operations which were recognised as a high risk loss area.

(i)the Board of the company with failure to keep itself informed of the chartering developments;

(ii)the senior executives involved in the chartering agreements with acting without authority and, apparently, independently of the Board;

(iii)the Department of Transport and Power and the Department of Finance with failure to adequately monitor the situation.

24.During 1982 there was a dramatic drop in the Tramp Time Charter Index (Table III). The rates had reached a peak in 1980 and there was a gradual downward trend in 1981. In March, 1981, it was possible to earn $20,000 a day with a panamax vessel and by December, 1982 this rate had fallen to $3,000 a day i.e. 15% of the prevailing March, 1981 rate. The speed and severity of the collapse took everyone by surprise. The international volume of bulk commodities shipped between 1970 and 1980 reached a peak of 801.1m tonnes per annum in 1980. There was a 4% decrease in this volume in 1981 and a further 8.5% decrease in 1982. All estimates for coal shipments proved to be substantially incorrect. The reduction in steel production in the United States is estimated to have been 45% while West European steel mills were operating at approximately 52% of capacity and, consequently, the demand for iron ore and coking coal was substantially reduced. It was also forecast that the price of oil would move nearer to parity with the price of coal. While the level of sea going trade in major bulk commodities was decreasing the international bulk carrier fleet was increasing from 154.5m tonnes to 167m tonnes. This supply/demand position was further adversely affected by the relatively sluggish demand for scrap steel which meant that vessels already overdue for scrapping were not withdrawn and the projected removal trends were not achieved. During this period also there was a substantial devaluation of the Irish Pound compared to the US Dollar.

25.At a meeting with representatives of Irish Shipping in July, 1982 the Department of Communications was informed of the company’s serious financial position. Officials of the Department informed the Joint Committee^* that a preliminary report had been furnished to it in September, 1982 which disclosed for the first time the extent of the chartering agreements and that the Minister and the Department were shocked by the report.

26.In December, 1982, the Reardon Smith Line informed Irish Shipping that they were no longer able to meet their obligations arising from the chartered in agreements entered into in association with Celtic Bulk Carriers and that if they could not come to some arrangement with their creditors they would be forced into liquidation. Following negotiations Irish Shipping obtained a payment of $2m from Reardon Smith. Irish Shipping maintained that it had a chance of obtaining all or some of the outstanding liability if and when market conditions permitted the Reardon Smith Line to meet their obligations. This development placed further strain on Irish Shipping as it would have to accept total liability arising from the charters for at least the following few years. The Joint Committee fails to understand why discussions between Celtic Bulk Carriers and the owners of the chartered in vessels were not initiated in an effort to try and secure substantial concessions before accepting the Reardon Smith Line portion of their liability arising from the charters. It believes that the board of Irish Shipping should not have accepted the Reardon Smith Line proposals prior to such negotiations as it should have been apparent to the Board that the annual accounts for the year ended 31 March, 1983, were likely to show substantial losses. The question arises as to how the company could have expected to sustain such losses while at the same time increasing its liability to 100% relative to the charter commitments. The prevailing tramp shipping rates would have had to be very substantially increased before even marginal profits could be anticipated. The Joint Committee concludes that when the Reardon Smith Line informed Irish Shipping of its difficulties -

(a)joint negotiations should have taken place with the owners of the long term charters before the subsequent agreement was reached between the parties; and

(b)the Board of Irish Shipping should have considered the full implications for the company of the adoption of its 100% responsibility for the costs of the seven long term charters entered into in association with Celtic Bulk Carriers.

27.From April, 1983, Irish Shipping had chartered in agreements for approximately 393,000 d.w.t. and the company’s own fleet consisted of 153,695 d.w.t. The portfolio of capacity available illustrates the ratio of the company’s own fleet capacity (which was basically in line with the strategic fleet requirement) to the substantial chartered in tonnage. The Joint Committee estimates that the gross cost to Irish Shipping of the chartered in tonnage in the financial year 1983/1984 was $34m. As the financial position of the company continued to deteriorate representatives of the company, in January, 1984, entered into negotiations with the foreign owners of the nine chartered in vessels in order to seek some reduction in the financial burden of the long term charters. In view of the fact that the Board of Directors of the company and the Department were aware of the serious financial problems of the company from September, 1982, the Joint Committee finds it difficult to understand the delay in dealing with the major problem of charters until January, 1984. On 11 April, 1984, the Minister for Communications in the course of his speech in the debate in the Dáil on the Second Stage of the Irish Shipping Limited (Amendment) Bill, 1984, made the following statement:

“I am glad to be able to say that as a result of the negotiations significant concessions have been obtained from the owners concerned. For obvious commercial reasons the details cannot disclosed but I can say that they mean very substantial cash savings to Irish Shipping in the period up to 31st December, 1985.”

28.When the Joint Committee, prior to the announcement of the liquidation of the company on 14 November, 1984, sought clarification of the company’s forward financial commitments under the chartering arrangements on 2 November, 1984, the company had an own fleet of five ships totalling 220,320 d.w.t. and seven chartered in ships, totalling 307,051 d.w.t. three of which incorporated equity participation on the termination of the chartered in periods. Each year from 1985 to 1990 at least one ship would have reached the termination of its chartered in period and this would have had the effect of reducing the gross forward chartered commitment of 1,335,657 tonnes in 1984/85 to 126,546 tonnes in 1989/90. The Report of the Directors and Financial Statements for the year ended 31st March, 1984 of the Reardon Smith Line, dated 30 November, 1984, incorporates the following information:

“Contingent Liabilities

Agreement was reached with Irish Shipping Limited that the liability of the Group in respect of losses on chartered-in vessels at least until 31st march, 1986, was to be limited by a payment of £1,300,000 (as a contribution to losses incurred up to 31st March, 1983) together with a further possible payment in respect of the accounting year ending 31st March, 1985, and subsequent years of 50% of the Group’s profits before depreciation but after deducting loan repayments and tax payable. From 1st April, 1986, onwards the Group will participate in sharing the profits and losses on Celtic Bulk Carriers.

Memorandum accounts have been maintained to record the profits and losses on all chartered-in vessels and the 50% contribution referred to above will be set off against the balance on these accounts. Irish Shipping Limited have advised that the memorandum account balance at 31st March, 1984 was £6,204,075.

Irish Shipping Limited has subordinate charges over the Group owned vessels which charges may become enforceable in the limited circumstances in which the balance of the Memorandum Account becomes an actual liability.

On the 14th November a Provisional Liquidator was appointed to Irish Shipping Limited and this has created uncertainty over the arrangements entered into with them.”

On 3 December, 1984, the High Court granted permission to the company to disclaim seven chartered agreements made by the company with their owners on terms that they be admitted as creditors for their loss.

IV. SUBSIDIARY AND ASSOCIATE COMPANIES

(a) Subsidiary Companies

29.The annual Report and Accounts of Irish Shipping for the year ended 31 March, 1984 lists nine trading subsidiary companies and six non-trading companies (Table VIII). The majority of the trading subsidiaries were incorporated into Oceanbank Developments Limited which was the principal subsidiary and investment holding company. Details of the retained group profit and loss attributed to subsidiary companies are given in Table IX. The group consolidated accounts which were prepared for the first time for the year ended 31 March, 1977, incorporated the accounts of Irish Shipping Limited (holding company) and its subsidiaries and the group share of the results and interests in associated companies. In 1976/77 Irish Shipping had three subsidiary companies. It had a 100% holding in two of the companies and it had an 80% holding in Irish Continental Line Limited, which was established in 1973 by Irish Shipping at the request of the then Minister for Transport and Power.

30.The company’s ferry operations recorded aggregate profits of £7.644m before taxation and extraordinary items in the period 1973 - 1983 (Table IX) and in the financial year ended 31 March, 1982 the company realised a profit of £3.34m on the sale of a ferry. In that year also Oceanbank Developments Limited was incorporated. Irish Shipping held 75% of the shares in the company and the remaining 25% of the shares were held by Allied Irish Banks Limited through its wholly-owned subsidiary, Allied Irish Holdings Limited. Early in 1982 Oceanbank purchased from Irish Shipping a 31.05% holding in the Insurance Corporation of Ireland, a 50% holding in the Property Corporation of Ireland, Limited and a 100% holding in Irish Continental Line, Limited. In that year also a new ferry service between Belfast and Liverpool was inaugurated by Belfast Car Ferries Limited, a newly formed associate company of Oceanbank. The ferry service traded profitably in the period ended 31 December, 1982 and in 1983 it became a subsidiary company of Oceanbank.

31.In August, 1983, Allied Irish Banks made an offer to acquire the 3,469,500 shares held by Oceanbank in the Insurance Corporation of Ireland. This offer was subsequently accepted and in January, 1984, Irish Shipping received £9.525m cash from Oceanbank by way of loan repayment. This repayment helped to alleviate the company’s cash problems. The book value of the shares was £1.872m in excess of the amount received for them and the difference is accounted for in the group profit and loss accounts for the year 31 March, 1984. An analysis of loan balances per the company’s balance sheet at 31 March, 1984 (Table X) shows that £17.297m related to Irish Continental Line Group Loans. Two subsidiary companies - Otter Shipping Corporation and Seashell Shipping Corporation - in which Irish Shipping had a 100% holding were established in 1984 to facilitate the purchase of and the related borrowings associated with the Celtic Venture and the Slaney Venture. The Minister for Communications when announcing in the Dáil the appointment of a Liquidator to the company stated, inter alia, that “while the disposal of the Irish Shipping Limited shareholding in Oceanbank is a matter for the Liquidator I see no reason why Irish Continental Line, which has traded profitably in the past, should not do so in the future.” As the Joint Committee does not have available to it the accounts of the subsidiary companies it is not in a position to comment further in the matter.

(b) Associate Companies

32.At 31 March, 1984 Irish Shipping had seven associated companies. The nature of the business activities of the companies is outlined in Table XI. The retained group profits attributed to associated companies for the financial year ending 31 March, 1976 to 1984 is detailed in Table IX. In the nine year period 1973 - 1982 60% of Irish Shipping’s group profits before taxation and extraordinary items were attributed to associated companies (Table XII). A substantial proportion of this profit would have resulted from the company’s association with the Insurance Corporation of Ireland.

V. FINANCE

(a) Share Capital

33.Irish Shipping Limited was incorporated under the Companies Acts in March, 1941 with an authorised share capital of £200,000 and borrowing powers up to £2m. The Minister for Finance initially held 51% of the shares. In October, 1943, the balance of the shares were transferred to the Minister and, subsequently, he held a 100% shareholding in the company. The authorised share capital of the company was increased to £5m by the Irish Shipping Act of 1947 and to £12m by the Irish Shipping Act of 1959 and there were no further increases in share capital until 1980. The borrowing limits under Ministerial guarantee were set at £2m in 1947 and £5m in 1959 and this latter limit remained unchanged until 1980. During the period 1970 to 1979 the company built nine bulk carriers at a total cost of £33m and acquired two car ferries at a cost of £17m. This investment of £50m was financed by the company without recourse to the Exchequer.

(b) Legislation

34.The Irish Shipping (Amendment) Act, 1980 provided for an increase in the authorised share capital of the company from £12m to £22m and the level of guaranteed borrowings was also increased from £5m to £15m. The enactment of the legislation was necessitated by the need to make provision for the capital and borrowing requirements of Irish Shipping in respect of a new bulk carrier and for the financial needs of the company over the following few years. This bulk carrier was built at Verolme Cork Dockyard and was named the Irish Spruce. In the course of the debate in the Dáil on the Second Stage of the Bill on 9 December, 1980, the Minister for Transport made the following statements:

“It is therefore proposed that the cost of the vessel will be funded by a combination of equity to the Company, borrowing by the Company and the payment of subvention to the yard.”

“The provision of this 70,000 ton carrier will put Irish Shipping into the position of being able to quote for the transport of coal to Moneypoint power station when it comes on stream eventually.”

It is a matter of record that when the legislation was being processed in the Houses the then Minister for Transport and the then Minister for Finance had not been made aware that, in the period between 20 September, 1979 and 11 November, 1980, the company had entered into agreements in association with Celtic Bulk Carriers for the long term chartering of four handysize vessels and had also chartered on its own behalf two panamax vessels (Table VII). In documentation submitted to the Joint Committee by the company it was stated that “ISL in particular was interested in getting all or part of the ESB contract for the carriage of coal to Moneypoint.” The Joint Committee also heard evidence^* from the company that it was expected that the contract was initially expected to commence in the second half of 1984 and that there would be a likely build up of the movement of coal from 300,000 tonnes initially to approximately 750,000 tonnes in 1990. The company had, therefore, already committed itself by way of charters to more than adequate capacity to cope with the ESB contract although it is now clear that the Government was not aware of this fact when the decision was taken to purchase the Irish Spruce.

35.The Joint Committee heard evidence^* from representatives of the company that it had obtained 50% of the ESB contract and that a Japanese company had obtained the rest. The position had arisen, therefore, that one commercial State-sponsored body (i.e. ESB) sought a contract for the carrying of coal from the USA to Moneypoint which another State-sponsored body (i.e. Irish Shipping) had the capacity to tender for. The Joint Committee recommends that, where a commercial State-sponsored body wishes to tender for a significant contract for which another commercial State-sponsored body may be in a position to bid, appropriate Government guidelines should be developed which, on the one hand, would not impinge on the competitiveness of open market quotations but, on the other hand, would provide for due consideration of the Exchequer’s involvment in both bodies.

36.The Irish Shipping Limited Act, 1982 provided for guarantees by the Minister for Finance in respect of moneys payable by Irish Shipping in respect of guarantees given, or under contracts entered into, by Irish Shipping, the amount of the guarantees not to exceed £50m. The Minister for Transport in the course of the debate on the Second Stage of the Bill in the Dáil on 12 May, 1982 made the following statement:

“The immediate need for the proposed legislation derives from the intention of the Government to institute a special financing arrangement for the Panamax bulk carrier which is presently under construction at Verolme Cork Dockyard Limited for Irish Shipping.

The cost of constructing the new vessel at Verolme is £28m. Under the original financing plan Irish Shipping Limited would have been liable for £14.2m of this and the balance would have been paid as shipbuilding subsidies by the Department of Industry and Energy to Verolme directly. The special financing arrangement which is now proposed and which will cover the total cost of the ship will incorporate a leasing contract in respect of the vessel on attractive terms thus enabling the company to draw from sources of funding not otherwise available for Exchequer purposes and outside the ambit of the Exchequer borrowing requirement.”

The Minister also made reference to the desirability of Irish Shipping providing for the transport of coal to Moneypoint for the ESB.

37.In December, 1982 it was decided that the construction costs of the vessel would be financed by means of a leasing arrangment whereby the vessel, when built, would be acquired by a subsidiary of a Japanese finance company for £27.8m (the estimated final cost) and leased back for use by Irish Shipping. The lease provided for payments of half yearly instalments of approximately £2.1m over a period of 15 years and for ownership of the vessel to revert to Irish Shipping at the end of the lease period. Because the cost of building the vessel was much greater than its market value the lessor did not regard it as sufficient security for the funds provided and it was agreed that the State should guarantee the repayment of all monies required to discharge the obligations arising under the lease. The Irish Shipping Limited Act, 1982, empowered the Minister for Transport to provide such a guarantee. The Joint Committee understands that the total certified cost of the vessel to August, 1984 was £32.3m, including delivery incentives. However, at that date the vessel was still within its guarantee period and additional costs could arise. At 25 July, 1984, the Government’s liability was £38.9m which represented the amount of an early termination payment at that date arising out of the leasing arrangements (Table XIII).

38.The main purpose of the Irish Shipping Limited (Amendment) Act, 1984, which was enacted in April, 1984, was to extend from £15m to £45m the limit on the amount of borrowings by Irish Shipping which could be guaranteed by the Minister for Finance. The Minister for Communications stated in the course of the debate on the Second Stage of the Bill in the Dáil that the enactment of the Bill was necessary in order to make provision for the probable financial needs of Irish Shipping over the following two years. The Government accepted proposals by the company which would help it to continue trading at least for the period up to 31 December, 1985. These proposals envisaged no additional equity from the Government but did require additional guaranteed borrowings of £23.613m made up as follows:-

(a)a guarantee of £11.36m (US$12.5m) in respect of the purchase of the two vessels “Slaney Venture” and “Celtic Venture”;

(b)a guarantee for short term borrowings of £4.063m to meet the projected cumulative cash deficit in 1984; and

(c)a guarantee of short term borrowings of £8.190m to meet the projected cash deficit in 1985.

The Department of Communications in its submission informed the Joint Committee that “ISL states that the Government would not be called upon to meet these guarantees except in the absence of a recovery of the shipping market by 1986 together with a failure to secure some further accommodation from the owners to meet such circumstances.” An Exchequer guarantee of £12.5m was provided towards the cost of the two vessels and the Minister for Finance provided the necessary guarantees for the company’s borrowings of £4.063m for 1984.

39.An analysis of the company’s Retained Group Profit and Loss for the financial years 1976 to 1984 is given in Table IX. In the period 1967 - 1982 the company generated operating profits of £27.7m. However, the operating losses for the financial years 1983 and 1984 were £44.1m. The financial results of the company for the years 1973 to 1982 inclusive (Table XII) show that -

(b)the company’s own fleet operations generated losses of £10.3m which were offset by a profit on the sale of ships of £3.9m;

(c)chartering profits (long and short term) were £1.743m, including £1.142m attributed to a payment in respect of the termination of a long term chartered in contract. The chartering operational profits for the period were, therefore, slightly in excess of £600,000 or 2.4% of total profits;

(d)profits generated by associated companies accounted for 60% of the total profits of the company.

In the light of this information the question arises as to whether the Board of the company, the Department of Transport and Power and the Department of Finance adequately evaluated the annual results of the company in terms of profit and loss centres relative to the corresponding level of investment/exposure in each case. The risk exposure level is highlighted by the fact that the chartered losses for the financial years ended 31 March, 1983 and 31 March, 1984 totalled £25m. If an analysis had been undertaken it would have shown the strengths and weaknesses of the company, would have provided a more meaningful basis for discussions between the company and the Government Departments involved, and would have ensured that the quality of information available was adequate for the Minister responsible to exercise his control function.

40.The following information disclosed in documentation submitted by the company gave rise to further doubt on the part of the Joint Committee as to the adequacy of the Board’s review of the results:

“The Board was concerned with the results as shown in the Monthly Statements produced at each Board meeting which enabled it to monitor the financial results being achieved by the Management. The Board were not concerned with the rates obtained on any particular fixture provided that the overall results were acceptable.”

In the financial years 1976 - 1984 the company recorded only very minimal profits on two occasions on its own fleet operations. It is against this background that the Joint Committee finds it difficult to understand the purchase of the two vessels in June, 1984, even allowing for the fact that they were foreign crewed. The level of operating profits from chartering (long and short term) highlights the modest profit contribution made by these operations in comparison with the financial risk exposure.

41.A diversified organisation operates from many different cost centres and for more effective planning and operation the organisation is divided into separate divisions which are identified as Strategic Business Units (SBU’s). It is only through the examination of the strategic plans and results of these units that the organisation’s performance can be evaluated. Irish Shipping, like many other State - sponsored bodies, had diversified into ancillary activities. In analysing group financial accounts it is difficult to ascertain the strengths and weaknesses within the company and, subsequently, it becomes difficult to evaluate the results of such ancillary activities against their objectives and also the degree of cross subsidisation of a loss making activity by a profitable operation which may not be readily apparent from the consolidation of the accounts. In some cases it may very well be that the objectives are no longer valid and that a disinvestment strategy should be considered. The Joint Committee recommends that-

(a)strategic business unit type accounting should form the basis for discussions between Departments and the State - sponsored bodies under their control;

(b)the financial reporting format of State - sponsored bodies should be reviewed and the same accounting practices be generally adopted; and

(c)all commercial State - sponsored bodies be obliged to submit to the sponsoring Minister accounts for each subsidiary company.

(d) Cash Flow

42.A reconciliation of the projected company loss with the projected cash flow requirements is given in Table XIV. It will be noted that the projected trading losses for the calendar years 1984 and 1985 were £16m and £11.5m respectively. With adjustments for non - cash items, other cash payments and other sources of funds, the projected cash deficit for 1984 and 1985 totalled £12.3m. The Irish Shipping Limited (Amendment) Act, 1984, provided for guarantees of short term borrowings to meet the projected cash requirements. The Joint Committee believes that the concept of financing projected cash deficits by way of borrowings, particularly in view of the company’s impoverished balance sheet position, was an extremely hazardous exercise from a commercial viewpoint.

(e) Balance Sheet

43.The Irish Shipping (holding company) balance sheet at 31 March, 1984, shows an accumulated deficit of £20.52m compared to share capital of £16.347m. Therefore, the share capital of the company had been completely depleted and the capital employed was solely dependent on loan capital. The company also had net current liabilities of £14.864m after allowing for £14.925m as a provision for foreseeable losses on year end charter hire commitments. The capital employed in the company was represented by loans of £73.62m or 88% of the capital employed and net current liabilities were £15.043m. The serious position of both balance sheets would have meant that a substantial amount of equity investment would have been required to re - establish the company as a meaningful commercial enterprise. The Joint Committee notes that the substantial liabilities arising out of the chartered in arrangements were classified as an off balance sheet liability and that it was disclosed in the company’s annual Report and Accounts for the year ended 31 March, 1984, that “the group financial statements have been prepared on a going concern basis”.

(f) Borrowings

44.An analysis of the company’s loan balances is given in Table X. These loans totalled £73.620m of which 57% were repayable between one and five years. Table XV shows that the long term interest payment by the holding company was projected to almost treble between 1984 and 1985. Following negotiations with the foreign owners of the chartered in vessels in January, 1984, the company requested limited support from the Government by way of Exchequer guarantees of borrowings towards the cost of purchasing two vessels and to meet its projected cash deficits in the period up to the end of 1985. The Joint Committee would have to question the basis of the company’s guarantee proposals. It would have expected that the company would have -

(b)appreciated that in order to sustain its fixed cost structure (related to fixed charter costs and interest payments) a substantial increase in international tramp shipping rates was required;

(d)that an increase in interest costs would only exacerbate the company’s adverse situation because of the increased borrowings; and

The inadequacy of the proposals to cope with the developments that took place is reflected in the fact that the company’s survival for an additional seven months cost the Exchequer in excess of £15m. The Minister for Communications stated on 14 November, 1984, that “the present financial position of Irish Shipping Limited is such that the company is unable to service any more borrowings. It is, in fact, insolvent without further financial support.” The Joint Committee questions the principle of guaranteed borrowings, particularly where the debt equity ratio is completely imbalanced and the company’s operational prospects are extremely poor. It believes that the practice of guaranteed borrowings should be perceived as a short term measure and not as a substitute for equity capital.

45.The Joint Committee recommends that there should be broad Government guidelines with regard to the ratio of interest bearing capital liabilities and the State equity involvment in a company. The proportion of such liabilities that are guaranteed by the State should be for a specific period of time thereby ensuring a greater emphasis on a time scale solution to the company’s problems rather than reviewing the matter when the ceiling of the amount under guarantee had been reached. It recommends also, that, where the mechanism of guaranteed borrowings is availed of to deal with a temporary problem within a State - sponsored company and where the servicing of such borrowings could place additional strain on the cash flow/working capital requirements of a company, consideration should be given to an interest subsidy towards the cost of servicing these borrowings for a limited period of time to allow the company to return to commercial viability.

VI.MANAGEMENT

46.The annual Reports and Accounts of the company show that until 1982 there was six management functions, as follows: General Manager, Agency Division Manager, Technical Manager, Financial Controller, Secretary and Administration Manager and Chartering and Operations Manager. During the financial year 1982/83 the Financial Controller was appointed General Manager to replace the then General Manager who had been appointed Chairman of the Board of Directors. There was no subsequent appointment of a Financial Controller although the company did retain the services of a Financial Adviser who acted as Financial Controller. In the course of the financial year 1983/84 the General Manager resigned to become General Manager of Irish Continental Line and was replaced by the Deputy General Manager and Secretary and the Report and Accounts for that year show that the number of management functions had been reduced from six to four. The following comments were made in written submissions made by Unions representing employees of the company:

“At present six separate management functions are vested in two individuals ......... the result of this monopolising of managerial functions by very few individuals is that important and far reaching decisions are being made on the highly subjective judgement of two or, at most, three people .........

“This unsatisfactory situation (i.e. the ‘bunching’ of managerial functions) is further exacerbated by the lack of consultation or even communication between top and middle management ......” [Association of Scientific, Technical and Managerial Staffs].

“In the main we feel there is a bunching of managerial functions into the hands of a small number of people ...... there is a need for a great deal of improvement of the management structures and personnel.” [Federated Workers Union of Ireland].

The Joint Committee also heard oral evidence from representatives of both Unions. The following comment was made by an F.W.U.I. representative:

“From the point of view of across the table industrial relations we always found it extremely difficult to get information from the company as to how they were performing.”

47.The Joint Committee believes that the management structure of the company was inappropriate for an organisation employing approximately 500 employees. It would have expected that the Board would have reviewed the organisational structure in the course of its periodic management audit of the company. It concludes that the restriction of the management functions of the company to a small number of executives since 1982 gave rise to an undue concentration of managerial authority and responsibility. It also believes that a full - time financial controller should have been appointed when the post fell vacant in 1982. The Joint Committee regrets the loss of jobs by the employees of the company, many of whom had worked for the company for a considerable number of years, and also the very limited opportunities that now exist for either employment or training with a deep sea or foreign going merchant fleet. The Union representatives informed the Joint Committee that “never was a day’s work lost as a result of official or unofficial industrial action.” The Joint Committee acknowledges the excellent industrial relations that existed in the company. It considers that (i) the Government should make resources available to former employees of the company to find alternative employment; that (ii) ex-gratia pension payments should be restored fully in all cases; and (iii) that arrangements should be made to enable trainees to obtain the necessary sea - time experience.

VII. LIQUIDATION

(a) Pre-liquidation

48.Prior to the announcement of the decision of the company to petition the High Court to appoint a Liquidator the Joint Committee requested particulars of Irish Shipping’s five year corporate plan from the Department of Communications. The Joint Committee’s request was refused (Appendix I). Furthermore, the Chairman of the company was invited to attend a meeting of the Joint Committee for the purpose of giving evidence and he was furnished with a list of draft questions which the Joint Committee wished to discuss with him at the meeting. In a reply dated 12 November, 1984, the Chairman informed the Joint Committee that it appeared to him that it would be necessary to obtain legal advice before he could respond and that, in the circumstances, he believed that it would not be appropriate for him to attend the proposed meeting (Appendix 2). A further invitation to the Chairman to attend a meeting with the Joint Committee was declined by his legal advisers.

49.The Joint Committee believes that if the company had been in a position to exercise an option to request the appointment of a Receiver rather than a Liquidator it was likely that it would have meant only a temporary respite before the eventual appointment of an Official Liquidator as the continued trading duration of the company, at least in the short term, would be dependent on (a) obtaining additional charter hire concessions, (b) an injection of additional equity capital and (c) the substantial reorganisation of the company’s operations. The Joint Committee recommends that the nature of charges registered on the assets of commercial State - sponsored bodies should be reviewed so that in the event of serious difficulties arising in the company technical problems would not emerge with regard to the option of either appointing a Receiver or a Liquidator. Under the provisions of Chapter 11 of the United States of America Bankruptcy Code, a company can request a Bankruptcy Court for protection against creditors while it reorganises its finances and develops a plan to become solvent. As part of the arrangements management specialists are normally taken into the company to develop and implement the plan and, meanwhile, the creditors may have to settle for shares in the reorganisation of the company rather than focusing on liquidation in order to comply with the rights of creditors as required by company law in Ireland and in most European countries. The Joint Committee recommends that consideration be given to the amendment of the Companies Acts, to provide legislation similar to that contained in the United States of America Bankruptcy Code, or alternatively, that the concept of an Administrator as recommended in the United Kingdom Report of the Review Committee on Insolvency Law and Practice under the Chairmanship of Sir Kenneth Cork, be introduced.

(b) Post Liquidation

50. (i)Following the appointment of a Provisional Liquidator to the company on 14 November, 1984 -

(a)the Department of Communications and the Department of Finance were asked to arrange for the attendance of officials at a meeting of the Joint Committee for the purpose of giving evidence. Both Departments refused to allow officials to attend [See Appendix 3],

(b)in response to the Joint Committee’s invitation to the Board of the company to give evidence a number of directors individually declined the invitation. One director, Mr. T. A. Finucane, did accept the invitation and gave evidence in private session [See Appendix 4],

(c)an invitation to the Provisional Liquidator to give evidence to the Joint Committee was not accepted [See Appendix 5],

(d)an employee of the company who, it is understood, was associated with the chartering in agreements with Celtic Bulk Carriers, failed to accept invitations from the Joint Committee to appear before it for the purpose of giving evidence [See Appendix 6],

(ii)The Joint Committee sought but failed to obtain from the Department of Communications information about the Minister for Communications’ proposals for the Irish Spruce [See Appendix 7].

plus any costs that may arise in relation to the Irish Spruce. It notes the statement of the Minister for Communications that, based on the company’s projections, “the total cost of keeping the company going for the next five years would amount to £144.5m” but it does not have information as to the basis on which these projected costs were computed. The Joint Committee was informed that the Board of Irish Shipping prior to liquidation put forward the following options for consideration by the Government:

(ii)an attempt at final renegotiations with the foreign ship owners with Government support.

Before option (ii) could be contemplated a financial commitment from the Government for £74.5m was required i.e. a sum of £27m additional to the Exchequer commitments already given in relation to guaranteed borrowings. The Joint Committee was informed that the board of the company unanimously supported this option as the preferred one. However, it does not have available to it the information which would enable it to evaluate the factors taken into account before the decision was made to liquidate the company.

52.The Joint Committee understands that the Liquidator has been directed by the High Court to report to it on the following matters on or before 1 June, 1985 -

3.whether any fraud was committed by any person in the operation of the company;

The Joint Committee will request that a copy of this report be made available to it by the High Court.

53.For the reasons mentioned in paragraphs 48, 50 and 51 the Joint Committee has been unable to complete to its satisfaction its examination of the company. To enable it to complete its examination it recommends to the Houses that legislation be enacted as a matter of urgency which would empower it to compel the attendance of witnesses and the production to it of all relevant documentation.

54.The Joint Committee wishes to express its appreciation of the assistance given to it by its consultant, Mr. Michael A. Kehoe, whose practical commercial experience was an invaluable asset throughout this enquiry.

SUMMARY OF CONCLUSIONS

1.The Joint Committee deplores the fact that the Board of directors of Irish Shipping did not inform the Department of Transport until September, 1982, of the details of the substantial chartered in contracts entered into by the company on its own behalf and in conjunction with Celtic Bulk Carriers between September, 1979, and July, 1981, notwithstanding the fact that two Bills to accommodate the purchase of the Irish Spruce had been enacted during that period. The Joint Committee concludes that -

(a)the absence of this information left the Minister and Members of the Houses at a severe disadvantage when enacting the legislation;

(b)failure to inform the Minister of the situation should have merited a request for the resignation of the Chairman and the Board of directors of the company;

(c)independent assessors should have been appointed to report on the financial situation of the company as a matter of urgency (Ref. Par. 11).

2.The Joint Committee fails to understand the rationale for the purchase of the Slaney Venture and the Celtic Venture in the light of the following -

(a)a report of the Commission of the European Communities on the State of the Shipbuilding Industry in the Community [Ref. COM(84)550 final] disclosed that the contract price for orders of new vessels as charged by Japanese and Korean yards in 1983 for two similar vessels was $30m;

(b)it was generally recognised that there was an oversupply of international tramp shipping tonnage in the market place;

(c)the low level of international tramp shipping rates could only have meant poor earning prospects;

(d)it was doubtful whether the target rate of return as required by Government guidelines would have been achieved by the investment;

(e)the purchase had the effect of increasing the company’s own fleet to 246,000 d.w.t., almost 100,000 d.w.t. in excess of the strategic fleet requirement.

3.The Joint Committee would have expected that, on disclosure of the 1973 Memorandum of Agreement between Irish Shipping and the Reardon Smith Line (which enabled both companies to trade together as Celtic Bulk Carriers), the Department of Transport and Power would have -

(a)sought the terms of the agreement and provided for periodic reviews of it; and

(b)satisfied itself with regard to the implications of the joint and several clause incorporated in the agreement (Ref. Par. 16).

4.With regard to the question of the Department’s awareness of the company’s commitment to long term charters the Joint Committee believes that the situation arose that the company did not inform the Department and the Department did not request the information. Both the company and the Department would have to accept responsibility for this situation (Ref. Par. 21).

5.The Joint Committee considers that a major cause of difficulty for the company and one which ultimately contributed to its liquidation, was the failure of the Board to lay down strict parameters within which its representatives who negotiated the long term chartered in arrangements would operate. This fundamental and serious breach in the management practices of the company is highlighted by the incompatibility of the actions of the representatives and the statements of the Chairman of the company published in the annual reports for 1979 and 1980. The Joint Committee cannot comprehend why the Board of the company abdicated its responsibilities in transferring its authority to its representatives involved in Celtic Bulk Carriers without providing for control procedures, and how such long term financial commitments were entered into without the minuted approval of the Board of the company (Ref. Par. 23).

6.The Joint Committee considers that the long term chartered in agreements, particularly from 1979 onwards, were a major mistake because -

(a)the commitments were disproportionate to the company’s resources and size; and

(b)the chartering developments were of a parallel nature to the company’s own deep sea operations which were recognised as a high risk loss area.

(i)the Board of the company with failure to keep itself informed of the chartering developments;

(ii)the senior executives involved in the chartering agreements with acting without authority and, apparently, independently of the board; and

(iii)the Department of Transport and Power and the Department of Finance with failure to adequately monitor the situation (Ref. Par. 23).

7.In December, 1982, the Reardon Smith Line informed Irish Shipping that they were no longer able to meet their obligations arising from the chartered in agreements entered into in association with Celtic Bulk Carriers....................................The Joint Committee fails to understand why discussions between Celtic Bulk Carriers and the owners of the chartered in vessels were not initiated in an effort to try and secure substantial concessions before accepting the Reardon Smith Line portion of their liability arising from the charters (Ref. Par. 26).

8.In view of the fact that the Board of Directors of the company and the Department were aware of the serious financial problems of the company from September, 1982, the Joint Committee finds it difficult to understand the delay in dealing with the major problem of charters until January, 1984 (Ref. Par. 27).

9.The financial results of the company for the years 1973 to 1982 inclusive show that -

(b)the company’s own fleet operations generated losses of £10.3m which were offset by a profit on the sale of ships of £3.9m;

(d)profits generated by associated companies accounted for 60% of the total profits of the company.

10.The Joint Committee believes that the management structure of the company was inappropriate for an organisation employing approximately 500 employees.................It concludes that the restriction of the management functions of the company to a small number of executives since 1982 gave rise to an undue concentration of managerial authority and responsibility. It also believes that a full - time financial controller should have been appointed when the post fell vacant in 1982 (Ref. Par. 47).

SUMMARY OF RECOMMENDATIONS

1.That every commercial State - sponsored body be obliged to carry out a review of its objectives every three years and that a statement of these objectives be incorporated in its annual report and accounts (Ref. Par. 9).

2.That, on the implementation of a major investment or reorganisation decision within a State - sponsored body, a report on the validity of the investment assumptions on which the decision was based should be prepared by the body in each of the following three years. This report should be submitted each year to the sponsoring Minister on the anniversary of the decision (Ref. Par. 11).

3.That every commercial State - sponsored body be obliged to give prior notice in writing to its sponsoring Minister with regard to -

(a)the signing of agreements which would have the effect of creating significant off balance sheet liabilities;

(c)the establishment of substantial or potentially substantial joint ventures and subsidiary companies

and that details of significant off balance sheet liabilities, which, inter alia, would include leasing, guarantees and other commitments should be incorporated in the annual reports of these bodies (Ref. Par. 16).

4.That the directors appointed to boards of subsidiary companies or representatives appointed to partnership type agreements by the main board of a company should be given clearly defined guidelines with regard to their authority and responsibility. Furthermore, the minutes, or a resumé of them, incorporating the major decisions of subsidiary companies should be circulated to the main board (Ref. Par. 17).

5.That, where a commercial State - sponsored body wishes to tender for a significant contract for which another commercial State - sponsored body may be in a position to bid, appropriate Government guidelines should be developed which, on the one hand, would not impinge on the competitiveness of open market quotations but, on the other hand, would provide for due consideration of the Exchequer’s involvment in both bodies (Ref. Par. 35).

(a)strategic business unit type accounting form the basis for discussions between Departments and the State - sponsored bodies under their control;

(b)the financial reporting format of State - sponsored bodies be reviewed and the same accounting practices be generally adopted; and

(c)all commercial State - sponsored bodies be obliged to submit to the sponsoring Minister accounts for each subsidiary company (Ref. Par. 41).

7.There should be broad Government guidelines with regard to the ratio of interest bearing capital liabilities and the State equity involvment in a company. The proportion of such liabilities that are guaranteed by the State should be for a specific period of time thereby ensuring a greater emphasis on a time scale solution to the company’s problems rather than reviewing the matter when the ceiling of the amount under guarantee had been reached (Ref. Par. 45).

8.Where the mechanism of guaranteed borrowings is availed of to deal with a temporary problem within a State-sponsored company and where the servicing of such borrowings could place additional strain on the cash flow/working capital requirements of the company, consideration should be given to an interest subsidy towards the cost of servicing these borrowings for a limited period of time to allow the company to return to commercial viability (Ref. Par. 45).

9.That the nature of charges registered on the assets of commercial State-sponsored bodies should be reviewed so that in the event of serious difficulties arising in the company technical problems would not emerge with regard to the option of either appointing a Receiver or a Liquidator (Ref. Par. 49).

10.That consideration be given to the amendment of the Companies Acts, to provide legislation similar to that contained in the United States of America Bankruptcy Code, or alternatively, that the concept of an Administrator as recommended in the United Kingdom Report of the Review Committee on Insolvency Law and Practice under the Chairmanship of Sir Kenneth Cork, to be introduced (Ref Par. 49).

Irish Shipping Ltd.

(Holding Company)

Own Fleet - Annual Total

Dead Weight Tonnes and No. of Ships

The “Irish Spruce” was financed on the instructions of the Department of Finance under a relatively complex leasing arrangement. The vessel is the subject of a “Bareboat Charter” and the Government has given a Guarantee of the liabilities arising from the charter. At 25/7/1984 the Government’s liability was £3,886,291 which represents the amount of the Early Termination payment at that date.

TITHE AN OIREACHTAIS

JOINT COMMITTEE on COMMERCIAL STATE-SPONSORED BODIES

SECOND REPORT

IRISH SHIPPING LIMITED