How can a publicly-quoted company justify its failure to disclose to its shareholders the full details of an agreed £4.2 million (€5.3 million) liability at a subsidiary, its failure to explain how it arose, and to explain why directors then decided to pay off the liability out of their personal funds.

Kingspan said the decision of founding directors Eugene and Brendan Murtagh to pay the liability themselves had been a pragmatic one because they owned 60 per cent of the group and because the company involved in the failed Canadian contract that led to the liability was not a subsidiary of Kingspan when it entered into the contract in 1986.

Kingscourt Construction Group (Exports) Ltd became a Kingspan subsidiary at the end of 1988 and was taken out of the group in 1993 as part of the arrangements to pay off the £4.2 million liability, according to a group spokesman.

Kingspan's 1992 annual accounts refer to "a conditional settlement" arising out of a claim by a creditor "of a former subsidiary". The accounts state that: "The settlement entails the company and certain subsidiaries issuing an indemnity, secured by a second fixed and floating charge. The contingency would only crystallise if the former subsidiary did not make agreed payments of £542,000 in each year up to 1999. The directors do not consider it likely that any claim will be made on the group on foot of such indemnity."

No further information was given about the liability, which, at £542,000 over eight years, totalled £4.34 million and would clearly fall back on the group if the payments were not made by the company involved.

The 1993 Kingspan group annual accounts show that the liability of "the former subsidiary" would have crystallised for group shareholders if the subsidiary failed to make the payments. That annual report put the amount of the liability at £3.25 million.

But from reading their annual reports, shareholders would have known nothing about a contract in Canada, problems with export credit guarantees, and a legal action seeking the repayment of £4.2 million to the Insurance Corporation of Ireland.

In the UK, shareholders can refer a company annual report and accounts to the Financial Reporting Review Panel when they are unhappy about the level or extent of information disclosed. In the Republic there is no similar forum.

In 1993, a Kingspan subsidiary agreed to pay a sum of £4.2 million to the Insurance Corporation of Ireland (ICI) to avoid legal action over export credit insurance payments made by ICI on what were subsequently found to have been "fraudulent representations" made to the insurer.

Kingspan's problems arose out of a contract entered into in 1986 by Kingscourt Construction Group (Exports) with a Canadian company for the construction, equipping and commissioning of a experimental milk farm in Canada. The contract was worth Can$16 million.

But by 1988, the Canadian company had defaulted on repayments to its financing bank. The end result was a net liability for the State under the Export Credit Insurance Scheme of about £6 million, according to the 1989 Report of the Comptroller and Auditor General. At that time ICI, on behalf of the government, provided insurance cover to exporters against the risk of default in payment. In November 1989, ICI appointed a receiver to the Canadian company to try to recover the State funds.

A year later, the receiver drew attention to certain unusual transactions in the financial records of the Canadian company as a result of which the Department put "a detailed series of questions" to Kingscourt on the financial arrangements surrounding the contract.

In his examination of the situation, the Comptroller and Auditor General (C&AG) found that the Department of Industry and Commerce had agreed to provide export insurance cover for the Kingscourt contract even though it knew that the Canadian company had been technically insolvent since June 1985 - the company was not named in the report. He found that a letter submitted to ICI as proof that the Canadian company had the milk quota considered crucial to the success of the venture had been tampered with.

In his 1989 annual report, the C&AG said the accounting officer from the Department told him that the Canadian company accounts, viewed in isolation, would have prompted ICI not to provide insurance cover. But he said the accounts were only "one in a series of factors" taken into account. Other factors were the downpayment of Can$4 million by the company and a bank guarantee of Can$3 million.

"Another factor was that the Irish content of this contract was very high and, accordingly, the downstream effect on indigenous Irish industry was substantial."

In his 1991 annual report the C&AG said that in April 1991, when £4.29 million had been paid out by ICI, the Minister directed that payments be suspended "pending the outcome of a review of compliance by the financing bank with certain conditions under which the guarantees were given". Following the review, carried out by ICI, payment of claims resumed in October 1991. A further £1.87 million was paid out, which brought the total payout by ICI on behalf of the State to £6.16 million.

But on November 15th, 1991, ICI told Kingscourt that the insurance was null and void and sought recovery of the funds paid out from the company under a standard recourse agreement.

Between February 1991 and November 1991 there was "a series of correspondence" between the Department and ICI, on the one hand, and Kingscourt, on the other. When the Department "failed to elicit all the information sought" and no repayment was forthcoming, legal action against Kingscourt was initiated.

From 1991 on, especially after legal action was initiated, it would have been reasonable for a Kingspan shareholder to expect to see some detail in the group's annual report on the liability at the subsidiary.

In the 1992 annual report, shareholders could have gotten an inkling of a problem. In the group annual reports for 1993 and 1994, no mention was made of threatened legal action and the subsequent £4.2 million agreed settlement. There was no mention of the problems in the reports of the chairman and of the directors. And these, or subsequent annual reports, never disclosed that group chairman Mr Gene Murtagh and then deputy chairman Mr Brendan Murtagh paid off the liability out of their personal funds.

The most shareholders were told in the accounts for 1993 appeared in note 30 subsection (ii). Headed guarantees and contingencies, it stated: "A contingency exists in relation to a second fixed and floating charge which has been granted to ICC Bank plc in respect of a liability incurred by a former subsidiary. This liability will crystallise if that company is unable to make the agreed payments totalling £3.25 million".

In the 1994 accounts the note was note 31 and it had changed to: ". . . A contingency exists in relation to an indemnity, secured by a second fixed and floating charge, which has been granted to ICC Bank plc in respect of a liability incurred by a former subsidiary. The contingency would only crystallise if that company did not make agreed payments of £542,000 each year up to 1999."

Because these charges were on the assets of the group, shareholders could have eventually become liable for the settlement. Neither note 31 in 1994 nor note 30 in 1993 were referred to in the profit and loss account, the balance sheet or the group cashflow statement.

So a shareholder would have had to read through the notes to the accounts to find them - there were 33 notes to the accounts in 1994 . . . and cross-references in the financial statements to the notes ended at note 28.

But what these entries clearly show is that the liability was that of a Kingspan subsidiary or former subsidiary. But the payment was made, according to a company statement, out of the personal funds of Gene and Brendan Murtagh and discharged in full by 1999.

Why did the directors decide to use their own funds? Why were shareholders never clearly told about how the liability arose and how it was eventually settled?

While Kingspan shareholders may be happy with the group's share price growth, they should have some concerns about the company's performance on disclosure. The latest evidence that the directors have been less than fully transparent in their reporting to shareholders follows the revelation in 1995 that the same directors were receiving tax-free royalty payments, and subsequent criticism of the non-disclosure of the payments by institutional investors.

Kingspan may not have breached accounting standards and the liability has now been fully paid off. But shareholders should demand full and frank disclosure when their company agrees a liability which they could eventually have to pay.