Codified Duties
Cases
Crindle Investments v. Wymes
[1998] IESC 65; [1998] 4 IR 567; [1998] 2 ILRM 196 The Supreme Court
KEANE J:
“There can be no doubt that, in general, although directors of a company occupy a fiduciary position in relation to the company, they do not owe a fiduciary duty, merely by virtue of their offices, to the individual members. That was the effect of the decision in the leading case of Percival v Wright [1902] 2 Ch. 421, but it has been emphasised in subsequent decisions that, in particular circumstances, a company director may indeed be in a position where he owes a fiduciary duty to individual shareholders. A helpful example is the decision of the New Zealand Court of Appeal in Coleman v Myers [1977] 2 N.Z.L.R. 225, which is referred to in the judgment under appeal.
In that case, a defendant made a takeover bid for a company, and having gained the requisite number of acceptances, sought to compulsorily acquire the shares of the remaining members, the plaintiffs, under the New Zealand equivalent of s. 204 of the Act of 1963. The plaintiffs, who had always relied on the advice of the defendants (members of the same family) in, business matters, reluctantly agreed. It transpired that the defendants had withheld information from the plaintiffs which had a bearing on the value of the shares. It was held that, in the particular circumstances, the defendants owed a fiduciary duty to the plaintiffs, of which they had been in breach. The circumstances in which such a fiduciary duty can arise were summarised as follows by Woodhouse J:-
“It is … an area of the law where the courts can and should find some practical means of giving effect to sensible and fair principles of commercial morality in the cases that come before them; and while it may not be possible to lay down any general test as to when the fiduciary duty will arise for a company director or to prescribe the exact conduct which will always discharge it when it does, there are nevertheless some factors that will usually have an influence upon a decision one way or the other. They include, I think, dependence upon information and advice, the existence of a relationship of confidence, the significance of some particular transaction for the parties and, of course, the extent of any positive action taken by or on behalf of the director or directors to promote it.”
(See also the decision of McWilliam J in Securities Trust Ltd. v Associated Properties Ltd. (Unreported, High Court, McWilliam J, 19th November 1980).
Now let us consider the facts of the present case. No doubt when this venture was launched, far back in history, the plaintiffs and the first and second defendants, with their close business and family ties, enjoyed a happy relationship based, like all successful human relationships, on trust. That, unfortunately, is all in the past. Since the abortive negotiations in the Tara proceedings which led to the presentation of the petition under s. 205 of the Act of 1963 on behalf of the plaintiffs, the relationship between the two groups has been the very opposite of one of trust and confidence. The description sometimes applied to business relationships as being “at arms’ length” is inadequate: in the case of these two groups, there has been, since those events, an atmosphere of hostility and suspicion so pervasive that it would be a misuse of language to say that either group reposed confidence or trust of any sort in the other. If the conduct of the first and second defendants in maintaining their personal claims is a violation of any legal right of the plaintiffs, then the court would doubtless be vigilant to ensure that relief was available. But, in the circumstances of this case, that illegality cannot be founded on a breach of a mutual trust or confidence, since that has not been a feature of the relationship between the parties at any stage of the events which have led to the institution of these proceedings.
Confronted with this difficulty, the plaintiffs have sought to argue that they could rely on the damage allegedly caused to Holdings and Bula by the conduct of the first and second defendants in pursuing their personal claims. They concede that normally only the company itself is entitled to institute proceedings for damage which it has suffered, or apprehends it will suffer, under the rule in Foss vHarbottle (1843) 2 Hare 461, the continuing relevance of which was illustrated in the decision of this Court in O’Neill v Ryan [1993] ILRM 557. The plaintiffs urged that they came within the ambit of the fourth exception to the rule, which is normally said to arise where a controlling majority of the company are alleged to be committing a fraud upon it or, somewhat more faintly, the less solidly based fifth exception which suggests that the rule may be relaxed where the interests of justice so require. Apart from any other considerations, there are certain procedural difficulties attendant on this aspect of the plaintiffs’ case, which were not addressed in the course of argument, and are dealt with at a later part of this judgment.
The ambit of the fourth exception was stated as follows by Lord Davey, giving the advice of the Judicial Committee of the Privy Council in Burland v Earle [1902] AC 83 at p. 93:-
“The cases in which the minority can maintain such an action are … confined to those in which the acts complained of are of a fraudulent character or beyond the powers of the company. A familiar example is where the majority are endeavouring directly or indirectly to appropriate to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to participate …”
To make out such a case it is not, of course, necessary to establish that there was fraudulent conduct in the criminal sense. Doubts have even been expressed as to whether fraud in any sense need to be established: thus, Templeman J, as he then was, in Daniels v Daniels [1978] Ch. 406 at p. 413 said:-
“The authorities which deal with simple fraud on the one hand and gross negligence on the other do not cover the situation which arises where, without fraud, the directors and majority shareholders are guilty of a breach of duty which they owe to the company and that breach of duty not only harms the company but benefits the directors … If minority shareholders can sue if there is fraud, I see no reason why they cannot sue where the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves. It would seem to me quite monstrous – particularly as fraud is so hard to plead and difficult to prove – if the confines of the exception to Foss v Harbottle (1843) 2 Hare. 461, were drawn so narrowly that directors could make a profit out of their negligence.””
Cobden Investments v RWM Langport Ltd and others
[2008] EWHC 2810
Warren J.
“For all this citation of authority and difference of emphasis, the position of a nominee director is, I conclude, as follows.
a. First, he owes the same duties to the company as any other director.
b. Secondly, he owes his duties as a director to the company alone.
c. Thirdly, the company is entitled to expect from the director his best independent judgment.
d. However, fourthly, these duties can be qualified in the case of a nominee director just as they can be qualified in the case of any other director. In particular, such duties (except perhaps for certain core duties) can be qualified by the unanimous assent of the shareholders.
e. But, fifthly, it is doubtful whether, as a matter of English law, it is possible to release a director from his general duty to act in the best interests of the company.
f. Sixthly, even if it is possible to do so, it would require strong evidence to demonstrate that that had been done, ideally an express written agreement signed by all of the shareholders. The onus must lie on those saying that the general rule has been attenuated or, to use another word, relaxed, as a result of unanimous shareholder approval to demonstrate that such approval has been given. And, I must add, they must show the extent to which the general rule has been relaxed.
g. Seventhly, however, I see no reason in principle why in relation to specific areas of interest, a director should not be released from his fiduciary duty to give his best independent judgment to the company. In particular, if a director is charged with negotiating on behalf of his appointor an agreement with the company where the interests of his appointor and the company are opposed, the shareholders can unanimously agree that he may conduct such negotiation without regard to the interests of the company. But if that were to be done, it might be expected that the director concerned would, by the same agreement, be precluded from discussions of the board relating to the negotiations and certainly from voting on the issue.
But whatever can be said as a matter of generality, I consider that the extent of the duties of a director in such a situation are very much fact-specific. The general duty is clear; the difficult question is the extent to which the duty is qualified. That qualification will depend critically on the context of the relationship and the particular action which is said to constitute a breach of duty. I accordingly consider the extent of the directors’ duties in relation to each complaint of unfairly prejudicial conduct alleged by CIL.
Whether it is possible for the shareholders by unanimous assent to allow a nominee director actually to subjugate the interests of the company to those of his appointer is doubtful. As will be seen, it is not necessary in the light of the facts to express a concluded view on that.
Bloxham (In Liquidation) -v- The Irish Stock Exchange Ltd
[2014] IEHC 93
Charleton J.
“Directors’ duties
3. Many cases on the scope and nature of directors’ duties have been referenced. One turns for an unimpeachable statement of principle back as far as Ussher – Company Law in Ireland (Dublin, 1986), where at pp. 200-203 the following is set out:
An individual director stands in a relationship to his company. A fiduciary has power to deal with the property of another, and is assumed therefore to occupy a position of trust and confidence in relation to that other, whom we might loosely call the beneficiary. In our case, the beneficiary is the company. To protect the relationship from abuse, the courts will prevent the fiduciary from making any personal profit from it without the informed consent of the beneficiary. They will curb acts of the fiduciary beyond the powers delegated to him, but they will be reluctant to interfere with decisions honestly made by him within his powers, since the discretion is his, and not the court’s. They will impose personal responsibility on him to compensate the beneficiary for loss caused through his dereliction of the duties which he undertook. … It is [also] well-established law that the director owes the duties arising out of his office to the company itself, the separate person, and to no one else.
4. To this some points of nuance may be added. Directors are bound to act in good faith in the interests of the company as a whole; G&S Doherty (Unreported, High Court, Henchy J., 19th June, 1969). Directors may not exercise their powers to further their own personal interests; Re Ashclad Ltd: Forest v. Harrington (Unreported, High Court, Geoghegan J., 5th April, 2000). As a nominee of a shareholder, a director must be free of any obligation to any other entity than the company and no duties may be imposed by the nominee on a director; Re Neath Rugby Ltd [2010] B.C.C. 597 at 605. As the matter was put by Street J. in Bennetts v. Board of Fire Commissioners of New South Wales (1967) 87 WN (NSW) 307 at 311:
It is entirely foreign to the purpose for which this or any other board exists to contemplate a member of the board being representative of a particular group or a particular body. Once a group has elected a member he assumes office as a member of the board and become subject to the overriding and predominant duty to serve the interests of the board in preference, on every occasion upon which any conflict might arise, to serving the interests of the group which appointed him. With this basic position there can be no room for compromise.
5. The triple obligations of directors, being required to act in good faith and within the scope of their powers and in the interests of the company as a whole, are to a large extent overlapping. If a decision of a board of directors is to be challenged, the problem will generally be one of proof. In Re Dublin North City Milling Company Limited [1909] 1 I.R. 179 at 184, Meredith M.R. stated that he was:
… of [the] opinion that the law allows the directors to hold their tongues. It allows them to say that everything was done honestly and bona fide in the interests of the company; … and according to my view I have no power to make them say more.
6. That may be fine in the context in which that decision is made. In court, each side has the opportunity to make a case. Failure to answer a plaintiff’s allegations may mean that such allegations are all that are in the case. Of course, the absence of a defence case as a decision in litigation is a risky one to take. What the Court is concerned with here, having heard both sides fully, is the issue about taint of self-interest in the decisions in question and, as with every case, whether the evidence exists to establish that a plaintiff has met the probable burden of proof. Most usefully, Ussher states, leaving out footnotes, at p.224:
The proof of bad faith usually involves clutching at straws. Attempts to prove infringements of the latter part of the definition, namely that the directors’ powers should be exercised for the proper purpose, are altogether more productive. Here the courts have attempted a systematic approach. “The first general proposition is that you must ascertain the powers of the directors from the very words of the articles,” said Meredith MR in Re Dublin North City Milling Company Limited. And Lord Wilberforce said much the same in giving the opinion of the Board of the Privy Council case of Smith (Howard) Ltd v Ampol Petroleum Ltd: “it is necessary to start with a consideration of the power whose exercises in question. …” and to define “as best can be done in the light of modern conditions the, or some, limits within which it may be exercised.” This initial consideration of the ambit of the power will generally be imprecise, and can only properly be phrased in generalities, since, as Lord Wilberforce admitted earlier in the opinion:
“To define in advance exact limits beyond which directors must not pass is, in the Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated.”
7. A director is not bound to bring special qualifications to that office. In fact, he or she may have nothing to offer at all. As Neville J. memorably stated in Re Brazilian Rubber Plantations and Estates Ltd [1911] Ch. 425 at 437, a person may enter the business of a rubber company “in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance”. But such abilities as a director must be applied to the company and the transaction of its business.
8. By what standard is the discharge by any director of the triple responsibility, of acting in good faith and within the scope of the relevant power and in the interests of the company as a whole, to be judged? In this case extremes have been argued. For the ISE, Howard Smith Ltd v. Ampol Petroleum Ltd [1974] AC 821 at 835 is cited for the proposition that having analysed the relevant power that is in issue in a case, the court must “give credit to the bona fide opinion of the directors” and where this is present must “respect their judgment as to matters of management”, ultimately concluding “as to the side of a fairly broad line in which case falls.” The test is said to be entirely subjective. This approach would appear at odds with other branches of the law concerned with commerce. A commercial contract has to be construed against the background into which it was entered in accordance with the meaning of its words interpreted so as to give to that contract the business efficacy that the parties intended. This seems to rule out subjectivity. In many branches of the law of contract, what a reasonable person would have concluded from a term or condition or from a particular representation or situation is the touchstone from which the law proceeds. Yet, the case of Regentcrest plc v. Cohen & Another [2001] B.C.L.C. 80 is cited in favour of an entirely subjective approach to scrutinising the discharge of directors’ responsibilities as follows:
The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task in persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.
9. For Bloxham, the argument goes the other way; in favour of an objective analysis of every decision made by a board of directors. Here the problem would be that in objectively analyzing decisions, the courts might be in danger of stepping into the shoes of directors. This is not appropriate. A court might be inclined to wear its legal brogues in circumstances where directors are entitled to, and where the experience exists, bound to wear the practical shoes of business people and that is a concept which extends to the muddy boots of the farming community, where incorporated. The court cannot displace a decision simply because it does not like it; and this is what a completely objective principle would tend towards, instead of appropriate deference to the exigencies and pressures of business. Even the case cited, taken at its height, does not support such a proposition. In Australian Growth Resources Corporation Pty Ltd v. van Reesema (1988) 6 A.C.L.C. 529 the Supreme Court of South Australia held:
It is not to the point that a director genuinely considers his purpose to be honest if those purposes are not in the interests of the company. The director must act in a way which he concedes to be for the benefit of the company as a whole, as that concept is understood by the law.
10. In other branches of the law, entirely subjective principles rarely hold sway. The most absurd and self-serving things have been thought by those who have usurped power over nations and those who have supported them through the course of human history. In public law, broad latitude is given to administrative and quasi-judicial decisions to the extent that these are not interfered with unless these are unreasonable. Originally, this was a question of jurisdiction; since it was thought that no limited power could be exercised within jurisdiction if a decision was unreasonable. Now, it is clear a public law decision can be overturned by the courts if it flies in the face of fundamental reason and common sense and that, as a matter of law, this ground stands alone. In the sphere of criminal law, subjective approaches are common since a major crime cannot be committed without intention or recklessness, or in the case of manslaughter, criminal negligence. Even there, a defendant does not inevitably get away with preposterous tales since it has been a principle of the criminal law for centuries that whereas a subjective belief may operate as a defence, as to whether that belief actually existed is be judged according to the presence or absence of reasonable grounds for it.
11. Thus, it seems that the test for the exercise of directors’ duties must involve a scrutiny of the relevant power in the context of the broad limits within which it can be exercised; the interests that from a business point of view that are involved in a particular decision; and whether the presence or absence of reasonable grounds enables what is said subjectively to be an honest decision to stand as being in the best interests of the company as a whole.”
In The Matter of: USIT World plc (in liquidation)
[2005] IEHC 285
Peart J.
!Where honesty is at issue and the Court has not been satisfied that the director has acted honestly, that dishonesty is more fundamental and goes to the core of a person’s integrity. I say that even though the section draws no distinction between honesty and responsibility. But it is significant that both words have been used in the section.
Dishonesty implies something akin to improper dealing with money or other assets belonging to the company, or some form of fraudulent trading. In an extreme case this would involve a director depleting the assets of the company directly for his own benefit, rather than settling his creditors, thereby leading to the collapse of the company; or obtaining funds from others with a fraudulent intent. Clearly such a director who is prepared to steal or deal with the company’s or another’s assets in such a fashion, or behave in any other way in which dishonesty is manifest will have demonstrated that the trust invested in him in exchange for the privileges attaching to limited liability through the mechanism of a limited liability company has been abused to the extent that he should be restricted within the terms of the section from being a director. Such dishonesty will of course also amount to irresponsibility.
But irresponsibility is a different concept. While dishonesty will always amount to irresponsibility the converse is not true.
In the present case no dishonesty has even been alleged by the liquidator against any director, and the Court is satisfied that none of the respondents has acted dishonestly, even Ms.Millington Wallace and Mr Moreels, who have filed no affidavits and have not appeared before the Court.
I will return toward the end of this judgment to a consideration of the position of Xavier Moreels and Lynn Millington Wallace given the lack of participation and I will deal with what I consider to be an interesting question, and one which has not directly arisen in any of the helpful judgments to which I have been referred during the course of extensive submissions. It is this. Is it possible, from the manner in which s. 150(1) of the Act has been worded, and from the absence of the express creation of a presumption as such, that the court may derive its satisfaction as to honesty and responsibility in respect of a respondent who has not appeared or been represented on the application, from what other respondents have said in their affidavits, so that a restriction order would not be made in circumstances where the Court, though satisfied that one ought not be made, is compelled to do so by default as it were? I will leave that interesting question over for the moment.
Given the enormity of the losses incurred, running as they do on anyone’s estimate to many tens of millions of Euro, it would be tempting to too easily blame the collapse on some irresponsibility of the directors, or some, or any one of them. However, in this context it is worth recalling the words of Murphy J. in Business Communications Limited v. Baxter and Parsons, unreported, 21at July 1995:
“…of course one must be careful not to be wise after the event. There must be no ‘witch-hunt’ because a business failed as businesses will.”
It is also worth noting the comment of Finlay Geoghegan J. in Kavanagh v. Cummins [2004] 2 ILRM 35 at page 41 when she stated the directors had discharged the onus upon them of establishing that they acted responsibly as directors and that the size of the deficit did not preclude her from reaching that conclusion. I respectfully agree that the size of the deficit should not of itself be determinative, although obviously the greater sums involved in the business the greater the care required to accompany decisions taken.
When the matters about which the liquidator and the Court have concerns in this case are scrutinised, it is not the case in my view that these can be seen as having caused the collapse of the group.
For example, and it is something which I shall return to later, there is no doubt that some documentation required to be filed in the Companies Registration Office (“CRO”) was not so filed. That is beyond doubt, even though individual directors may seek to argue that within the organisation of the company’s affairs it was not within their remit to look after those matters.
In some situations, there is no doubt that in the absence of these documents being filed, some creditor may be deprived of relevant information prior to lending money, or providing services to a company which later goes into liquidation, and had it seen the up to date state of affairs of the company from an examination of the company file in the CRO it may say that it would have chosen not to do business. In such a situation clearly there is a causative link between the culpable behaviour of the directors and the loss sustained by the creditor on liquidation. In the present case there is no such causative link. The largest creditor of USIT World was USIT Limited to the tune of about €56 million.
Therefore in the context of the present case, the failure to file some returns, while being something of importance and to be observed by directors, is so incidental to the collapse of the group as not to be capable of being a matter of irresponsibility for the purposes of an application of this kind, and in the sense of being connected causally to the collapse of the group.
It is unlike a worse situation where over perhaps many years of trading, officers of the company have ignored completely the obligations under the Companies Acts regarding the requirement to file returns, and/or other statutory requirements, where such behaviour would be demonstrative of such a degree of irresponsibility of attitude generally, and such egregious and wanton disregard of the obligations upon officers of limited companies as to liabilities as to indicate their complete lack of suitability for the entrustment of the privileges of limited liability. From such persons the public are entitled to be protected in the future. But, we are far from that scenario in the present case in spite of the enormity of the liabilities.
Acting honestly and responsibly:
A vital question is what level of honesty and responsibility must be shown to be present in conduct of the director if the Court is satisfied that that director acted honestly and responsibly. Referring to one aspect of this question, McCracken J. stated the following in Gasco Limited (in liquidation), unreported, 5th February 2001:
“………regard must be had to the area of management in the company for which the director was personally responsible. This does not mean, of course, that a director can disclaim responsibility altogether on the basis that financial matters were the responsibility of another director, but nevertheless one of the matters to be considered in assessing whether he acted responsibly was whether his reliance on the actions of another director was itself responsible.”
In this regard, Mr Murray for the liquidator has submitted that to draw any distinction between as between directors on the basis of their involvement in the management of the company is incompatible with section 383(3) of the Companies Act 1963 (as substituted by section 100 of the Company Law Enforcement Act, 2001 which provides that:
“It is the duty of each director and secretary of a company to ensure that the requirements of the Companies Acts are complied with by the company.”
I would be of the view that this should be interpreted as meaning exactly what it says, namely that each director is responsible in that regard. But in the context of an application under s. 150 it does not appear to run contrary to the section to draw a distinction in an appropriate case to the level or degree of that responsibility as between one director and another. No director can close his eyes completely to this responsibility, and it may in the end boil down to the question identified by McCracken J. in Gasco, namely “whether his reliance on the actions of another director was itself responsible.”
Murphy J. in Business Communications Limited v. Baxter and Parsons [supra] stated:
“………However it does seem to me that the most important feature of the legislation is that it effectively imposes a burden on the directors to establish that the insolvency occurred in circumstances in which no blame attaches to them as a result of either dishonesty or irresponsibility.”
In Squash Ireland Limited [2001] 3 IR 35, McGuinness J.stated at page 39:
“The question before the Court is whether they [the directors] acted responsibly, and this, as was correctly stated by counsel on behalf of the respondent, must be judged by an objective standard. In the case of all companies which have become insolvent it is likely that some criticisms of the directors may be made. Commercial errors may have occurred; misjudgments may well have been made; but to categorise conduct as irresponsible I feel that one must go further than this.”
She stated also in that same judgment at page 41 that:
“the Court should look at the entire tenure of the director and not simply at the few months in the run up of to the liquidation. It appears from the history of the company that the appellants have always acted responsibly and honestly and have put the interests of the company in the forefront of their minds, even insofar as losing their own money in an effort to assist the continuation of the company.”
There are aspects of these remarks relevant to the present case, certainly in respect of Mr and Mrs Colleary.
But the concept that the entire period of tenure should be looked at is, at first glance, at odds with what McCracken J. has stated in his judgment in Gasco [supra] when he stated:
“I think it is quite significant that no restrictions can attach to somebody who ceased to be a director of the company more than twelve months before the winding up. This seems to me to indicate that the primary aim of section 150 is to deal with directors who have behaved irresponsibly or dishonestly during the last twelve months of the life of the company, and that the actions of a director who is subject to Section 150 are to be looked at primarily in the light of his actions during that period. This indeed has a considerable practical logic, as it is presumably intended to focus attention on the behaviour of the directors in the period leading up to the winding up, and to try and ensure that they deal with creditors when a company is in difficulties. In my view therefore there should be particular scrutiny of the actions of directors during the final months before winding up.”
The distinction between these two judgments is that in the case of the former, the backward gaze of the Court was with a view to getting an overall picture as to how the directors in question had conducted themselves and that this would be relevant in assessing whether it was right to restrict them, as opposed to the liquidator doing a trawl through the years of the company’s existence in order to point to some matter or matters way behind twelve months which could be regarded as having at that time been dishonest and irresponsible, but which did not lead to insolvency.
In the latter case, however, the reference to the twelve month period is to a period in respect of which there may be found by the liquidator to have been some conduct which could give rise to a finding of dishonesty or irresponsibility. That would be in contradistinction to a situation where the respondent may be regarded as having at a much earlier stage in his or her tenure as a director been guilty of some dishonest or irresponsible act, but not during the final twelve months prior to the appointment of the liquidator. In this way, the emphasis is on the link between the act or acts which are dishonest and irresponsible and the insolvency of the company.
From cases such as Business Communications Limited v. Baxter and Parsons, unreported, 21st July 1995, La Moiselle Clothing Limited v.Soualhi [1998] 2 ILRM 345, Re Vehicle Imports Limited, unreported, High Court, 23rd November 2000, Squash Ireland Limited [2001] 3 IR 35, and Colm O’Neill Engineering Services Limited (in voluntary liquidation), unreported, 13th February 2004, a body of case-law has developed which gives considerable guidance to the Courts faced with considering whether in a particular case a director has acted honestly and responsibly. I do not propose to set out in any great detail what this case-law establishes, save to say that there are a number of factors which can be looked at in order to form an overall view as to whether the actions of a director are to be judged honest and responsible. A useful summary can be seen in the judgment of Shanley J. in La Moiselle Clothing Ltd v. Soualhi [supra] at page352 as follows:
“(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963-1990.
(e) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(f) The extent of the director’s responsibility for the insolvency of the company.
(g) The extent of the director’s responsibility for the net deficiency in the assets of the company.
(h) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.”
The list I am sure cannot be regarded as exhaustive, and neither in my view does the presence of one or more of these factors in a particular case mean that in that case the director must be regarded as having acted either dishonestly and/or irresponsibly to such an extent as to warrant restriction. Each case will have to be looked at on its own particular facts. In one case a director may have been culpable in respect of a number of the factors on the list, but in the heel of the hunt none of those factors had any direct or meaningful bearing on the failure of the company. In another case, a director may fall foul of only one of the factors, yet that one lapse may be of such a degree and have such a direct bearing on the insolvency of the company that it outweighs all the other ways in which the director conducted himself/herself honestly and responsibly as a director, and be such that the public should be protected for the period of restriction from any risk that it might happen again.
As will have been readily apparent from the contents of the affidavits which I have tried to summarise in a reasonably comprehensive way, there are conflicts between what the liquidator states and what the directors state in respect of some matters. These differences of opinion remain. The question arises as to how the Court is to deal with these conflicts when making its assessment as to the honesty and responsibility of any of the respondents insofar as those matters about which there remains disagreement are relevant to these questions. An important consideration is the fact that these applications are dealt with by way of affidavit evidence. While there is the usual procedure available to any party to serve Notice to Cross-examine any deponent in order to test what has been stated, none has been served in this case. Counsel for Mr Colleary, John O’Donnell SC referred the Court to a passage from the judgment of Browne Wilkinson VC in Re Lo Line Electrical Motors Ltd [1988] BCLC where he stated as follows:
“In the present case there are many factual issues on which the evidence given by Mr Browning in his affidavit directly contradicts allegations made against him by the official receiver. Yet he has not been cross-examined. In my judgment proceedings for disqualification are no different from any other proceedings: it is not possible for the Court to disbelieve evidence given on oath in the absence of cross-examination of the witness. I therefore proceed on the footing that Mr Browning’s evidence is correct.”
Nevertheless, where matters deposed of by a director/respondent relate less to purely factual matters than to a view held by the director as to the probity of his actions, the Court may of course take into account the fact that such a director will inevitably be seeking to place as favourable an interpretation of facts and events as he can, so as to discharge the onus upon him.
Similarly in a situation where the liquidator states that for example he was unable to locate any books and records of the company and seeks to have an inference drawn that none were prepared and kept, a mere denial that this is true will not be sufficient necessarily to dislodge the inference, even in the absence of cross-examination, unless the denial appears to be corroborated by other evidence or from the circumstances generally. In that sense only would I seek to qualify the passage from Browne Wilkinson VC. In general I would approach the standard of proof by the director as to his honesty and responsibility on the basis of a balance of probability, taking all relevant circumstances into account.
La Moselle Clothing Ltd. v. Soualhi
[1998] IEHC 66; [1998] 2 ILRM 345
Shanley J.
“11. Thus it seems to me that in determining the “responsibility” of a director for the purposes of Section 150(2)(a) the Court should have regard to:-
(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963-1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the directors responsibility for the insolvency of the company.
(d) The extent of the directors responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.
(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.
12. These criteria necessarily overlap: for example a failure to keep proper books of account may directly contribute to the company becoming insolvent and may be caused by the incompetence of a director. But not all situations of a want of responsibility will result from a breach of obligations imposed by the Companies Acts; for example, a director’s inability to see the “writing on the wall” (e.g. an inability to see from a perusal of the company’s management accounts that the company was trading while insolvent) may result from sheer incompetence and justify a restriction (see Re: Continental Assurance Co. of London Plc, Secretary of State and Industry -v- Burrows 1997 1 BCLC 48, where an inability to read and understand the statutory accounts of a company was considered a ground for disqualification of a director). Equally, a director who takes excessive sums from the company by way of drawings for salary without regard to the financial state of health of the company may be said to have acted without commercial probity although he did not necessarily fail to comply with his obligations under the Companies Acts 1963 – 1990.
13. Apart from satisfying the Court that he as a director acted honestly and responsibly, the director must also satisfy the Court that there are no other reasons why it would be just and equitable to restrict him from acting as a director of a company. It is to be noted that acting honestly and responsibly relates to “the conduct of the affairs of the company” and arguably such bears no relation to any period after the commencement of a winding-up or receivership of the particular company where the person may not be involved any further in the conduct of the affairs of the company. That the director must satisfy the Court that the there is no other reason why it would be just and equitable to restrict the director, allows the Court to take into account, in my view, any relevant conduct of the director after the commencement of the winding-up or the receivership (for example, any failure to co-operate with the liquidator or receiver) in deciding whether or not to make an Order under Section 150, sub-section (1), of the Companies Act, 1990. “
The Director of Corporate Enforcement -v- Slattery & anor
[2014] IEHC 363
Barrett J.
“It is important also to recognise the limits of what Carroll J. stated in Re Hunting Lodges. In effect she said that a married female director cannot escape liability as a director by reference, for example, to some sort of subservience to husbands that may have existed before the modem age of equality between the sexes. However, Carroll J. did not say that a married female director can never escape liability as a director where she embarks upon a directorship through ties of natural affection and never does anything in relation to the company of which she is director. That would place so great a premium on legal reality above practical reality as to be almost certain to result in injustice in some instances, an outcome which Carroll J. undoubtedly did not intend. Notably, Carroll J. states that “A director who continues as director but abdicates all responsibility is not lightly to be excused’. She does not, however, dismiss the possibility that such a passive director may be excused in some circumstances. Indeed she gives one instance, that of where a passive director “reasonably endeavoured to keep abreast of company affairs and had been deceived’, in which it might be possible to excuse such director from liability. Neither expressly nor impliedly does Carroll J. assert that there are no other instances in which a passive director might be so excused. Carroll J. establishes as the litmus-test of personal liability in respect of such a director that there should, as a matter of necessity, be some “real moral blame” attaching to her before personal liability should arise. In Re Hunting Lodges, the purportedly passive director, Mrs. Porrit, had been party to fraudulent trading that included the opening of a building society account under a false name, with the mandate documents for that account being signed by herself and her husband under false names. As a consequence of her actions, Mrs. Porrit would likely have struggled to persuade any judge that no moral blame attached to her.
However, later case-law presents with instances in which, though it is reiterated that non-executive or passive directors cannot simply wash their hands of responsibility, in fact such responsibility is not visited upon them because they are not guilty of specific wrongdoing. In the present case, the court considers that in any event no liability should attach to either of the respondents, whether under s.160 or s.150 of the Act of 1990, and thus the court is not required to render judgment on the contention made in respect of the second-named respondent that she was in effect only a passive director of Chercrest who never played any role in relation to the activities of same. Were it required to do so, however, the court does not see on the evidence before it any “real moral blame” on the part of Ms. Caffrey which so taints her behaviour as a director as to place it in one or more of the categories of behaviour in respect of which a s.150 declaration is required or, alternatively, to render it behaviour that merits a disqualification order under s.160.”
AIB PLC & Ors -v- Diamond & Ors
[2011] IEHC 505
Clarke J.
“7.4 In Regal (Hastings) Ltd. v Gulliver [1967] 2 AC 134, at 144, Lord Russell of Killowen made the following statement of law, which is a useful starting point in this case:
“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”
7.5 This was later followed in Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162, at 176, where Roskill J. briefly noted that same principle that:
“It is an overriding principle of equity that a man must not be allowed to put himself in a position in which his fiduciary duty and his interests conflict.”
7.6 This leads to the question: what is a fiduciary? In Bristol and West Building Society v Mothew [1996] 4 All ER 698, at 711-712, Lord Justice Millett provided the following definition:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”
7.7 It was this definition that formed the backdrop to the decision of Elias J. in Nottingham University v Fishel [2000] in which he considered the question of whether an employee may be held to be a fiduciary of his employer. The relevant part of his decision is in the following terms:
“Trustees, company directors and liquidators classically fall into this category which Dr. Finn, in his seminal work on fiduciaries, has termed “fiduciary offices” (see PD Finn, Fiduciary Obligations (1977)). As he has pointed out, typically there are two characteristics of these relationships, apart from duty on the office holder to act in the interests of another. The first is that the powers are conferred by someone other than the beneficiaries in whose interests the fiduciary must act; and the second is that these fiduciaries have considerable autonomy over decision making and are not subject to the control of those beneficiaries.
By contrast, the essence of the employment relationship is not typically fiduciary at all. Its purpose is not to place the employee in a position where he is obliged to pursue his employer’s interests at the expense of his own. The relationship is a contractual one and the powers imposed on the employee are conferred by the employer himself. The employee’s freedom of action is regulated by the contract, the scope of his powers is determined by the terms (express or implied) of the contract, and as a consequence the employer can exercise (or at least he can place himself in a position where he has the opportunity to exercise) considerable control over the employee’s decision making powers. This is not to say that fiduciary duties cannot arise out of the employment relationship itself. But they arise not as a result of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Where this occurs, the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken.
[…]
The problem of identifying the scope of any fiduciary duties arising out of the relationship is particularly acute in the case of employees. This is because of the use of potentially ambiguous terminology in describing an employee’s obligations, which use may prove a trap for the unwary. There are many cases which have recognised the existence of the employee’s duty of good faith, or loyalty, or the mutual duty of trust and confidence – concepts which tend to shade into one another. As I have already indicated, Lord Millett has used precisely this language when describing the characteristic features which trigger fiduciary obligations. But he was not using the concepts in quite the same sense as they tend to be used in the employment field. Lord Millett was applying the concepts of loyalty and good faith to circumstances where a person undertakes to act solely in the interests of another. Unfortunately, these concepts are frequently used in the employment context to describe situations where a party merely has to take into consideration the interests of another, but does not have to act in the interests of that other.
[…]
Accordingly, in analysing the employment cases in this field, care must be taken not automatically to equate the duties of good faith and loyalty, or trust and confidence, with fiduciary obligations.
[…]
Accordingly, in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interests of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached […]”.
7.8 In the case of Crowson Fabrics Ltd v Rider and others [2007] EWHC 2942 (Ch), following on from the Fishel case, Smith J. held that:
“Where an employee is not a director it is essential to look at the role of that employee and determine whether or not the nature of that role is sufficiently senior for the court to conclude that in addition to his normal duties as an employee he owed fiduciary duties.”
7.9 However, even if not a fiduciary an employee owes a duty of fidelity to an employer as part of the mutual relationship at the heart of a contract of employment. That duty of fidelity prevents an employee, while still employed, from taking actions in competition with the employer concerned. However an employee is entitled to take preparatory steps for life after the contract of employment has terminated. Smith J., in Crowson Fabrics, quoted the decision in Helmut Integrated Systems Ltd v Tunnard [2006] EWCA Civ 1735, [2007] IRLR 126 on the question of the legitimacy of preparatory activity:
“The battle between employer and former employee, who has entered into competition with his former employer, is often concerned with where the line is to be drawn between legitimate preparation for future competition and competitive activity undertaken before the employee has left. This case has proved no exception. But in deciding on which side of the line Mr Tunnard’s activities fall, it is important not to be beguiled into thinking that the mere fact that activities are preparatory to future competition will conclude the issue in a former employee’s favour. The authorities establish that no such clear line can be drawn between that which is legitimate and that which breaches an employee’s obligations.”
In his conclusion, Smith J. determined that the defendants were in breach of their duty of fidelity and that one of them was also in breach of his fiduciary duty in a number of ways, namely:
“First, they set about creating a rival business in breach of those duties. Second, they retained or copied or transferred to [NewCo] documents belonging to the Claimant with a view to using them as an illegitimate springboard to compete with the Claimant. Third, they solicited the business of agents and some customers. Fourth, they diverted some business opportunities to themselves.”
Of note is that on the facts in Crowson Facts, the defendants, while working out their notice periods, had also incorporated a company, identified and acquired a substantial leasehold premises and purchased a computer and registered an email account for the planned business. However, these facts did not form part of the actions determined by the court to have been in breach of the defendants’ duties to their employer.
7.10 In Wessex Dairies Ltd v Smith [1935] 2 KB 80, at 88, Maugham L.J. provided the following guidance as to where the line between legitimate preparation and a breach of an employee’s duty to his employer lies:
“The Lord Justice then asked himself whether the defendant in Robb v. Green ([1895] 2 QB 1) acted with good faith and fidelity. The same question has to be answered in the present case. In dealing with it certain considerations should not be left out of sight. First, after the employment terminates, the servant may, in the absence of special stipulation, canvass the customers of the late employer, and further he may send a circular to every customer. On the other hand, it has been held that while the servant is in the employment of the master he is not justified in making a list of the master’s customers, and he can be restrained, as he was in Robb v. Green, from making such a list, or if he has made one, he will be ordered to give it up. But it is to be noted that in Robb v. Green the defendant was not restrained from sending out circulars to customers whose names he could remember. Another thing to be borne in mind is that although the servant is not entitled to make use of information which he has obtained in confidence in his master’s service he is entitled to make use of the knowledge and skill which he acquired while in that service, including knowledge and skill directly obtained from the master in teaching him his business. It follows, in my opinion, that the servant may, while in the employment of the master, be as agreeable, attentive and skilful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers’ friendly feelings when he calls upon them if and when he sets up business for himself. That is, of course, where there is no valid restrictive clause preventing him doing so.
In this case the question is whether the defendant acted with fidelity when, on the Saturday afternoon in question and perhaps on the previous days of the week, in going his round he informed the customers that he would cease on Saturday to be in the employment of the plaintiffs, that he was going to set up business for himself, and would be in a position to supply them with milk. He was plainly soliciting their custom as from Saturday evening. In my opinion that was a deliberate (sic) as it was a successful canvassing at a time when the defendant was under an obligation to serve the plaintiffs with fidelity. I am of opinion therefore that he committed a breach of his implied contract by acting as he did before the termination of his employment.”
7.11 Elaborating on that case, Lord Green MR, in Hivac, LD. v Park Royal Scientific Instruments, LD. [1946] 1 Ch. 169, at 177, noted:
“I cannot read the judgment as meaning that if the roundsman had on a Saturday afternoon, when his work was over, gone round to all these customers and canvassed them, he would have been doing something he was entitled to do. It would be a curious result if, quite apart from making use of the list of customers or his special knowledge or anything of that kind, he could set himself during his spare time deliberately to injure the goodwill of his master’s business by trying to get his customers to leave him.”
7.12 It was thereafter in following this decision that, in Sanders v Parry [1967] 1 WLR 753¸ Havers J. ruled that where an employee enters into an agreement with a customer to transfer that customer’s business from his employer to the employee’s own practice but did not inform his employer of the proposal: he breaches the implied term of good faith and fidelity in the employment agreement. This decision was reached notwithstanding that the agreement was initiated by the customer.
7.13 While AIB argues that the personal defendants are fiduciaries, as a fallback AIB relies on the proposition that, where an employee is not found to be a fiduciary the test is as to whether any actions on the part of a relevant employee went beyond the line identified in the above jurisprudence. Did the actions concerned amount to actual competition at a time when the relevant employee remained in the employ of the former employer and owed that employer a duty of fidelity or was it simply legitimate pre-planning and non-competitive preparatory steps which are permissible?
7.14 By reference to that standard, it seems to me that the factual matters, in respect of which I am satisfied that AIB has made out a strong arguable case, fall on the wrong side of that line from the perspective of the personal defendants. If it is established at trial that any of the personal defendants were involved in a scheme which involved taking steps in the form of securing confidential information, approaching existing clients, downloading information to facilitate the transfer of such clients and the like then same would clearly be unlawful. I have already concluded that AIB has made out a strong arguable case on the facts that such a scheme was in place. It will, of course, be for the trial judge to decide whether that case is fully made out on the balance of probabilities at the end of the day. So far as Mr. Foley, Mr. McEvoy and Mr. O’Reilly are concerned, I am satisfied that the evidence is sufficient to give rise to a strong arguable case that their level of involvement in the implementation of the scheme in that way was sufficient so as to give rise to an inference that they expressly or by implication approved of the implementation of the scheme in an unlawful manner. It should be recorded that each of the three individuals concerned denied their involvement in anything unlawful. It will be for the trial judge, who will have had the benefit of all of the evidence and will have the benefit of seeing relevant witnesses cross examined, to conclude whether, on the balance of probabilities, that case is made out. It is sufficient, for the purposes of this application, to conclude that there is a strong arguable case to be tried on the facts for the illegality contended for on the part of AIB in respect of those defendants.
7.15 The situation regarding Centralis is relatively straightforward in that it stands to gain from the actions complained of against those personal defendants referred to above and as such I am satisfied that a case has been made out that there exists a corresponding strong arguable case against Centralis also. It is on this basis, and in light of the analysis of Dunne J. in Net Affinity Ltd v Conaghan & Ors [2011] IEHC 160, to which it will be necessary to return later, that I am satisfied that it is appropriate to make an order against Centralis.
7.16 The case in respect of Mr. Walsh is more difficult. The extent to which there is evidence of an actual involvement on the part of Mr. Walsh is relatively limited. That Mr. Walsh had an involvement in the overall scheme is, perhaps, clear. However, for the reasons which I have pointed out, the scheme was capable of being implemented in a lawful manner provided that those involved did not “jump the gun”. The mere fact of Mr. Walsh’s involvement in the overall scheme would not, therefore, necessarily give rise to an inference that he was involved in or approved and authorised unlawful activity. The question which I must ask is as to whether there is sufficient evidence, at present, to warrant a conclusion that there is a fair case to be tried on the facts that Mr. Walsh was involved in or accepted and approved of an unlawful implementation of the scheme. On balance, I have come to the view that the evidence currently available does not go sufficiently far to enable me to conclude that AIB has made out a fair case in respect of Mr. Walsh. It may be that the evidence which will be available at the trial will put the matter further. However, I am confined to the evidence which is before me and am not satisfied that there is enough evidence to establish a sufficient case on the facts for the contention that Mr. Walsh was knowingly involved in and accepted and authorised any unlawful implementation of an overall scheme designed to improperly take customers from AIB IFS to Centralis. It follows that, on that ground alone, no injunction should be given against Mr. Walsh and that he should be released from the undertaking presently in place.”
Foster Bryant Surveying Limited v Bryant and another
[2007] EWCA Civ 200
Rix LJ
“The law on a director’s fiduciary duties
At trial it was common ground between the parties that the synthesis of principles expounded by Mr Livesey QC, sitting as a deputy judge of the high court, in Hunter Kane Limited v. WAtkinss [2002] EWHC 186 (Ch) (unreported, 24 January 2003), which Mr Livesey had himself taken largely from the judgment of Mr Justice Lawrence Collins in CMS Dolphin Limited v. Simonet [2001] 2 BCLC 704 and the authorities there cited and discussed, accurately stated the law. In this court in In Plus Group Ltd v. Pyke [2002] 2 BCLC 201 Brooke LJ described the Simonet analysis as “valuable” (at para 71). Mr Livesey said:
“1. A director, while acting as such, has a fiduciary relationship with his Company. That is he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self-interest.
2. A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the Company, any property or business advantage either belonging to the Company or for which it has been negotiating, especially where the director or officer is a participant in the negotiations.
3. A director’s power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the Company.
4. A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined the director is in general not under the continuing obligations which are the feature of the fiduciary relationship.
5. Acts done by the directors while the contract of employment subsists but which are preparatory to competition after it terminates are not necessarily in themselves a breach of the implied term as to loyalty and fidelity.
6. Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which is plainly in the public interest that they should be free to exploit it in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the ‘stock in trade’ of the knowledge he has acquired while a director, even including such things as business contacts and personal connections made as a result of his directorship.
7. A director is however precluded from acting in breach of the requirement at 2 above, even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the Company and where it was his position with the Company rather than a fresh initiative that led him to the opportunity which he later acquired.
8. In considering whether an act of a director breaches the preceding principle the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the Company and the circumstances under which the breach was terminated, that is whether by retirement or resignation or discharge.
9. The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity ‘of the Company is that the opportunity is to be treated as if it were the property of the Company in relation to which the director had fiduciary duties. By seeking the exploit the opportunity after resignation he is appropriating to himself that property. \he is just as accountable as a trustee who retires without properly accounting for trust property.
10. It follows that a director will not be in breach of the principle set out as point 7 above where either the Company’s hope of obtaining the contract was not a ‘maturing business opportunity’ and it was not pursuing further business orders nor where the director’s resignation was not itself prompted or influenced by a wish to acquire the business for himself.
11. As regards breach of confidence, although while the contract of employment subsists a director or other employee may not use confidential information to the detriment of his employer, after it ceases the director/employee may compete and may use know-how acquired in the course of his employment (as distinct from trade secrets – although the distinction is sometimes difficult to apply in practice).”
In the present proceedings the principles with which we are most concerned are 1, 2, 4, 5, 7, 8, 9 and 10.
It seems to me that this restatement, as to which the parties are in agreement, will suffice at present to form the legal background to my consideration of the facts, which I will take very largely from the judgment of the judge. It will be necessary to look at some of the underlying (or more recent) authorities in due course.
….
Clark v. Workman
[1920] I.R.114
Ross J.
“What is the intent and meaning of these provisions? There must be bona fides. There must be no indirect motives. The directors are to act strictly as trustees in the matter of the transfers: Bennett’s Case (1).
In all cases bona fides is the test of the valid exercise of powers by trustees….
When the test of bona fides comes to be applied, all these matters and the surrounding circumstances call for the most careful attention. I refer in this connexion to the weighty observations of Lord Lindley when Master of the Rolls in Allen v.Gold Reefs Co. of West Africa (1). Even the statutory powers of altering articles of association by a special resolution must be exercised subject to those general principles of law and equity which are applicable to all powers enabling majorities to bind minorities. They “must be exercised,” says the learned Master of the Rolls, “not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and must not be exceeded. These conditions are always implied, and are seldom if ever expressed.” These observations refer to the exercise of powers by shareholders. They apply with augmented force when the powers are being exercised by directors.
There is one other matter of law affecting the case, and it is this: the powers given to directors are powers delegated to the directors by the company, and when once given the company cannot interfere in the subject-matter of the delegation unless by special resolution: Automatic Self-cleansing Filter Co. v. Cunninghame (2).
I have stated the principles of law applicable to this case, and I now proceed to apply them. ……..
I must now consider the action of the defendant directors, their motives and intentions, and ascertain whether what they proposed and supported was, in the circumstances, inconsistent with a right performance of their fiduciary duty to the company. In the recent Scotch case of Hindle and John Cotton, Ltd. (1),Lord Finlay said: “Where the question is one of abuse of powers, the state of mind of those who acted, and the motive in which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials, which genuinely throw light upon that question of the state of mind of the directors, so as to show whether they were honestly acting in discharge of their powers in the interests of the company, or were acting from some by-motive, possibly of personal advantage, or for any other reason.”
Vehicle Imports Ltd. (in liquidation),
Re [2000] IEHC 90
Murphy J.
“Applicable Law
50. These duties have been conveniently summarised in Barings and I would adopt the seven headings in the head note to the Barings case (re: Barings Plc. & Others Secretary of State for Trade and Industry-v- Baker & Others (1999) 1BCLC 433 at 435-6, more extensively detailed at 486-489) as follows:-
Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.
Subject to the articles of association of the company, the Board of Directors might delegate specific tasks and functions. Some degree of delegation was almost always essential if the company’s business was to be carried out efficiently: to that extent, there was a clear public interest in delegation by those charged with the responsibility for the management of a business.
The duty of an individual director, however does not mean that he might not delegate. Having delegated a particular function it does not mean he was no longer under any duty in relation to the discharge of that function, notwithstanding that the person to whom the function had been delegated appeared both trustworthy and capable of discharging the function.
Where delegation has taken place the Board (and the individual directors) remained responsible for the delegated function or functions and retained a residual duty of supervision and control. The precise extent of that residual duty will depend on the facts of each particular case, as will the question of whether it has been breached.
A person who accepted the office of Director of a particular company undertook the responsibility of ensuring that he understood the nature of the duty a director was called upon to perform. That duty would vary according to the size and business of that particular company and the experience or skills which the director held himself or herself out to have in support of appointment to the office. The duty included that of acting collectively to manage the company.
Where there was an issue as to the extent of a directors duties and responsibilities in any particular case, the letter of reward which he was entitled to receive or which he might reasonably have expected to receive from the company might be a relevant factor in resolving that issue. It was not that the unfitness depended on how much he was paid. The point was that the higher the level of reward, the greater the responsibilities which might reasonably be expected (prima facie at least) to go with it.
The following general propositions could be stated with respect to the directors duties:-
Directors had, both collectively and individually a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.
Whilst the directors were entitled (subject to the articles of association of the company) to delegate particular functions to those below them in a management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation did not absolve a director from the duty to supervise the discharge of the delegated functions.
No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it had been discharged, depended on the facts of each particular case, including the directors role in the management of the company.”
In the Matter of Tralee Beef and Lamb Ltd (In Liquidation)
[2008] IESC1
Supreme CourtHardiman J.
“Applicable Case Law.
The criteria historically applied in considering whether a party has acted honestly and responsibly were for many years regarded as authoritatively expressed in what the article just cited describes as the “seminal dictum” of Shanley J. in Re La Moselle Clothing [1998] 2 ILRM 345. These criteria, which were cited by the learned trial judge in the present case are as follows:
“(a) The extent to which the Director has or has not complied with any obligation imposed on him by the Companies Acts, 1963 – 1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the director’s responsibility for the insolvency of the company.
(d) The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up, or thereafter.
(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.”
This passage was approved by McGuinness J. in giving the views of the Supreme Court in Re Squash (Ireland) Ltd. at p.40. In the authoritative Irish work Company Law by the former Chief Justice, Mr. Justice Keane, the passage is cited at paragraph 27.173 preceded by the words:
“The burden of proof rests on the director to satisfy the court that the order should not be made and the courts have identified a number of factors which will be relevant in determining in particular whether the director has acted ‘reasonably’. In Re La Moselle Clothing Ltd. and Rosegem Ltd., Shanley J. said that the Court should have regard to [the factors set out above]”.
In her judgment in the present case Finlay Geoghegan J. set out the passage quoted above from Shanley J. and a passage from McGuinness J. in the Squash (Ireland) Ltd. case. She then decided that the matters set out by Shanley J. required “amplification”:
“I would respectfully suggest that the above matters need the following amplification when being considered in relation to the respondents herein. Shanley J. at paragraph (a) refers only to the obligations imposed on a director by the Companies Acts. At common law, directors owe duties to the Company which are normally divided into duties of loyalty based on fiduciary principles, developed initially by the Courts of Equity, and duties of skill and care developed initially by the Common Law Courts from the principles in the law of negligence. There is no suggestion in the above decision that the Courts should ignore those duties. Accordingly, it appears to me that when considering the matters referred to by Shanley J. in La Moselle Clothing Ltd. v. Soualhi [1998] 2.I.L.R.M. 345, under paragraph (a) a court should have regard not only to the extent to which a director has or has not complied with any obligation imposed on him/her by the Companies Acts but also with duties imposed by common law.”
This passage appears to me to be central to the result arrived at. Both the liquidator and the High Court found that each respondent had satisfied them that he or she acted honestly in relation to the affairs of the Company. No breach of any obligation “imposed on him by the Companies Acts” by the appellant was identified. Accordingly the entire issue is as to whether or not he can satisfy the Court that he acted responsibly. The judgment of the learned High Court judge discussed Common Law duties of directors at great length.
This discussion can be found, in particular, at pp 8ff of the judgment. I wish to make it clear that I am in agreement with these propositions of law enunciated by the learned High Court Judge. In particular, I would endorse her citation from the 3rd edition of Keane’s Company Law (Dublin, 2000) and the cases cited there. This discussion may be of the greatest use in future cases under the relevant sections. But I consider that the appellant has a legitimate ground of complaint under a number of headings in relation to the application of these principles to him.
(1) “Amplification” of the La Moselle criteria.
This step which the learned trial judge felt obliged to take is the engine of the finding against the appellant. Much of the rest of the legal part of the judgment is devoted to identifying and defining the Common Law duties of a director. For present purposes, the whole of the “amplification” took place in relation to paragraph (a) of the citation from the judgment of Mr. Justice Shanley:
“The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963 – 1990.”
Those duties, arising exclusively from statute, are readily ascertainable and it does not appear that either the liquidator or the learned High Court judge considered that Mr. Coyle was in breach of any of them. The other duties, by reference to which this criterion was “amplified”; are more amorphous and are expressed in words of very general purport. They include what the learned High Court judge called “duties of loyalty based on fiduciary principles, developed initially by the Courts of Equity and duties of skill and care developed initially by the Common Law Courts from the principles in the law of negligence.”
The learned High Court judge considered that in the judgment of Mr. Justice Shanley “There is no suggestion… that the court should ignore those (latter) duties”. That is not, perhaps, quite the same as saying that the judgment actually mandates the taking into account, apparently in the face of the mode of expression of paragraph (a) above, the much more extensive and less well defined Common Law duties. Mr. Paul Gardiner S.C. for Mr. Coyle pointed out that, had Mr. Coyle taken advice as to his personal liability before he took the steps (and it was he who took them) that led to the winding up, and thus to the present application, he would have been advised along the unamplified lines of La Moselle. I accept this. There has been no suggestion that the proposed amplification or its terms were discussed at the hearing. Some further observations on these themes are made in the brief discussion of the Baring’s case, below.
Having regard to the need to respect Mr. Coyle’s constitutional rights, not only to fair procedures but to his good name and the associated right to earn a living by the practice of his profession, I do not consider that it was appropriate to “amplify” the criteria for restricting a director after the hearing. Furthermore, I do not consider that the findings against Mr. Coyle which were in fact made could have been made without such amplification. The judgment of a judge, however eminent, should not be construed as though it were a statute and I hope I can avoid that error. But when a judge of great authority in this area of the law, as the late Shanley J. was, speaks of compliance or otherwise “with any obligation imposed on him by the Companies Acts, 1963 – 1990” he may safely be taken to be speaking of those duties and not of others which may arise from another source. To reach this conclusion it is not necessary to apply, as one might to the words of a statute, the maxim “expressio unius exclusio alterius”. It is only necessary to construe the words in their ordinary and natural meaning and to bear in mind the near canonical status which they have enjoyed for a decade or so, as shown from their approval by the Supreme Court and their adoption in a text book of high authority. Moreover, a survey of the periodical literature on the topic confirms the status accorded to the words by the practising profession: one author’s statement to this effect has been quoted earlier in this judgment. A Common Law judge is of course quite entitled to modify, to develop or to amplify the decisions of his or her predecessors: the Common Law has for centuries developed in precisely this way. As I have said, I do not disagree with the content of the learned trial judge’s “amplification”. But in a hearing of great importance to the appellant, where his reputation and his professional standing are intimately involved, I do not think it right to alter amplification or otherwise the criteria for imposing on him what I am satisfied is a very significant stigma. This point weighs with me all the more strongly because the appellant has been expressly found to have been honest in his dealings, and I have no doubt that he was. I do not think that any amplification of the law, however desirable on general or policy grounds, should take place in the context of inflicting a grave stigma on such a person, or without detailed argument as to the content and wording of the amplification.”
O’Donnell & ors -v- Governor and Company of the Bank of Ireland & ors
[2013] IEHC 375
McGovern J.
“….. If the members of the company learn of what is proposed in time, they will be able to restrain such transaction: if they only discover the facts later, their remedy lies against those who have wrongly caused the company to act in excess or abuse of the company’s powers. If a third party has received the company’s property with notice of the excess or abuse of powers, such third party will be personally liable as a constructive trustee and the company will be able to recover the property: see Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. (No. 2) [1980] 1 All E.R. 393”
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44. The plaintiffs plead that the court should infer constructive knowledge on the part of the first and second named defendants that Vico Limited, its directors and/or the trustees of the Avoca Settlement had acted in breach of trust or breach of fiduciary duty entering into the Security arrangements. In general, a third party dealing with a company is entitled to assume that the company’s internal affairs are in order. In Rolled Steel Browne-Wilkinson LJ stated the position thus at page 304:-
“However, the principles of ostensible authority apply to the acts of directors acting as agents of the company and the rule in Turquand’s case, 6 E. & B. 327 establishes that a third party dealing in good faith with directors is entitled to assume that the internal steps requisite for the formal validity of the directors’ acts have been duly carried through. If, however, the third party has actual or constructive notice that such steps had not been taken, he will not be able to rely on any ostensible authority of the directors and their acts, being in excess of their actual authority, will not be the acts of the company.”
45. I find no basis in the evidence upon which to infer any knowledge of a breach of trust or other irregularity on the part of the first and second named defendant.
…..
47. The plaintiffs similarly seek to establish an equitable interest through the doctrine of knowing receipt citing inter alia the judgment in Ulster Factors v. Entonglen Ltd [1997] IEHC 34 wherein Laffoy J approved the approach taken by the Court of Appeal of England and Wales in Belmont Finance Corporation v. Williams Furniture Limited (No. 2) [1980] 1 All ER 393 and stated at page 3:-
“Under the Belmont principle, as applied by the Supreme Court, what renders the recipient of or the dealer with funds which are being misapplied in breach of the fiduciary duties of the directors of a company liable as a constructive trustee is knowledge, actual or constructive, of the breach of trust.”
48. While it is clearly established that constructive knowledge may suffice to demonstrate knowing receipt, the plaintiff’s assertion on this point is again unfounded. Both of these grounds are premised on the fact of there having been a disbursement of property that is impressed with a trust. The evidence in this case unequivocally demonstrates that Vico Limited was the full legal and beneficial owner of Gorse Hill. Given that there has been no dealing in trust property
49. Furthermore, the evidence also shows that the first and second named defendants had no knowledge, or reason to believe that there had been a breach of trust or breach of fiduciary duty on the part of the trustees of the Avoca Settlement or of the directors of Vico Limited. Insofar as the plaintiffs claim that the surrounding circumstances should have put the bank “on inquiry” of the possibility of a breach of trust, the evidence before me shows that appropriate inquiries were in fact made, disclosing no difficulties.
In re S. M. Barker, Ltd. [1950] I.R. 135
Gavan Duffy P.
“Here was a small private company, owned and controlled by a family group, who acted unanimously, and in concert with the incoming members about to replace them, at the September and October meetings; and what they did they did in good faith and in natural reliance for the technical mechanics of their operations and of the deal upon an accountant-auditor belonging to a firm of high repute. However improvident the resolution releasing the Latchmans’ indebtedness and however regrettable the failures to observe the requirements and the formalities of company law, quite beyond their ken, I think, the outstanding fact is the fact that the true owners of the property, acting with the full assent of their prospective assignees, all concurred at the two meetings and throughout in every step taken. Consequently, in my view, the Company cannot through its liquidator make the Latchman shareholders liable in their capacity of directors for the value of the released debts, unless the liquidator can show some act done ultra viresof the Company by the Latchmans as directors to have caused loss, or prove an improper pecuniary benefit acquired by the directors, for which they are accountable to the Company.”
Fay -v- Tegral Pipes Limited & ors
[2005] IESC 34
Supreme Court
Judgment by: McCracken J.
“In any event, I would question whether, in the absence of fraud, any action for negligence can lie against a director for his part in signing a declaration of solvency. Section 256 embodies safeguards to ensure that a director will not act carelessly or recklessly. It requires an independent report by a person who is qualified to be an auditor of a company and it allows any creditor to apply to the Court within 28 days after the resolution of a winding-up has been advertised if the creditor wishes to contest the solvency of the company. Where it transpires that in fact the declaration of solvency was incorrect, and the company is not able to pay its debts in full, then and only then is there a provision for personal liability of the directors, but in the present case I am quite satisfied that the company did pay its debts in full within the relevant period, and accordingly the directors do not have any liability under the statutory provisions of the section.
…..
In any event, this claim appears to be based on the fact that the Defendants knew or ought to have known that the Plaintiff, and possibly other employees, had a contingent claim against the company in the event of their contracting an illness due to contact with asbestos. In my view this totally misunderstands the nature of a contingent debt. For a contingent debt to exist, there must be a relationship between the company and a specific creditor in relation to a specific debt which may or may not become due depending upon the happening of some event. I do not think that some vague prospect in the future of some unidentified and unknown person making a claim could be construed as a contingent debt. Were it otherwise, it could lead to absurdities, particularly in relation to the winding-up of a company. To my mind there must be certainty in the winding-up of a company, and it would be ridiculous to suppose that a company in liquidation must make provision, and presumably retain monies, in case at some time, perhaps ten or twenty years in the future, a claim might be made against it by one of more of a class of claimants. In this regard it is relevant to note that the declaration required by s.256 must state that all debts will be paid in full within twelve months. Thus it is clear that the policy of the legislation is that where a solvent company is being wound-up, its debts should be paid, and the winding-up completed, within this period. Where, as in this case, the company can pay all its present debts within the twelve month period, there could be no question of negligence or breach of duty on the part of the directors in not making provision for possible unknown and unquantifiable claims which might arise after that period.
For these reasons I would allow the appeal and I would make an order striking out these proceedings.