Disqualification Process
Cases
Walsh & anor -v- Barrett & anor
[2016] IEHC 525 (27 July 2016)
JUDGMENT of Mr. Justice Tony O’Connor delivered on the 27th day of July, 2016
Introduction
1. This is an application to disqualify the first named respondent and restrict the second named respondent pursuant to s. 160(2) and s. 150 of the Companies Act 1990 (“the 1990 Act”)[s. 842 and s. 819 of the Companies Act 2014 (“the 2014 Act”) respectively]
Background
2. Eventelephant Limited (“the Company”) operated a self-service online event registration website which allowed customers to use the site to create their own web pages to advertise and sell tickets for events. The Company processed ticket payments and received a commission for same. Many charities and some high profile sport organisations and airlines used the website according to the report of an independent accountant dated 18th July, 2013 which was relied upon to appoint the first named applicant as an interim examiner on that day. The applicants were appointed joint liquidators by order of this Court on 9th August, 2013. A mareva type injunction was made on 23rd August, 2013 freezing the accounts and assets of the first named respondent.
Fraud
3. The first named respondent did not dispute any of the facts asserted by the liquidator. The second named respondent in his replying affidavit of 28th May, 2015 recognised his obligation to satisfy the Court that he acted responsibly from an objective viewpoint at the times relevant to the Court’s consideration. No allegation of dishonesty was levelled at the second named respondent.
4. Suffice to say that the first named respondent siphoned off significant portions of the income destined for the customers of the company to a paypal account of the Company which he then transferred to a PTSB account in the first named respondent’s name and control. The software developed for the Company should have been intended and designed to direct payments to a trust account or the actual account of the event organiser.
5. The first incident of wrongful diversion as detected by the applicants occurred in 2009 which was within a year of the commencement of business and incorporation of the Company. The applicants identified that a total of €967,276.71 was transferred from 8th May, 2009 to 6th August, 2013 to the paypal account controlled exclusively by the first named respondent in a 21 page listing of each such transfer.
6. In addition, solicitors for the second named respondent brought to the Court’s attention quite properly a letter from the solicitors for the first named respondent dated 1st June, 2016 confirming that the second named respondent had pleaded guilty to nine charges of making incorrect VAT returns for nine different periods in the years 2009, 2011, 2012 and 2013 in addition to one charge of failing to comply with keeping PAYE records. The letter indicated that the first named respondent awaits sentencing on 25th October, 2016.
Disqualification
7. Mr. Flynn, counsel for the first named respondent, implicitly acknowledged the inevitability of a disqualification order and the obligation on the Court to disqualify. In regard to the period of disqualification he emphasised that the first named respondent is 38 years of age with young children. I was informed that one of the children has a long term medical condition. Counsel sought to ensure that there was no infirmity in the disqualification order by reason of the suggested alternative reliance solely on s. 160(1) of the Companies Act 1990 which refers to an application by a “prosecutor”. It is for another day to decide that issue raised by Mr. Flynn but the Court appreciates the effort of all counsel and solicitors to keep the Court right in making an effective disqualification order.
8. Having regard to the detailed consideration of s. 160(2) and the facts which the Court might take into account given by Finlay Geoghegan J. in Director of Corporate Enforcement v. McDonnell [2005] 1 IR 503 at 513, I conclude that the first named respondent should not be deprived of hope, redemption and an opportunity to make a living for himself and his family in the future. The purpose of the Companies Acts in this context is to protect others from an abuse of the privileges afforded to people like the first named respondent when trading through a company. The first named respondent has deprived charities and event organisers of hard earned income which the Court cannot acknowledge sufficiently through its words. I conclude that a disqualification order pursuant to s. 160(2)(a) of the 1990 Act which is now s. 842(a) of the 2014 Act should be made in view of the undisputed wrongful actions of the first named respondent in relation to the Company and its creditors. Aggravating circumstances which could affect the public in the future and personal to the first named respondent are not known to the Court. It is in that vein that the Court has applied what is now considered the minimum period (save in exceptional circumstances) of disqualification of five years.
Restriction application
9. Mr. Leahy (counsel for the second named respondent) fairly acknowledged the per se omissions which could be attributed to the first named respondent like the failure to prepare and swear a statement of affairs and the filing of the statutory return for the year ended 30th June, 2012. He stressed the undisputed fact that the first named respondent’s conduct hindered compliance by the second named respondent. The evidence is that the second named respondent was as shocked as most people were to learn of the egregious wrongs perpetrated by the first named respondent.
10. It is indeed sad to learn that the second named respondent (aged 69 in 2016) who resides in England had invested much time and money for his pension type fund in the Company while his reputation has been damaged at an age which is unlikely to afford him a chance to reinstate his pension investment and to recover his reputation. However, as the Court of Appeal in Director of Corporate Enforcement v.Walsh [2016] IECA 2 at para. 60 explained:-
“The whole thrust of the legislative provision [there s. 160(2)(h)] is to ensure that all directors of all companies comply with their obligations. It matters not that they be directors of family companies, or be at the helm of large or quoted enterprises. Neither do the qualifications of the directors or the economic challenges that the companies may be facing affect the obligations of directors to act responsibly in respect of an insolvent company.”
11. There is no question that the Company was insolvent for a number of years prior to the appointment of the applicant.
12. The assessment of whether a director’s conduct was irresponsible is not a formulaic process although the practice is for applicant liquidators to highlight the areas of concern which in this case were identified as:-
(a) Failure to maintain proper books and records of the Company which is a requirement of s. 202 of the 1990 Act (now s. 281 of the 2014 Act);
(b) Failure to prepare and swear a statement of affairs;
(c) Failure to cooperate with the applicants in the liquidation;
(d) Failure to file a company’s registration office return.
13. The respondents according to the second named respondent, divided responsibility between them. The first named respondent was the financial controller and primarily responsible for financial administration while the second named respondent, based in the UK, was responsible for sales. He travelled regularly to Dublin and attended board meetings. He referred to management accounts which were prepared but which were not exhibited, apparently due to their unavailability following the appointment of the applicant.
14. The second named respondent was indeed hampered in regard to the one outstanding return to the Companies Registration Office due for the year ending 30th June, 2012 by the activities of the first named respondent. It was indeed only one return that was outstanding.
15. The second named respondent at his own expense gathered boxes of records after the landlord of the London offices of the Company placed them in a basement. He then arranged for the delivery to the applicants and engaged with the applicants subsequently.
16. Undoubtedly, the horror of discovering the deception together with the loss of his investment, job, and reputation would affect many directors in the aftermath of the liquidation.
17. As for the argument that the auditors whose last report was dated 5th April, 2013 for the year ending 30th June, 2011 and the independent accountants report dated 18th July, 2013 for the application to appoint an interim examiner, did not allude to the deception of the first named respondent, the Court was still not satisfied by the averments of the second named respondent that he as a director particularly in the period 2011-2013 acted responsibly when one looks at the state of affairs objectively.
18. The auditors rely on directors and staff and it is noteworthy that the last audited accounts were for the year ending 30th June, 2011. The independent accountant could not have been expected to do an auditing analysis and clearly had to rely on the information and concerns of the directors. There is no evidence that the second named respondent alerted the auditor or the independent accountant to the chargeback problems which were becoming more common.
19. Apart from the failure of the Company to make proper VAT and PAYE returns for which the first named respondent has pleaded guilty and which the second named respondent does not deal with in his affidavits, the second named respondent does not explain if and when he sought or was given proper assurances about turnover and income. In his position I believe that he ought to have known the volume of sales which he was generating. The repeated vacuous excuses offered by the first named respondent by referring to “chargeback difficulties” that gave rise to a media expose in 2013 prior to the appointment of the interim examiner were accepted by him without delving further. Naivety and total ignorance of potential deception does not excuse the necessity for directors like the second named respondent from seeking more than just an oral assurance without further enquiry. I was not satisfied that the second named respondent acted as responsibly in the period 2011-2013 having regard to the necessity to prepare proper books, records and returns in view of the continuing significant losses which the Company was incurring according to the information available.
20. To the credit of the second named respondent he acknowledged that he was not using a passive director type defence and through his counsel admitted the shortcomings other than that which the Court has sought to summarise just now. In short, the second named respondent ought to have asked harder questions and sought more corroborating evidence for assurance beyond that which he mentions in a general way. The Court in making this assessment is looking at matters objectively at the period from 2011-2013 and when the second named respondent ought to have known the extent of sales generated by the Company.
Conclusion
21. Therefore, as the law requires, the Court is obliged to make a declaration in the terms of paragraph no. 3 in the notice of motion issued on 3rd March, 2015 while noting that the order should actually refer to s. 819(3) of the Companies Act 2014 with the capital requirements specified in the 1990 Act.
22. It may be some small consolation to the second named respondent to be advised that s. 822 of the Companies Act 2014 provides for an application which he can make if the necessity and circumstances arise to grant relief from the restrictions which follows the declaration which the Court is obliged to make.
Director of Corporate Enforcement -v- Byrne
[2009] IESC 57 (23 July 2009)
Court: Supreme Court
Composition of Court: Denham J., Fennelly J., Macken J.
Judgment by: Denham J.
Judgment by: Denham J.
Status of Judgment: Approved
Link
Appeal dismissed – affirm High Court Order
Murray C.J., Denham J., Hardiman J., Geoghegan J.
Denham J
Judgment delivered the 23rd day of July, 2009 by Denham J.
1. This is an appeal by Patrick Byrne, the respondent/appellant, referred to in this judgment as “the appellant”, from a judgment of the High Court (Murphy J.) delivered on the 26th day of
May, 2008, and from an order made on the 31st July, 2008. It was ordered, pursuant to s.160(2) of the Companies Act, 1990, that the appellant be disqualified for a period of four years from
being appointed or acting as an auditor, director, or other officer, receiver, liquidator or examiner or being in any way, whether directly or indirectly, concerned or taking part in the promotion,
formation or management of any company or any society registered under the Industrial and Provident Societies Act 1893 to 1978. However, it was also ordered, under s.160(8) of the
Companies Act, 1990, that the appellant be permitted to continue to act as a director of and be involved in the management of Business Consultancy & Advisory Services Limited Company, a
company which he had set up and through which he provided consultancy services, with effect from the 31st July, 2008.
2. The Director of Corporate Enforcement, the applicant/respondent, referred to in this judgment as “the Director”, has cross appealed from the failure to make orders under s.160(2)(b)
and (d).
3. This application by the Director was brought to the High Court after the publication of the “Report of the Inspectors Appointed (Under Section 8 of the Companies Act 1990) to Investigate
the Affairs of National Irish Bank Limited and National Irish Bank Financial Services Limited”, referred to in this judgment as “the Inspectors’ Report”. The Inspectors’ Report was published by
order of the court on the 23rd day of July, 2004. National Irish Bank Limited and the National Irish Bank Financial Services Limited are referred to as “the bank”.
4. Counsel for the appellant informed the Court that this is the first of a series of cases heard by the High Court (Murphy J.) arising after the Inspectors’ Report. This appeal refers to a narrow
and net part of the Inspectors’ Report. The Inspectors’ Report held that there had been improper practices by the bank. However, this case relates only to two specific criticisms of the
appellant by the Inspectors. The decision is limited to those two matters insofar as they refer to the appellant. Counsel for the Director acknowledged that the conduct of the appellant was at
the lower end of the scale.
5. The proceedings were issued approximately one year after the publication of the Inspectors’ Report when the Director sought an order pursuant to s.160(2)(b), and/or (d) and/or (e) of the
Companies Act, 1990 disqualifying the appellant from being appointed or acting as an auditor, director or other officer, liquidator, receiver or examiner or being in any way, whether directly or
indirectly concerned or taking part in the promotion, formation or management of any company or any society registered under the Industrial and Provident Societies Act, 1893-1978. The
application was grounded on the Inspectors’ Report.
6. The Director’s application was heard over five days in the High Court, commencing on the 5th February, 2008, during which the appellant was cross-examined. Judgment was delivered on
the 26th May, 2008, in which it was indicated that the High Court was mindful of making an order pursuant to s.160(2)(e).
7. On the 15th July, 2008 submissions were heard as to what, if any, period of disqualification should be imposed on the appellant. A judgment was delivered ex tempore by Murphy J. on the
31st July 2008, in which he imposed a disqualification order with effect for a period of four years, with the exception of the company referred to, through which the appellant provided
consultancy services.
The High Court
8. The High Court reviewed the Inspectors’ Report. The learned High Court judge also referred to the DIRT Theme Audit Report which was circulated in January, 1995, hereinafter referred
to as “the Theme Report”. The learned trial judge stated that the major findings of the Theme Report were that there was a lack of care and concise guidelines on DIRT (Deposit Income
Retention Tax) compliance issues in relation to non-resident and special savings accounts; that SSA notice requirements were not being properly imposed and that an unacceptably high
proportion of declarations were missing or incomplete. The High Court held:-
“The court finds that, notwithstanding the role of Mr. Bowden as Head of Tax – Europe, Mr. Byrne retained responsibility for making the interim and end of year returns. Whatever about the position prior to the DIRT Theme Audit Report and the meeting of 9th February, 1995; after that point, Mr. Byrne could no longer assume that the returns made by the branch managers were accurate. Returns made, especially after that meeting, without verification from the General Managers as to their accuracy, could not have merited the declarations made.
If it were not clear that there was a retrospective liability even on the narrow grounds contended in respect of early withdrawals from special savings accounts, then advice could and should have been sought. Mr. Byrne had a responsibility to seek such advice. While Mr. Byrne may have had no responsibility with regard to what he did not know before the DIRT Theme Audit, he failed to consider the issue of a retrospective liability to DIRT after the meeting of 9th February, 1995. In respect of the returns made after February, 1995, he ought to have sought verification and obtained advice. He should have notified the Executive Committee and Mr. Seymour, the Executive Director, before Mr. Seymour retired on 15th July, 1996. The court has heard no evidence that Mr. Bowden had any responsibility to notify any of those parties. Mr. Byrne’s evidence was that tax issues, such as that encompassed by DIRT, were the function and responsibility of the European Head of Tax. If this were so, then Mr. Byrne should have notified Mr. Bowden that the retrospective liability to DIRT was a concern.”
Also it was held:-
“It would seem to me to be a misunderstanding on the behalf of a finance department and, more particularly, of the Head of Finance, to assume that the figures appearing on Livelink could be simply aggregated and downloaded by the computer into a statutory return to the Revenue Commissioners. Mr. Byrne’s evidence seems to suggest that such returns were automatic and that his department had no function, whether professional or otherwise, to verify the accuracy of the data. It seems to the court that, in the exercise of his function, Mr. Byrne as Head of Finance could not regard the data as given to be accurate.”
The learned trial judge held that the appellant ought to have known that the reference to non-compliance affected the accuracy of the DIRT returns being made by him. The learned trial judge turned to the issue of whether the findings of the Inspectors’ Report “in the light of the evidence to this Court relating to Mr. Byrne”, justified disqualification. Murphy J. asked the following questions: Did this failure amount to a lack of commercial probity? Does it go far enough that it should be categorised as being grossly irresponsible or being a danger to the public? Or is such failure ordinary commercial misjudgement?
He held:-
“There appears to have been a systemic corporate failure of tax compliance within the Bank which was disclosed by the DIRT Theme Audit. The court accepts that this represented an oversight on the part of Mr. Byrne as Head of Finance who had responsibility for tax liability. However, the court, having heard the evidence of Mr. Byrne, confirms the findings of the Inspectors. Moreover, as Head of Finance and Planning, Mr. Byrne was held to share responsibility for the deficiency in circular S11/95. Mr. Byrne’s conduct would appear to be a departure from the ordinary standard of conduct of a professionally qualified Head of Finance.
It is this departure from ordinary standards of conduct, rather than any misfeasance or specific breach of duty to the company, which underlies s. 160(2)(d) and (e) of the Act of 1990 and which renders a person unfit to act as director or other officer of a company.”
The High Court made clear findings:-
“The court finds no evidence of gross negligence or total incompetence, nor a danger to the public.”
However, the High Court went on to conclude:-
“Mr. Byrne told the court that no-one raised the issue of tax evasion or of irregularity with him in relation to non-resident accounts and special savings accounts. He stated that the DIRT Theme Audit Report did not mention tax evasion. References to non-compliance were understood by him as being documentary in nature. He felt that declarations were a matter for branch managers and tax was a matter for London.
The court, for the reasons given, is not satisfied with such explanation. It believes that, in the circumstances, following the meeting of 5th February, 1995, Mr. Byrne had the responsibility to raise the issue and failed to do so.
The court finds that Mr. Byrne, in the circumstances, displayed a lack of commercial probity.
Accordingly, the Court is mindful of making an order under s.160(2)(e) and will hear Counsel in relation to a period for such disqualification.”
The Appeal
9. The appellant filed a notice of appeal, with thirty nine grounds of appeal, seeking to set aside the order of the High Court.
The Director filed a cross appeal, on the grounds that the High Court erred: in failing to make an order disqualifying the appellant pursuant to s.160(2)(b); in failing to make an order disqualifying the appellant under s.160(2)(d); in failing to consider whether there was sufficient evidence that the appellant had acted in breach of his duty as an officer of the National Irish Bank; and that the learned High Court judge misdirected himself in holding that s.160(2)(b) and/or s.160(2)(d) applied only to directors of National Irish Bank Ltd. and/or National Irish Bank Financial Services Ltd.
Submissions
10. Very full written and oral submissions were made on behalf of the parties. They included the following.
11. Counsel for the appellant submitted that:-
(i) The Director expressly acknowledged, openly and without qualification, that there was no suggestion by either the Director or the Inspectors’ Report that the appellant acted dishonestly.
(ii) The High Court expressly found that there was no evidence of gross negligence on the part of the appellant.
(iii) The High Court expressly found that there was no evidence of total incompetence on the part of the appellant.
(iv) The High Court expressly found that there was no evidence that the appellant was a danger to the public.
(v) As accepted by the High Court judge, the Inspectors’ Report made no finding of actual knowledge on the part of the appellant of any of the improper practices within National Irish
Bank. The DIRT tax returns which his department submitted to the Revenue Commissioners were, in the honest belief of the appellant, true and accurate in respect of each and every return.
(vi) The uncontradicted evidence was that the appellant has had no blemish on his professional career of more than twenty five years bar the two criticisms made by the Inspectors’ Report.
(vii) The Institution of Chartered Accountants concluded that the criticisms in question did not amount to even a prima facie case of misconduct against the appellant.
12. It was submitted on behalf of the appellant that the test for a disqualification order was not met in this case.
13. Counsel for the appellant submitted that the Inspectors’ Report made two criticisms only of the appellant, neither of which made any suggestion of dishonesty by the appellant. The criticisms
may be seen at pp. 173 and 174 of the Inspectors’ Report.
Law
14. Section 160(2), of the Companies Act, as amended, contains subsection (e), which was applied by the learned High Court judge. It provides that:-
“Where the court is satisfied in any proceedings or as a result of an application under this section that—
(e) in consequence of a report of inspectors appointed by the court or the Minister under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company;
the Court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.”
The legislation requires a finding that a person such as the appellant is unfit to be concerned in the management of a company.
Inspectors’ Report
15. The Director’s application to the High Court was based on the Inspectors’ Report, as was the judgment of the High Court. The Inspectors’ Report is at the foundation of the case and is
crucial to the issues on this appeal.
At pp.173 and 174 of the Inspectors’ Report, in relation to the appellant, it was stated:-
“Mr Byrne was appointed Head of Finance on 11 April 1994; his title subsequently became Head of Finance and Planning.
The Head of Finance had responsibility for ensuring that the Bank made returns of DIRT to the Revenue Commissioners within prescribed time limits. The accuracy of these returns was critically dependent on the proper categorisation of deposit accounts at branch level between those exempt from DIRT, those liable to DIRT at the standard rate of tax and those liable at a reduced rate.
In the respective periods throughout which Mr Hunt and Mr Byrne were responsible for returns of DIRT to the Revenue Commissioners, neither was on the circulation list for branch internal audit reports. Accordingly, neither was aware through this medium of the extent of the deficiencies or “irregularities” in the declarations held by branches in support of claims for DIRT-exempt non-resident status.”
16. It is clear that the Inspectors’ Report does not criticise the appellant for activities prior to the Theme Report.
17. The Inspectors found that it was the responsibility of Mr Brennan, the General Manager Retail Banking, and Mr Keane, the General Manager for Banking, to ensure that accounts classified
as DIRT-exempt non resident accounts were correctly classified as such and to see that Regional Managers secured full compliance with the statutory provisions relating to D.I.R.T. While the
Inspectors made findings as to their responsibilities, the appellant was not held to have a responsibility for the accuracy of the returns.
Earlier Draft Report
18. The absence of a finding of liability for the accuracy of the returns is emphasised by the fact that there was such a finding in an earlier draft of the Inspectors’ Report, but which, after
correspondence, was deleted.
An earlier draft had included the following:-
“The Head of Finance had responsibility for ensuring that the Bank made accurate returns of DIRT to the Revenue Commissioners within prescribed time limits. The accuracy of these returns was critically dependent on the proper categorisation of deposit accounts at branch level between those exempt from DIRT, those liable to DIRT at the standard rate of tax, and those liable at a reduced rate.
As Head of Finance, you had a responsibility to take reasonable care to ensure that all returns of DIRT made to the Revenue Commissioners correctly recorded the Bank’s liability for the DIRT payable on all interest paid or credited on relevant deposits. In the light of the internal audit reports of deficiencies and “irregularities” in the non-resident declarations held by branches, it is evident that the returns could not have been correct.”
However, this was altered and the Inspectors’ Report ultimately did not make a finding that the appellant had a responsibility to make accurate returns. The Inspectors’ Report found that he had a responsibility to make timely returns. The Inspectors did point out that the accuracy of the returns was mutually dependent on the proper categorisation of deposit accounts at branch level. While the appellant had no responsibility for that, the Inspectors found that the situation changed after the Theme Report.
Inspectors’ Report – final draft
19. The Inspectors’ Report referred to the Theme Report and stated at p.174 that:-
“Mr Byrne was on the circulation list for the DIRT Theme Audit report of December 1994 and attended the meeting on 9 February 1995 to discuss the results of the audit and the issues arising therefrom. He was thus aware of the extent of non-compliance in the operation of DIRT-exempt non-resident accounts and ought to have known the consequences of such non-compliance for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.
And later:-
Mr Byrne, in common with Mr Seymour, Mr Keane and Mr Brennan, has given evidence to the Inspectors that the issue of a potential retrospective liability to the Revenue Commissioners for DIRT arising from the findings of the Theme Audit was not considered at the meeting of 9 February 1995. The Bank has confirmed to the Inspectors that no payment of retrospective DIRT was made to the Revenue Commissioners prior to their appointment.
Mr Byrne, as Head of Finance at the time of the DIRT Theme Audit, had a responsibility to raise the issue of potential retrospective liability for DIRT due in respect of interest on accounts wrongly classified as DIRT-exempt, and failed to do so.”
This last paragraph cited above is the most serious finding against the appellant. The Inspectors find that because the appellant received the Theme Report and attended the meeting of the 9th February, 1995, he “Mr. Byrne ought to have known the consequences of such non-compliance for the accuracy of the returns of DIRT being made to him.” The Inspectors find that the appellant had a responsibility:-
“to raise the issue of potential retrospective liability for DIRT due in respect of interest on accounts wrongly classified as DIRT-exempt, and failed to do so.”
Circulars
20. The Inspectors’ Report also considered the issue of the circulars, which were the responsibility of the appellant. At p.28 the Inspectors’ Report states that:-
“Special Circular No.S11/95 introduced documentary requirements for the opening of new non-resident accounts. It required that before any new non-resident account could be opened, documentation had to be produced as evidence that the depositor was resident outside the State (e.g. a driving licence or passport or other identification with details of the person’s address and signature). But there was still the same omission as before. Branch staff were not instructed that DIRT had to be deducted unless the Bank was satisfied that the depositor was non-resident. Because of this, an individual who was resident, but happened to have a foreign passport, or a foreign driving licence, would have been able to open a non-resident account. In regard to existing non-resident accounts, the circular was also deficient. The only direction given was that DIRT had to be deducted at the standard rate “unless a valid declaration is held which has been signed, dated and in all other respects fully completed by the customer.”
Circular S22/95, issued on 15 May 1995, refers to a DIRT aide memoir prepared by Finance and Planning Department as a guide for use by cashiers and other branch staff. It is stated that it summarises the contents of Circular S11/95 but in fact it does more than that. It contains for the first time in any Bank documents relating to non-resident accounts an instruction that “The official who opens the account must be fully satisfied that the customer is a non-resident …” This instruction, however, concerns the opening of new accounts only. The Guide does not deal with existing accounts.”
And at p.174 it is stated that:-
“At the meeting on 9 February 1995, Finance and Planning Department was charged with responsibility for drafting revised instructions to staff in relation to the operation of DIRT. These instructions were issued on 8 March 1995, as Special Circular No. S11/95. As already stated, this Circular introduced documentary requirements in relation to the opening of new non-resident accounts, but did not address the position in regard to accounts which had been opened previously apart from indicating that a valid declaration must be held “which has been signed, dated and in all respects fully completed by the customer”, nor did it inform the branches of the provisions of Section 32(2) of the Finance Act, 1986 … As Head of Finance and Planning, Mr Byrne shares responsibility for the defects in this Circular.”
Thus the drafting of the circulars, which were the responsibility of the appellant, was criticised.
21. Counsel for the appellant submitted that the legal test was not applied to the facts of the case and that the s.160 order should not have been made. I have considered a number of legal propositions which were before the Court.
Legal Propositions
22. I am satisfied that the following are useful legal propositions.
(i) There is a distinction between a restriction order under s.150 of the Companies Act 1990 and a disqualification order under s.160 of the same Act. A restriction order merely precludes a person from acting as a director or being otherwise involved in a company unless certain requirements are met, the main one being that the company has a certain minimum paid up share capital. By contrast, a disqualification order disqualifies the person from acting in virtually any capacity in relation to any company, no matter what its size, and is a far more severe order than a restriction order.
(ii) The conduct necessary to justify the making of a disqualification order has to be much more grave and blameworthy than the conduct which justifies a restriction order.
As Murphy J. stated in Business Communications Limited v. Baxter and Parsons (Unreported High Court, 21st July, 1995):-
“Clearly, it is the comprehensive nature of a disqualification order which is seen as constituting an appropriately severe sentence for conduct which is manifestly more blameworthy than merely failing to exercise an appropriate degree of responsibility in relation to an insolvent company in liquidation of which the person was a director.”
(iii) Incompetence, even when occurring with irresponsibility, is not sufficient to ground a disqualification order. As McCracken J. stated at p.592 in Re Newcastle Timber Ltd. (In
Liquidation) [2001] 4 IR 586:-
“As I have already said, many faults can be found in the conduct of the respondents in the present case. I have no doubt that they acted incompetently, and, particularly in relation to insolvent trading and preference of trade creditors, I think they behaved irresponsibly. However, the applicant has not satisfied me that the respondents were so much in breach of their duties that they are unfit to be concerned of the management of a company, particularly in view of the undoubted discretion which I have in this regard. The applicant did rely to a considerable degree on the fact that the Revenue debts remained unpaid, and cited a number of authorities as to the importance of this aspect of the case, but taking the overall behaviour of the respondents into account I do not think it could be said that a disqualification order is necessary to protect the public against their future conduct.”
(iv) The conduct necessary to justify a disqualification order must be manifestly more blameworthy than merely failing to exercise an appropriate degree of responsibility. Commercial
misjudgement is not sufficient. The conduct complained of must display a lack of “commercial probity”, although in an extreme case of gross negligence or total incompetence, disqualification
could be appropriate. “Probity” is used in the sense of dishonesty, lack of integrity.
In the case of Cahill v. Grimes, Re Readymix Limited, [2002] 1 IR 372 the Supreme Court at p.381 approved the analysis of Browne-Wilkinson V.C. in Re Lo-Line Motors Limited (1988) B.C.L.C. 698:-
‘What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. … … Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.’
Murphy J. referred to the above analysis as “a correct statement of law and represents a proper approach to the application and interpretation of s.160 of the Companies Act, 1990.” In Re N.I.B. Ltd.: Director of Corporate Enforcement v. D’Arcy [2006] 2 IR 163 Kelly J. referred to the differences between s.150 and s.160, and to the words of Browne-Wilkinson V.C. in In Re Lo-Line Motors Limited at p.175 and stated that:-
“Whilst the observations of Browne-Wilkinson V.C. were related to the unfitness of a director and dealt with an insolvent company, a similar line of reasoning is applicable to the question of the disqualification of a person whose conduct is alleged to have made him unfit to be concerned in the management of a company. His conduct must show a lack of commercial probity or gross negligence or total incompetence before disqualification can be ordered.”
I would adopt and apply this approach.
(v) The primary purpose of a disqualification order is not to punish the individual but to protect the public against the future running of companies by persons whose past records have shown them to be a danger to creditors and others.
(vi) The Court should take into account the entire history of the person in question and not just the alleged act or acts of wrongdoing in isolation.
(vii) There is an element of deterrence in the exercise of the Court’s discretion.
(viii) The matter is not to be judged with the inevitable benefit of hindsight.
(ix) In the exercise of its discretion, the Court is entitled to take into account the fact that the effect of a disqualification order may be greater on a professional person. The Court should
exercise its discretion proportionately.
(x) The burden of establishing that a disqualification order is warranted rests on the Director, and this is a substantial burden.
As Murphy J. stated in Business Communications Limited v. Baxter and Parsons (Unreported, High Court, 21st July, 1995):-
“Again, in relation to a disqualification order it is clear that there is a substantial burden to be discharged before the Court has jurisdiction to make the appropriate order.”
23. I apply those propositions to this case. Applying them to all the circumstances of the case I am satisfied that the High Court fell into error. This legal test is considered in some detail later in
the judgment.
24. The High Court found that in relation to the appellant there was no evidence of gross negligence or total incompetence, nor of him being a danger to the public. I would affirm these findings.
They are primary findings, and they favour the appellant.
25. However, the High Court went on to ask the question whether the conduct of the appellant displayed a lack of commercial probity, and the learned High Court judge referred to definitions
of probity, incorporating integrity and honesty. I am satisfied that a key ingredient of “probity” is honesty. In this case the Director did not allege dishonesty on behalf of the appellant, and it was
not an issue.
26. There was no finding in the Inspectors’ Report of tax evasion by the appellant. Yet the High Court referred to this in the following terms:-
“Mr. Byrne told the court that no-one raised the issue of tax evasion or of irregularity with him in relation to non-resident accounts and special savings accounts. He stated that the DIRT Theme Audit Report did not mention tax evasion. References to non-compliance were understood by him as being documentary in nature. He felt that declarations were a matter for branch managers and tax was a matter for London.
The court, for the reasons given, is not satisfied with such explanation. It believes that, in the circumstances, following the meeting of 5th February, 1995, Mr. Byrne had the responsibility to raise
the issue and failed to do so.
The court finds that Mr. Byrne, in the circumstances, displayed a lack of commercial probity.”
I am satisfied that the High Court fell into error in this analysis. There was no issue of a finding by the Inspectors of tax evasion in relation to the appellant. Quite simply the Inspectors held that the appellant having seen the Theme Report and having attended the meeting on the 9th February, 1995, and ought to have been aware of non-compliance. The height of their criticism was that he:-
“… ought to have known the consequences of such non-compliance for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.”
There is no question of the appellant acting dishonestly. Consequently, I am satisfied that the learned High Court judge fell into error in the conclusion of his judgment.
Criticisms in context
27. The criticisms found by the Inspectors of the appellant are that he should have realised after the Theme Report and after the meeting of the 9th February, 1995 that the data on the Livelink
from the branches was not accurate and he should have raised the issue of whether the bank had a retrospective liability. This has to be seen in the context that others with a responsibility for the
accuracy of the returns of DIRT did not raise this issue.
Theme Report
28. The problems identified by the Theme Report were documentary. The Inspectors’ Report at p.44 pointed out that branch audit reports were consistently critical of the standard of
compliance of non-resident deposit accounts. As to the Bank’s obligation to hold a non-resident declaration in a form prescribed by the Revenue Commissioners pursuant to s.37 of the Finance
Act 1986 for each account designated as a non-resident account, the deficiencies most commonly reported were:-
a. failure to produce non-resident declaration form at time of audit;
b. holding a “charities” declaration instead of a non-resident declaration form;
c. relying on “obsolete” non-resident declaration forms;
d. undated non-resident declaration forms;
e. incomplete non-resident declaration forms;
f. incorrect account number on non-resident declaration forms.
Thus there were problems with the documentation identified. It was recommended that branches comply with the statutory requirements.
Retrospective tax liability
29. No one in the Bank raised the issue of a retrospective tax liability. The Head of Internal Audit did not raise the issue in his report, nor at the meeting on the 9th February, 1995, nor
afterwards. The internal audit function would have included responsibility for the branches and monthly internal audit reports highlighting problems.
30. The appellant gave evidence that the issue of possible retrospective tax liability never occurred to him. The appellant gave evidence that he did not consider that the account would be
deprived of its DIRT-free status provided any documentary error was corrected. He was cross examined as to the inferences he should have drawn from the Theme Report. On day 3, at
p.118, the transcript provides the following answer from the appellant:-
“A. No, Judge, what I said was there was nothing in [the Theme Report] which stated that there were issues with the bona fides of the accounts. What I’ve said was that there were documentation issues with the accounts which was putting those bona fide accounts into jeopardy.
Q. Well, did you discuss with Mr. Harte or anyone else in the Internal Audit team whether in their opinion all of these accounts were bona fide accounts? Is that something that was discussed or was it something you simply assumed?
A. No, Judge. As I said a moment ago, the [Theme Report] did not suggest or state that there was an issue with the bona fides of any of the accounts they dealt with.
Later, counsel for the Director asked the appellant, on Day 4, transcript at pp.54-55:-
“Q. Is it premised on a conclusion that the accounts are bona fide. I am asking you on what basis did you form that view, i.e. that the accounts are bona fide?
A. Judge, as I said earlier, I formed that view on the basis of my reading of the [Theme Report] that it did not in any way question the bona fides of those accounts. And nothing else had come to my attention since I joined the bank in April 1994 to indicate that there was an issue with the bona fides of the accounts.”
31. It is clear that the appellant considered that if a bona fide depositor had a non-resident account on which there was a documentary error, that no one had suggested that the owner of the
deposit account would not be entitled to continue to hold a DIRT-exempt account, provided the documentation was corrected. The circulars, of which he was in charge, were to advise how to
correct the documentation. Indeed, ultimately, that exercise proved to be satisfactory. The appellant’s evidence was that he honestly believed that for that reason the calculation of the DIRT
liability was correct and that therefore the returns from his department were correct.
32. While the appellant had the responsibility for making the returns to the Revenue Commissioners he did not have the responsibility to oversee or check their accuracy. The Inspectors’ Report
noted that he has a responsibility for the timely return to the Revenue Commissioners. As referred to previously, while an early draft of the Inspectors’ Report referred to him having a liability for
accuracy this was dropped in the final report. The final Inspectors’ Report did not find that he was responsible for the accuracy of the returns. The figures came to his office, on Livelink, from
the branches, and were compiled onto a Revenue Commissioners form manually, the total sum determined, and the form sent to the Revenue Commissioners under his direction.
33. Evidence was received by the Inspectors that the issue of retrospective liability to the Revenue Commissioners for DIRT arising from the Theme Report was not considered at the meeting of
the 9th February, 1995. However, the Inspectors’ Report found that a consequence of the Theme Report and the meeting of the 9th February 1995, was that the appellant “had a responsibility
to raise the issue of potential retrospective liability for DIRT due in respect of interest on accounts wrongly classified as DIRT-exempt and failed to do so.”
34. While that may be a finding of the Inspectors’ Report it has to be considered in context. The appellant joined the Bank in 1994 and had responsibilities pursuant to his job description.
There had been a change within the bank as to areas of responsibilities prior to his appointment. The situation in his office was that the figures came in over Livelink from the branches and under
his direction they were manually put on a Revenue Commissioners form and sent to the Revenue Commissioners. The appellant did not have responsibility for the accuracy of the returns. His
responsibility was to gather the returns from the branches (who had the responsibility of returning accurate accounts) and to compile the figures into a general return to be made in a timely
manner to the Revenue Commissioners.
Circulars
35. As a consequence of the Theme Report and the meeting of the 9th February 1995 the appellant was requested to prepare circulars for all branches explaining what should be done to
comply with the procedures. Circulars and a laminated sheet were issued to guide the branches as to how they should comply with the documentary requirements for such accounts.
36. These circulars were criticised in the Inspectors’ Report, as set out earlier. It appears to me that two matters are relevant to this criticism. First, having considered the circulars and
laminated sheet, I agree that they might have been drafted more clearly. Secondly, at its height this criticism is a drafting criticism and clearly is not the type of conduct which should lead to a
disqualification. Indeed, the High Court viewed the circulars only as part of the context. Thus, in effect, the only issue before the Court is the first identified, that is the issue that he ought to have
realised the potential of retrospective tax liability.
Application of the legal propositions
37. I shall apply the legal propositions set out earlier in the judgment to this case.
(i) There is a distinction between a restriction order under s.150 of the Companies Act, 1990 and a disqualification under s.160 of the Companies Act 1990. At issue in this case is a disqualification order under s.160.
(ii) The conduct necessary to justify the making of a disqualification order has to be much more grave and blameworthy than the conduct which justifies a restriction order. Therefore, more grave and blameworthy conduct is required to be identified in this case if the Director’s application is to succeed.
(iii) The conduct necessary to justify a disqualification order must be manifestly more blameworthy than merely failing to exercise an appropriate degree of responsibility. The Inspectors’ Report in this instance held that having read the Theme Report and attended the meeting of the 9th February 1995 he “ought to have known the consequences of such non-compliance for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.” At its height the Inspectors’ Report criticised the appellant for not exercising a responsibility, which he did not have, and which he did not realise arose.
Commercial misjudgment is not sufficient. However, this did not arise as an issue in this case.
The conduct complained of must display a lack of “commercial probity”, although in an extreme case of gross negligence or total incompetence, disqualification could be appropriate. The High Court held that there was no evidence of gross negligence or total incompetence. There was no issue of dishonest behaviour by the appellant. Thus these aspects of the legal test are not met.
(iv) The primary purpose of a disqualification order is not to punish the individual but to protect the public against the future running of companies by persons whose past records have shown them to be a danger to creditors and others. The learned High Court judge held that the appellant was not a danger to the public, and I would affirm that finding.
(v) The Court should take into account the entire history of the person in question and not just the alleged act or acts of wrongdoing in isolation. The appellant has had an unblemished record, apart from the criticisms in the Inspectors’ Report.
(vi) There is an element of deterrence in the exercise of the Court’s discretion. This discretion arises especially if the person involved is a danger to the public. The High Court found that the appellant was not a danger to the public and as the appellant is no such danger there is no necessity to exercise a discretion relating to deterrence.
(vii) The matter is not to be judged with the inevitable benefit of hindsight. In this case the appellant had entered his role in 1994, he complied with the requirements of his position, neither he, nor others in the Bank, were alerted to the danger of a retrospective tax liability by either the Theme Report or the meeting on the 9th February, 1995. The benefit of hindsight is not given to any one party, or to be so assessed.
(viii) In the exercise of its discretion, the Court is entitled to take into account the fact that the effect of a disqualification order may be greater on a professional person. While the appellant is a professional person, I am satisfied that the issue of a discretion to be exercised, and whether it is proportionate or not, does not arise in this case, as the Director has not presented a case such as should ground a disqualification order.
(ix) The burden of establishing that a disqualification order is warranted rests on the Director. In this case I am satisfied that the Director has not discharged the burden of raising the Court’s jurisdiction to make an order under s.160 of the Companies Act, 1990.
Cross appeal
38. The Director sought to bring a cross appeal seeking findings under s.160(2)(b) and (d). This cross appeal is grounded also on the Inspectors’ Report. I am satisfied that the conduct
described in the Inspectors’ Report does not make the appellant unfit to be concerned in the management of a company. The conduct described does not warrant the making of a
disqualification order. I would dismiss the cross appeal.
Conclusion
39. The appellant was a relatively new employee of the bank, having joined in April, 1994, when it is submitted that these issues arose in 1995. The Inspectors made two criticisms of the
appellant. The second related to the drafting of circulars and is not a basis upon which to ground an order of disqualification. The first ground of criticism was that the appellant, after the Theme
Report and the meeting of the 9th February, 1995, had a responsibility to raise the issue of a potential retrospective liability for DIRT due in respect of interest on accounts wrongly classified as
DIRT-exempt, and that he failed to do so. I am satisfied that the correct legal test was not applied to the facts of the case and I would allow the appeal. I am satisfied that, applying the legal
test, the jurisdiction to make a disqualification order does not arise. I would allow the appeal and dismiss the cross appeal.
JUDGMENT of Mr. Justice Fennelly delivered the 23rd day of July, 2009.
1. By orders of 30th March 1998 and 15th June 1998, the High Court appointed Mr Justice John Blayney and Mr Tom Grace, FCA, pursuant to section 8 of the Companies Act, 1990 to
investigate the affairs of National Irish Bank Limited (“the Bank”) and a number of associated companies. The report of the Inspectors was published by order of the High Court dated 23rd July
2004.
2. Following the publication of the report, the Director of Corporate Enforcement (“the Director”) made applications to the High Court for the disqualification of a number of persons who had
been involved in the management of the Bank. Some of these applications have been heard in the High Court. The case of the present appellant was one. Several judgments were delivered on the
day of the judgment the subject of the present appeal, which is the first to come to hearing in this Court.
3. It is vital that I emphasise, at the outset of this judgment, that it will concern only the matters which have been alleged against the appellant. There are two reasons for this. The inspectors
concluded that improper practices had been carried on by the management of the Bank under six different headings and made adverse findings against a number of persons whom they found to have
engaged in those practices. The Director applied for disqualification orders in the High Court in five other cases. The appellant is the subject of adverse findings in specified respects under two only
of those headings. This judgment is, therefore, limited in those respects and cannot be read as implying any view concerning different persons, practices or findings.
The proceedings
4. The Director, by a notice of motion dated 20th July 2005 sought an order from the High Court pursuant to section 160 (2) (b) and/or (d) and/or (e) of the Companies Act, 1990
disqualifying the appellant for such period as the court might deem appropriate from being appointed or acting as director or other officer, liquidator, receiver or examiner or being in any way,
whether directly or indirectly concerned or taking part in the promotion, formation or management of any company or any society registered under the Industrial and Provident Societies Acts
1893—1978. The application was grounded on the findings made in respect of the appellant in the Inspector’s Report. Section 160(2)(e) permits the court to make the disqualification order where
it is satisfied that:
“in consequence of a report of inspectors appointed by the court or the Minister under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company…”
5. There was an exchange of affidavits and oral evidence, but the application is essentially founded upon the Inspector’s Report to which detailed consideration needs to be given.
6. It is right to say, from the beginning, that the Director has consistently stated at all times that he does not allege that the appellant has been guilty of any dishonesty.
7. The application was heard by Murphy J, who delivered judgement on 26th May 2008. He found, pursuant to section 160 (2) (e) of the Act, that the appellant had displayed a lack of
commercial probity and was, for that reason, unfit to be concerned in the management of a company. In a separate judgment delivered on 31st July 2008, the learned judge determined that the
period of disqualification should be four years. It will be necessary, at a later point, to consider the judgment of the High Court in some detail. Before doing so, I will outline the findings relevant to
the appellant in the Inspector’s Report and outline the legal principles.
The Inspector’s Report
8. The period covered by the report was from 1988 to 30 March 1998. The appellant did not join the Bank until April 1994. He left in 1998. The inspectors made a number of findings at a
general level before proceeding to assign individual responsibility.
9. They found that improper practices had been widespread in the bank under six general headings. Only two are relevant to the appellant:
· bogus non-resident accounts were opened and maintained in the branches, enabling customers to evade tax through concealment of funds from the Revenue Commissioners;
· Special Savings Accounts had DIRT deducted at the reduced rate, notwithstanding that the applicable statutory conditions were not observed.
10. The first heading arose from the tax known as DIRT (deposit interest retention tax) which required the bank to deduct and to return and pay to the Revenue Commissioners a fixed rate of
tax from the interest paid to holders of deposits in the Bank. Deposits of persons not resident in the State are exempt from DIRT. This all takes place under a strict legislative scheme. The key
provision is section 32 of the Finance Act, 1986, which provides:
“(1) Where a relevant deposit taker makes a payment of relevant interest it shall deduct out of the amount of the payment the appropriate tax in relation to the payment; and the person to whom such payment is made shall allow such deduction upon the receipt of the residue of the payment; and the relevant deposit taker shall be acquitted and discharged of so much money as is represented by the deduction as if that amount of money had actually been paid to the person.
(2) A relevant deposit taker shall treat every deposit made with it as a relevant deposit unless satisfied that it is not a relevant deposit; but where it has satisfied itself that a deposit is not a relevant deposit it shall be entitled to continue to so treat the deposit until such time as it is in possession of information which can reasonably be taken to indicate that the deposit is, or may be, a relevant deposit.”
11. The “deposit taker” is, of course, the Bank and “the appropriate tax” is deposit interest retention tax, known as DIRT. The second heading related to Special Savings Accounts, which
were subject to DIRT at a reduced rate, provided certain conditions were met. One of these was that thirty days notice had to be given of any withdrawal of funds from such an account.
12. The Inspector’s Report uncovered a widespread practice in the branches of the Bank of false non-residence claims. These came to be known as “bogus non-resident” accounts. A large
number of deposits were treated as exempt, even though the holder was resident in the State. This unlawful practice was effected by means of false non-resident declarations.
13. The Inspector’s Report made important findings at a general level regarding the engagement in improper practices in the Bank to the following effect:
1. Bogus non-resident deposit accounts were opened and maintained by the Bank and were widespread in the branch network during the period, the subject of the investigation.
2. The opening and maintenance of such accounts by the Bank constituted an unlawful and improper practice which served to encourage the evasion of Revenue obligations by third parties
both on the funds deposited and on the interest earned.
3. At branch level the Bank failed to deduct DIRT from bogus non-resident accounts and from non-resident accounts where a properly completed declaration in a form prescribed or
authorised by the Revenue Commissioners was not held by the branch.
4. Although senior management was aware of the existence of bogus non-resident accounts, the Bank failed to account to the Revenue Commissioners for the DIRT properly payable on the
interest paid or credited on such accounts.
5. The Bank failed to account to the Revenue Commissioners for DIRT payable on the interest paid or credited on non-resident accounts where the Bank did not hold a properly completed
declaration in a form prescribed or authorised by the Revenue Commissioners.
6. The Bank failed to deduct DIRT at the standard rate from interest paid or credited on accounts designated as Special Savings Accounts where the branch did not hold a properly completed
declaration in a form prescribed or authorised by the Revenue Commissioners or where there had been a breach of the statutory requirements relating to withdrawals.
7. Other senior management was aware of the breaches of the relevant statutory requirements. The Bank took no steps to calculate and remit to the Revenue Commissioners arrears of DIRT
due, being the difference between tax at the standard rate, which ought to have been deducted, and tax at the reduced rate actually applied.
14. The management structure of the Bank, as described in the Report, may be summarised as follows. There was a chief executive later called the Executive Director to whom the General
Manager in charge of banking reported. The latter was responsible, inter-alia, for the retail branch network. The branch managers reported to regional managers, later called area managers, who
reported, in turn, to the General Manager—Banking. The report does not suggest, nor has the Director contended, that the appellant had any executive or managerial responsibility in respect of the
branches.
15. The Inspectors’ description of the management structure also describes the Financial Advice and Services Division but does not mention either the appellant, or his predecessor, or their
titles.
16. Prior to the appellant’s appointment, Mr Gerry Hunt had been Chief Accountant from 1988. His title was changed successively to Head of Financial Control, Head of Finance and head of
Finance and Strategy until he ceased to hold that position in 31st December 1993. The appellant commenced employment at the Bank on 11th April 1994, initially as Head of Finance. Shortly
afterwards his title changed to Head of Finance and Planning. Initially, he reported directly to the Executive Director, Mr Seymour and, from July 1996 to Mr Philip Halpin, the Chief Operating
Officer.
17. One of the duties of the appellant, as Head of Finance, was that of ensuring that the bank made returns of DIRT to the Revenue Commissioners within the prescribed time limits.
18. During the period from 1988 to 1997, 202 internal audits of branches were conducted. The Inspectors found that these reports were consistently critical of the standard of compliance within
the Bank with legislative provisions regarding DIRT. The Inspector’s Report gives detailed consideration to a number of these reports. It is neither necessary nor appropriate to discuss them here for
the simple reason that, as found by the inspectors, neither the appellant nor his predecessor Mr Hunt were on the circulation list for those reports. The inspectors therefore concluded that “neither
was aware through this medium of the extent of the deficiencies or “irregularities” in the declarations held by branches in support of claims for DIRT-exempt non-resident status.”
19. In December 1994, Mr Paul Harte, Head of Audit, selected the area of DIRT compliance for its first Theme Audit for the stated reason that DIRT compliance issues continued to be
reported in branch and other audits on a regular basis. The appellant was on the circulation list for the draft of this report and received the final report dated 24 January 1995. It was the fact that he
was aware of the contents of the DIRT Theme Audit Report that led the Inspectors to make virtually all of the criticisms of the appellant which became the subject matter of the Director’s
application for his disqualification and, ultimately, of this appeal.
20. As noted by the Inspectors, the DIRT Theme Audit Report disclosed extensive irregularities at branch level in respect of the declarations which were essential if a deposit-account holder
was to be entitled to claim exemption from DIRT. Some 40% of declarations selected contained some errors or omissions and, the report stated:
“1. Non-resident declaration forms were not sighted for 12% of accounts.
2. 21% of the declarations had an incorrect account number.
3. 13% of the declarations were not dated.”
21. Corresponding deficiencies were noted in the area of Special Savings Accounts. For example, 91% of withdrawals breached the notice requirements for these accounts. The conclusion set
out in the management summary of the DIRT Theme Audit Report was:
“The results of this audit are very disappointing and management must take immediate steps to improve the situation. The structure of the whole area can be improved but the level of non-compliance is too high. It appears that there needs to be an organisation-wide change in attitude to the whole area. This is a risk area and the penalties for non-compliance at the level shown in this report would be very significant.”
22. The DIRT Theme Audit report did not allege or even suggest that the underlying problem was one of tax evasion by deposit holders. It made no reference to bogus non-resident accounts.
Its emphasis was entirely on the unsatisfactory state of the Bank’s records.
23. The appellant was heavily involved in the work to follow up the report. He was one of ten people in senior management who attended a meeting on 9th February 1995 attended, amongst
others, by the Executive Director, the General Manager—Administration and the General Manager—Banking. At that meeting, the appellant was assigned responsibility for the preparation of a new
circular to be circulated to the branches. Nobody at the meeting raised any question of potential retrospective tax liability to the Revenue.
24. Part 8 of the Inspector’s Report is entitled: “IMPROPER PRACTICES: KNOWLEDGE AND RESPONSIBILITY.” This is where the Inspectors made findings regarding the
responsibility of individuals including the appellant. The findings regarding the appellant fall into three parts, namely:
· Failing to raise an issue of potential retrospective liability for DIRT following the circulation of the DIRT Theme Audit Report or at the time of the meeting of 9 February 1995;
· producing a circular for the branches which was defective in that it failed to draw attention specifically to the statutory provision regarding DIRT, section 32 of the Finance Act, 1986
(quoted above), and to alert the branches expressly that staff at the branches had to satisfy themselves that account holders claiming exemption from DIRT were in fact non-resident and that this
requirement applied to all accounts and not merely to new accounts;
· that he was aware, following the DIRT Theme Audit Report, of the extent of non-compliance in the operation of DIRT-exempt non-resident accounts and ought to have known the
consequences of such non-compliance for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.
25. The Inspectors addressed the first of these issues, retrospective liability, as follows:
“ The corrective action proposed by Internal Audit and accepted by management did not include any proposals to deal with the issue of the Bank’s liability for such arrears of DIRT as might be due in the circumstances. Because of this, the Audit Committee ought not to have accepted the corrective action proposed as being adequate, but should have sought further information as to how management intended to deal with the issue of potential retrospective liability for DIRT.”
26. The inspectors criticised the Audit Committee, the External Auditors and the two General Managers who attended the meeting of 9th February 1995 for this omission. They said that, if the
external auditors had “requested that the potentially material liability he quantified, this would have emphasised its importance to senior management and it is unlikely that they could
have ignored it, as they did.”
27. One heading of the Inspector’s Report is: “EVASION OF REVENUE OBLIGATIONS: INCORRECTLY CLASSIFIED NON-RESIDENT ACCOUNTS. Bogus Non-Resident
Accounts.” Under that heading, the Inspectors criticised a number of senior managers expressly for their failure to be aware of the widespread existence of bogus non-resident accounts in the
branch network. No criticism on that ground is made in respect of the appellant.
28. They made the following finding in respect of the appellant under this heading:
“Mr Byrne, as Head of Finance at the time of the DIRT Theme Audit, had a responsibility to raise the issue of potential retrospective liability for DIRT due in respect of interest on accounts wrongly classified as DIRT-exempt, and failed to do so.”
29. The criticism of the appellant in the Inspector’s Report regarding the deficiencies in the circular prepared as a result of the meeting on 9th February 1995 was as follows:
“At the meeting on 9th February 1995, Finance & Planning Department was charged with responsibility for drafting revised instructions to staff in relation to the operation of DIRT. These instructions were issued on 8th March 1995 as Special Circular no. S 11/95.
This Circular introduced documentary requirements in relation to the opening of new non-resident accounts, but did not address the position in regard to accounts which had been opened previously, apart from indicating that a valid declaration must be made “which has been signed, dated and in all respects fully completed by the customer”, nor did it inform the branches of the provisions of Section 32 (2) of the Finance Act, 1986.”
30. In addition to these criticisms, counsel on behalf of the Director submitted that the appellant was criticised in the report for being responsible for making false or inaccurate returns to the
Revenue in respect of DIRT. This is based, in particular, on a combined reading of two paragraphs of the report, the first of which is follows:
“The Head of Finance had responsibility for ensuring that the bank made returns of DIRT to the Revenue Commissioners within prescribed limits. The accuracy of these returns was critically dependent on the proper categorisation of deposit accounts at branch level between those exempt from DIRT, and those liable to DIRT at the standard rate of tax, and those liable at a reduced rate.”
31. However, a separate significant paragraph on the same page of the report says of the two General Managers that it was their responsibility “to ensure that accounts classified as
DIRT-exempt non–resident accounts were correctly classified as such and to see that Regional Managers secured full compliance with the statutory provisions relating to DIRT. They
failed to discharge this responsibility.” This finding of actual responsibility for the correct classification of the accounts did not apply to the appellant.
32. The other paragraph of the report invoked by counsel for the Director recalled that the appellant had been on the circulation list for the DIRT Theme Audit report, that he had attended the
meeting of 9th February 1995 and that “he was thus aware of the extent of non-compliance in the operation of DIRT-exempt non-resident accounts and ought to have known the
consequences of such non-compliance for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.”
33. The appellant had failed, in the view of the Inspectors, to appreciate that the returns of DIRT made by him or under his responsibility might be inaccurate. Again, it is important to note that
no dishonesty is alleged in the report or by the Director in these proceedings.
The High Court judgment considered
34. The learned High Court judge considered the Inspector’s Report, the affidavits sworn on behalf of the Director and by the appellant as well as the oral evidence of the latter. He noted the
Director’s contention that the findings against the appellant were restricted to two areas, namely non-resident accounts and special savings accounts. The learned judge summarised the findings in
respect of these areas under three headings which I have already mentioned insofar as they are contained in the Inspector’s Report.
35. Most significantly, the learned judge conducted a careful assessment of the extent to which the appellant was responsible for the accuracy of the DIRT tax returns made to the Revenue
Commissioners by him are under his responsibility. It is convenient here to interpose reference to a part of the evidence upon which counsel for the appellant placed particular reliance at the hearing
of the appeal. The inspectors communicated provisional findings to the appellant which included the following two paragraphs:
“The Head of Finance had responsibility for ensuring that the Bank made accurate returns of DIRT to the Revenue Commissioners within prescribed time limits. The accuracy of these returns was critically dependent on the proper categorisation of deposit accounts at branch level between those exempt from DIRT at the standard rate of tax, and those liable at a reduced rate. [emphasis added]
As Head of Finance, you had a responsibility to take reasonable care to ensure that all returns of DIRT made to the Revenue Commissioners correctly recorded the Banks liability for the DIRT payable on all interest paid or credited on relevant deposits. In the light of the internal audit reports of deficiencies and “irregularities” in the non–resident declaration is held by branches, it is evident that the returns could not have been correct.”
36. The appellant made detailed written representations to the Inspectors which led them to make alterations in their final report. Counsel for the appellant attached particular importance to the
fact that the second of these paragraphs did not appear at all in the final Inspector’s Report and that the word “accurate” was deleted from the first.
37. The learned judge reviewed in considerable detail the extent of the appellant’s responsibility in respect of DIRT tax returns. He examined, in particular, exchanges of correspondence by
e-mail and otherwise between the inspectors and Mr Richard Bowden who, according to the appellant, was responsible for taxation and based at the Bank’s headquarters in London.
38. In July 2002, the inspectors addressed an e-mail to Mr Bowden in which they asked his view as to who, during the period 1988 to 1998, had responsibility to ensure that DIRT returns
correctly recorded the Bank’s liability for this tax. Mr Bowden explained that, whilst the Finance Department would have had input into and reviewed the branch procedures, it had no line
management responsibility for branch banking. He said: “In an ideal word those managers would report to the Regional Managers, who in turn would report to the General Manager, Banking that
the procedures had been complied with.”
39. The inspectors at one point suggested in correspondence with the appellant’s solicitors that there was an inconsistency between Mr Bowden’s statements and those of the appellant. They
said that appellant claimed that he had no responsibility for the accuracy of the returns of DIRT, while Mr Bowden was not so clear on this point. Mr Bowden’s reply of 9th January 1993 denied
any such inconsistency. It is quoted in full in the judgment of the High Court. It is as follows:
“I thought I had made it quite clear that the Head of Finance, NIB, be it Patrick Byrne or whoever from time to time, was and could only be held, responsible for the correct completion of the DIRT return and paying over the correct amount of DIRT withheld as recorded in the Bank’s records.
The branches’ operating procedures, to my recollection, were set in regard to DIRT that, if the branch applied the correct systems code, would result in DIRT being withheld in appropriate cases and would be correctly recorded in the Bank’s records.
The line management responsibility for ensuring branch staff implemented Bank procedures ……………… rested with the Branch manager and the Branch manager’s line manager to whom he reported. Neither the Finance nor Tax functions had management responsibility for branch banking. Finance/Tax having ensured that the DIRT procedure were adequate to enable the Bank to fulfil its legal obligations in that regard, it was the responsibility of branch managers to implement those procedures.
In short, ………………… I believe Patrick Byrne and myself are in agreement as to his responsibilities ……………… I can see no inconsistency between what I wrote in response to the Inspectors’ letter ……… and what you report as Patrick Byrne’s contention.”
40. The important issue here was, of course, the extent of the appellant’s responsibility for the accuracy of the tax returns. The learned trial judge, however, observed that Mr Bowden had not
stated that he had taken over the Bank’s tax function from the appellant and that the written replies of Mr Bowden to the inspectors was not consistent with that view. This is not, in fact, the relevant
issue. The Inspectors’ question to Mr Bowden was expressed in general terms and was not related to the appellant.
41. The judgment concludes on this point as follows:
“What was clear from the correspondence above was that Mr Byrne’s Finance Department and Mr Bowden had an input into and power to review the branch procedures; neither had line management responsibility for branch banking. It does not follow that neither had any responsibility. The responsibility of the Finance management is to control, verify and report. The responsibility of the Head of Finance is to ensure that control is effective, verification is accurate and reporting is timely. The making of accurate tax returns is an integral part of financial reporting.”
42. The last four sentences appear to be an expression of the learned judge’s own views. They are not views expressed by the Inspectors. I have already summarised what the Inspectors said.
43. The judgment then dealt with the DIRT Theme Audit Report, noting that it had made no reference to tax evasion. The learned judge observed that the report should have been of critical
concern to the appellant since it involved the assessment of withholding tax by a bank. He said that the appellant could no longer assume that the returns made by the branch managers were accurate and that:
“Returns made, especially after that meeting [9th February 1995] without verification from the General Managers as to their accuracy, could not have merited the declarations made.”
44. Each of the six-monthly returns of DIRT made by the Finance Department contained the following declaration:
“I declare, to the best of my knowledge and belief, that the correct method of calculation has been applied and that the payment on account is correct and complete.”
45. In general terms, the learned judge expressed a number of criticisms of the appellant in line with the Inspector’s Report.
46. The learned judge then posed to himself the following questions:
“Did this failure amount to a lack of commercial probity? Does it go far enough that it should be categorised as being grossly irresponsible or being a danger to the public? Or is such failure ordinary commercial misjudgement?”
47. At the same time, the learned judge commented that the appellant’s “conduct would appear to be a departure from the ordinary standard of conduct of a professionally qualified
Head of Finance.” He proceeded:
“It is this departure from ordinary standards of conduct, rather than any misfeasance or specific breach of duty to the company, which underlies s. 160(2)(d) and(e) of the Act of 1990 and which renders a person unfit to act as director or other officer of the company.”
48. Following reference to authority, the learned judge reached the following conclusion:
“The court finds no evidence of gross negligence or total incompetence, nor a danger to the public.”
49. At a later point, the learned judge said that the question “to be determined by the court here is whether the conduct complained of displays a lack of commercial probity…” He
reviewed a number of French and Latin dictionary definitions of probity. They appear to equate it with, inter alia, honesty. He did not refer to any English dictionary.
50. The Oxford English dictionary (2nd Ed., Vol XII) defines probity as: “moral excellence, integrity, rectitude, uprightness; conscientiousness, honesty, sincerity.”
51. At the end of the judgment, the learned judge concluded that the appellant “in the circumstances, displayed a lack of commercial probity.” he said that he was mindful of making an
order under section 160(2)(e) of the Act. He made no order under any other provision.
The appeal
52. The parties have submitted extremely extensive oral and written submissions to the court.
53. On one issue, there was common ground. The Director insisted that he had never imputed dishonesty to the appellant and did not claim that the Inspector’s Report did so. In these
circumstances, it was difficult to stand over the finding of a lack of commercial probity. Counsel for the Director argued for a broad interpretation of the judgment of the High Court. Counsel for the
appellant, on the other hand, contested the finding of a lack of commercial probity and also said that, once the learned judge had concluded that there was no evidence of gross negligence or of total
incompetence and that there was no evidence that the appellant was a danger to the public, the application for a disqualification should necessarily have been dismissed.
54. The parties were in agreement that the inspectors had criticised the appellant in two respects, namely:
· failure to raise the issue of retrospective liability to tax;
· responsibility for deficiencies in the new circular two branches.
55. Counsel for the Director, on the other hand, maintained that the Inspector’s Report had also held the appellant responsible for the accuracy of the returns of DIRT which were made under
his responsibility from and after the circulation of the DIRT Theme Audit Report. This in turn led to a debate about the extent of the appellant’s responsibility for these returns.
The power to disqualify
56. Section 160(1) of the Companies Act, 1990 deals with the case of a person who is convicted on indictment of any indictable offence in relation to a company, or involving fraud or dishonesty.
57. Although only one paragraph, paragraph (e), of Section 160(2) is directly relevant to the issues on the appeal, it helps to set it out in full. The following is the text as amended by section 41 of the Company Law Enforcement Act, 2001:
2) Where the court is satisfied in any proceedings or as a result of an application under this section that—
( a ) a person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any fraud in relation to the company, its members or creditors; or
( b ) a person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any breach of his duty as such promoter, officer, auditor, receiver, liquidator or examiner; or
( c ) a declaration has been granted under section 297A of the Principal Act (inserted by section 138 of this Act) in respect of a person; or
( d ) the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company; or
( e ) in consequence of a report of inspectors appointed by the court or the Minister under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company; or
( f ) a person has been persistently in default in relation to the relevant requirements; or
(g) a person has been guilty of 2 or more offences under section 202(10); or
(h) a person was a director of a company at the time of the sending, after the commencement of section 42 of the Company Law Enforcement Act, 2001, of a letter under subsection (1) of section 12 of the Companies (Amendment) Act, 1982 , to the company and the name of which, following the taking of the other steps under that section consequent on the sending of that letter, was struck off the register under subsection (3) of that section; or
(i) a person is disqualified under the law of another state (whether pursuant to an order of a judge or a tribunal or otherwise) from being appointed or acting as a director or secretary of a body corporate or an undertaking and the court is satisfied that, if the conduct of the person or the circumstances otherwise affecting him that gave rise to the said order being made against him had occurred or arisen in the State, it would have been proper to make a disqualification order otherwise under this subsection against him;”
the court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.
58. In the present case, the Director claims that the Court should, in consequence of the Inspector’s Report be satisfied that the appellant is, pursuant to section 160(2)(e), “unfit to be
concerned in the management of a company.” Counsel for the Director correctly submitted that, although this provision (“paragraph (e)”) or its English equivalent has been the subject of
interpretation for a number of years, the Court must ultimately apply the section itself. This submission is well founded. It needs to be borne in mind when interpreting the authorities.
59. The use of the term “unfit” requires some consideration. Paragraph (e) does not refer to any act or even series of acts by the person, but rather to the quality of the person. Paragraph (e)
thus contrasts with paragraphs (a) and (b) which refer respectively to some act of fraud or breach of duty of which the person has been guilty. Paragraph (f), as amended by section 42 of the
Company Law Enforcement Act, 2001, refers to persistent failure in compliance requirements.
60. Under paragraph (e) the court must be satisfied that the person is in a state or condition such that he can properly described as “unfit” to be involved in the management of a company. The
question is one of suitability or capacity.
61. The following propositions do not appear to be disputed and are well grounded in the case-law:
1. The court has no power to make a disqualification order unless it is satisfied that at least one of the paragraphs of section 160(2) applies. (Re Readymix Limited (in liquidation); Cahill v
Grimes (“Readymix”) [2002] 1 IR 372, per Murphy J at page 381; In re Wood Products (Longford) Limited; Director of Corporate Enforcement v McGowan [2008] IESC 28, per
Fennelly J);
2. The Director bears the burden of establishing the ground for the making of the order, in this case that the person is “unfit.” (per Murphy J, ibid.)
3. The primary purpose of a disqualification is not punitive, but protective, though there is usually a deterrent element. (per Murphy J, ibid.; per Fennelly J, ibid.).
62. The debate, in the present case, has centred on the meaning of “unfit.” The following passage from the judgment Browne-Wilkinson VC in Re Lo-Line Motors Limited (1988) BCLC 698
has been cited with approval in a number of cases:
“’What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
63. Murphy J, in his judgment in Readymix, with which Murray J (as he then was) and McGuinness J agreed described that as a correct statement of the law and as representing a proper
approach to the application and interpretation of section 160. He cited several cases where it had already been followed. It has been treated as a useful point of reference in several later cases. It is
obvious, however, that Browne-Wilkinson VC was not propounding an exhaustive definition. His use of expressions such as, “in a normal case,” and “primary purpose,” show that. No doubt,
unfitness could encompass physical or mental incapacity, though not mentioned. So also might irresponsible behaviour, total neglect or a high degree of carelessness. All would depend on the
circumstances.
64. Dillon L.J., in his judgment in Re Sevenoaks Stationers Ltd. [1991] Ch. 164 at 176 deplored the tendency to treat these statements as “judicial paraphrases of the words of the statute,
which fall to be construed as a matter of law in lieu of the words of the statute.” He went on to state the “the true question to be tried is a question of fact.”
65. Nonetheless, having administered those cautions, it is clear that the words of Browne-Wilkinson VC provide some useful pointers to how the court should assess “unfitness.” The drastic
nature of the remedy necessarily implies that the Director should meet a high standard of proof. It is natural to begin by asking whether the person is shown to be dishonest. In that event, it will be
very difficult to show that he should be trusted with the management of a company.
66. Counsel for the Director placed particular reliance on some passages from the judgment of Jonathan Parker J in Re Barings plc and others; Secretary of State for Trade and Industry v
Baker (1999) BCLC 433 ate 483, which were as follows:
“Unfitness may be shown by conduct which is dishonest (including conduct showing a want of probity or integrity) or by conduct which is merely incompetent. In every case the function of the court in addressing the question of unfitness is ‘to decide whether [the conduct………], viewed cumulatively and taking into account any extenuation circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies’”
67. Jonathan Parker J went on to say that, where the case is based solely on allegations of incompetence the burden on the Secretary of State is “to satisfy the court that the conduct
complained of demonstrates incompetence of a high degree.” He referred to the various expressions which had been used in the cases, including “total incompetence” as in the judgment of
Browne-Wilkinson VC, before reiterating that the burden in a case based on incompetence is a “heavy one.”
68. I agree that it is correct to examine the question of the fitness of the person by looking at his behaviour and record as a whole (Jonathan Parker J used the word “cumulatively.”) The
question of unfitness must be assessed generally and rigid categories should be avoided. There are degrees of honesty, probity and integrity. In Re Newcastle Timber Limited [2001] 4 IR 586 at
592, McCracken J considered that directors had acted incompetently, adding: “particularly in relation to insolvent trading and preference of trade creditors, I think they behaved
irresponsibly.” Nonetheless, he was not satisfied that they had been shown to be unfit. I do not say that I would necessarily have reached the same conclusion on the facts of that case. I mention it
as an example of an assessment of all the relevant behaviour taken as a whole.
69. One other procedural detail is important. Section 160(7) of the Act obliges the Director to give at least ten days notice to the person of his intention to apply for a disqualification order. This
provides him with an opportunity to respond, as he did in the present case. This provision illustrates the general principle that any person who is to be the subject of an application under the section
must be given clear notice of that fact and of the grounds on which the application is to be made. I emphasise the matter here because it has a bearing on the finding of want of commercial probity
made by the learned trial judge in the present case. The Director, by his notice, stated that he intended to make the application pursuant to paragraphs (b), (d) and (e) of Section 160(2), but also
stated that the application was to be brought having regard to the Inspector’s Report. In fact, both the draft notice of motion sent with the Director’s prior notice and the notice of motion actually
sent were based exclusively on the contents of the Inspector’s Report.
Conclusion
70. The first matter to be considered is the scope of the present appeal, having regard to the form of application brought by the Director, the Inspector’s Report and the High Court judgment.
Although the notice of motion was brought pursuant to paragraphs (b), (d) and (e) of section 160(2), the High Court determined the matter exclusively pursuant to paragraph (e). The court may also
determine that a person is “unfit” to be involved in the management of a company pursuant to paragraph (b) if he commits a breach of duty as an “officer” of a company or pursuant to (d) for his
“conduct” as such an officer. However, the present application was based entirely on the Inspector’s Report and it was appropriate that any finding be made by reference to the report. It is true that,
in response to the appellant’s replying affidavit, the Director introduced further evidence which had not necessarily been contained in the Inspector’s Report. That did not alter the basic fact that the
entire justification for the Director’s application was to be found in the Report.
71. I have already summarised the elements of the Inspectors’ findings so far as the appellant was concerned. They fell under three headings:
· Failure, following the DIRT Theme Audit Report, to raise the issue of potential retrospective liability:
· Deficiencies in the S11/95 Circular devised by the appellant for circulation to the branches;
· That the appellant ought to have known, following the disclosure by the DIRT Theme Audit Report of the inaccuracies in the branches’ records, of the consequences for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.
72. It is important to emphasise, in the first instance, that the Inspector’s Report should be accepted at its face value. To the extent that the Inspectors criticised the appellant, those criticisms
should be accepted, unless they are clearly shown to be incorrect. Counsel for the appellant accepted, when this matter was raised at the hearing of the appeal, that he was not seeking to go behind
the Report or to contest its findings. On that basis, I will comment briefly on each of the three headings.
73. The appellant failed to raise the issue of potential retrospective liability following the circulation of the DIRT Theme Audit Report, especially at the important management meeting of 9th
February 1995. As Head of Finance and as a qualified accountant, he should have realised that there was such a danger if the records at the branches were as poor as was disclosed by the Report.
It is fair to place in the balance the fact, recorded in his favour by the Inspectors, that the appellant, unlike other people in management had not received the earlier internal audit reports on branches.
Perhaps more importantly, the appellant was not alone in this failure. Nobody in the most senior management seems to have adverted to this danger. Nor did the Audit department or, more notably,
the external auditors, a most eminent firm.
74. The Director has at all times treated the deficiencies in the new circular S11/95 as being in a “minor area.” The deficiencies were the failure to draw attention of the branches to ensure that all
accounts, not merely newly opened ones should be accompanied by properly completed and genuine non-resident declarations and failure to send to the branches a copy of section 32 of the
Finance Act, 1986. Counsel for the appellant has taken the Court through the circular and drawn attention, in particular, to a laminated sheet devised by the appellant to be used by branch staff and
which was certainly more explicit than the circular. The terms of the circular were certainly open to some criticism, but, in the end, it is true that this was a comparatively minor element.
75. Counsel for the Director placed most emphasis at the hearing on the responsibility of the appellant, as Head of Finance, to make accurate tax returns and the implications of the knowledge
of non-compliance with DIRT requirements in the branches acquired through the DIRT Theme Audit Report. The Inspectors did not, however, attribute to the appellant any actual knowledge that
false recording of non-resident accounts was taking place (as it undoubtedly was) in the branches. In this context, it is telling that the Inspectors amended their provisional findings in the ways
described above. It is also noteworthy that the General Manager—Banking, but not the appellant, was found to be responsible for the accuracy of the branch records. It seems likely that it was this
aspect of the Inspector’s Report that led the learned trial judge to make the disqualification order. It is undoubtedly a potentially serious matter. It is important, therefore, that the Inspectors, by
making the amendments which they did and by not alleging that the appellant knowingly made false tax returns did not allege any dishonesty against the appellant.
76. It is then necessary to consider the conclusions of the learned trial judge in respect of the appellant as summarised above. They fall into three parts. As counsel for the Director accepted in
argument, the judgment presents some difficulties of interpretation.
77. Undoubtedly, the most important finding is that the appellant “in the circumstances, displayed a lack of commercial probity.” The sentence of the judgment which follows that finding is:
“Accordingly, the Court is mindful of making an order under s. 160(2)(e)………………” Although the judgment contains no explicit finding of unfitness, it is plain that the finding of a lack of
“commercial probity” led to the making of the disqualification order.
78. I am satisfied that this finding cannot be permitted to stand. The Director has at all times insisted that he does not and did not allege any dishonesty against the appellant. It is true that there is
a reference to “commercial probity” in the grounding affidavit of Mr Dick O’Rafferty, but no such allegation was made in the prior statutory notice addressed to the appellant. If it were the case that
the Director was making a distinction between “dishonesty” and “want of probity,” he would no doubt, as a matter of fairness, have informed the appellant. The Director has, from before the High
Court hearing, disavowed any intention to ascribe dishonesty to the appellant and has not sought to make any such distinction. In these circumstances, it cannot have been right to make a finding of
lack of commercial probity.
79. The learned judge also found “no evidence of gross negligence or total incompetence, nor a danger to the public.” It might have been thought that a determination by the court that
there was no evidence that the appellant presented a “danger to the public” would, on its own, have concluded the matter in favour of the appellant. At the least, it makes it difficult to understand
how the learned judge decided to consider making a disqualification order without adverting to this problem.
80. The learned judge also found that the behaviour of the appellant “would appear to be a departure from the ordinary standard of conduct of a professionally qualified Head of
Finance” before concluding that it was “this departure from ordinary standards of conduct, rather than any misfeasance or specific breach of duty to the company, which underlies s.
160(2)(d) and(e) of the Act of 1990 and which renders a person unfit to act as director or other officer of the company.” Counsel for the Director has sought to link this finding with the
judgment of Jonathan Parker J in Barings, quoted above. But the reference in that judgment to falling below standards cannot be read in isolation from his further remarks postulating a
demonstration of incompetence “to a high degree.” If the learned trial judge intended to convey that unfitness could be found merely on the basis of a departure from the ordinary standards of
conduct of a person in the position of the appellant, he would have been in serious error. It is not clear that he intended that meaning. His finding that there was “no evidence of gross negligence or
total incompetence” shows that he was applying the correct standard and finding that it had not been met.
81. I think his implicit finding of unfitness flowed from his finding of a lack of commercial probity. Since I do not believe that finding can be allowed to stand, I would allow the appeal and dismiss
the application of the Director.
82. The Director has cross-appealed against the failure of the learned trial judge to make findings under paragraphs (b) and (d). At the same time, he accepted that he was not relying on any
different evidence from that relied on in support of the application under paragraph (e). I believe that the matter has been fully dealt with on its merits under paragraph (e). I would dismiss the cross-appeal.
Cahill v. Grimes
[2002] IESC 12 (1st March, 2002)
JUDGMENT OF MR JUSTICE FRANCIS D MURPHY DELIVERED THE 1 ST DAY OF MARCH, 2002 [NEM DISS.]
_________________________________________________________________________
1. By order dated the 20th July, 2001, made pursuant to a judgment delivered by him on the same date, Mr Justice Thomas Smyth disqualified the respondent (Dr Grimes) from being concerned in the management of a company as a liquidator, receiver or examiner for a period of seven years from the 20th day of July, 2001, and imposed conditions limiting the right of Dr Grimes to act as auditor, director or secretary of any company during the same period. It is from that judgment and order, which was made pursuant to s.160 of the Companies Act 1990, that Dr Grimes appeals to this Court.
2. The above named CB Readymix Limited (Readymix) was incorporated on the 7th of April, 1988. The formation of the company was procured, apparently, by Cork Company Registrations an enterprise owned/or controlled by Dr Grimes. Readymix engaged in the business of quarrying and selling sand and gravel. As the learned trial Judge explained in his judgment, Readymix got into financial difficulties, in particular, in respect of returns and payments to the Revenue both in respect of PAYE and VAT. The Revenue commenced proceedings against the company by way of summary summons on the 15th of March, 1995, seeking liberty to enter final judgment in the sum of £50,510.70. When the matter was eventually listed before the Master, the Revenue became aware that the company had been struck off the Register of Companies on the 25th of September, 1995, for failure to furnish the appropriate annual returns. On the 15th January, 1996, the company, although struck off the Register, purported to pass a resolution winding up the company and appointing Dr Grimes as liquidator. On the 25th of March, 1996, Barron J ordered the restoration of Readymix to the Register and at the same time made an order restraining Dr Grimes from acting as liquidator thereof on or before the 22nd of April, 1996. It was on the 27th of March, 1996, that the Master of the High Court granted the Revenue liberty to enter final judgment against Readymix in the sum of £50,510.70. On the 18th day of April, 1996, a petition was presented for the winding up of Readymix by the Court. On the 25th April, 1996, the applicant (Mr Cahill) was appointed as provisional liquidator. On the 29th April, 1996, Mr Justice Barron ordered a stay on the appointment of Mr Cahill as provisional liquidator. On the 27th of January, 1997, Mr Justice Barron discharged the stay restraining Mr Cahill from acting as provisional liquidator and by the same order declared that the resolution purporting to wind up Readymix voluntarily and the appointment of Dr Grimes as liquidator thereof on the 15th of January, 1996, was invalid. In addition a stay was put on the order dated the 25th of March, 1996, pending an appeal to the Supreme Court. That appeal was never prosecuted.
3. It is clear that Dr Grimes was never validly appointed as liquidator of Readymix. It is equally clear that in the relatively brief period from the 15th of January 1996 to the 25th of April 1996 he did purport to act as liquidator of Readymix and between the latter date and the 27th of January, 1997, Dr Grimes disputed the entitlement of Mr Cahill to act as provisional liquidator of the company. There is no doubt that Dr Grimes held himself out as being the liquidator of Readymix and repeatedly asserted in affidavits and other legal documents that he held that position.
4. Ultimately Mr Cahill was appointed official liquidator of the company by order of the High Court made on the 23rd day of January, 1997.
5. In the period subsequent to his appointment as provisional liquidator Mr Cahill had several meetings and communications with Dr Grimes. Whilst the communications ranged over a wide variety of topics Mr Cahill in his evidence drew attention to a particular observation made at a meeting which he had with Mr Grimes on the 2nd of May, 1996, at Grattan Court, Washington Street, Cork, when he, Mr Cahill recorded part of the conversation between them in the following terms:-
“Dr Grimes then stated that surely EFC (Mr Cahill) did not expect to get any books and records of the company. EFC inquired why and Dr Grimes stated quite categorically that the books could have an accident. EFC stated that he would have to get the books but made no further comment on this aspect.”
6. Other topics discussed between the parties were the ownership of the lands and the identity of the persons who were working in the quarries which appeared to be owned by Readymix. In an affidavit grounding an application for judicial review by way of order of certiorari to quash the decision of the Revenue Commissioners to raise certain assessments on Readymix Dr Grimes did swear (at para. 70) that:-
“I have looked at the company’s books and I am satisfied that no money whatever is owing to Revenue.”
7. On the 16th of May, 1997, Mr Cahill wrote to two persons, namely, Anne Carey and Carol O’Sullivan who, it appeared to him, had been appointed directors of the company in place of the original directors. In a reply dated the 30th May, 1997, Ms Anne Carey explained that the company had been put into liquidation and Dr Grimes appointed liquidator thereof. She said that “all the books were handed over to him”.
8. In an affidavit sworn on the 31st of July, 2001, Dr Grimes set out the position in relation to the books and records of the company in the following terms:-
“ 22 I contacted Mr Cahill and offered to meet him so that I could hand over the books of the company which I had in my capacity of liquidator.
23 Mr Cahill took legal advice and wrote back saying that on legal advice he declined to meet me.
24 I was then stuck with the situation wherein the court informed me that I was never liquidator. I had offered the books to the only person entitled to them and he did not want them. The Acts that I read said that only officers of the company were responsible for the books and I had never taken any hand, act or part in running or operating the company and was not even liquidator I therefore had no duty to keep them and consequently I was not going to be having them around for years so I destroyed them. I did not fall into any category covered by the Act with a duty of care. Nobody wanted them and there was no court order extant dealing with them.”
9. At a meeting on the 12th October, 1996, Dr Grimes was recorded by Mr Cahill as having stated:-
“That he had the books and records of the company in his possession and he further stated that the books and records were, in his opinion, adequate.”
10. In an affidavit sworn by him on the 29th of October, 1996, Dr Grimes explained the position with regard to the records as follows:-
“My understanding for this was that I was finished, not going to be consulted further and therefore had no further responsibility for any of the books of the company which I had and now I no longer needed. I checked the relevant Acts insofar as I was able and it appeared to me that since I never had been an officer of the company and never been liquidator, I had nothing to do with the company and that I did not expect that I was going to be brought back before this honourable court and asked to produce the documents which, not having any need of, I decided not to keep and dumped.”
11. The learned trial Judge in his judgment records the description given to him by Dr Grimes as to the manner in which the documents were “dumped” in the following terms:-
“On inquiry as to how ‘the dumping’ was done, Mr Grimes, who represented himself, stated that he had filled about two and a half sacks and put them out for collection with the garbage. On further inquiry he has stated the books and records were ‘dockets for sand and gravel’ and where they went.”
12. In this Court, as in the High Court, Dr Grimes sought to make light of the documents which he “dumped”. He drew a fine, but unreal, distinction between putting aside documents so that they would be destroyed by others and destroying them himself. Again his contention that the documents which he caused or permitted to be destroyed were merely documents which could be replaced or duplicated cannot be reconciled with the abundant evidence given by himself and others that he did have access to the books and records of the company but was no longer in a position to hand them over to the official liquidator. The learned trial Judge rejected the argument and evidence to that effect. In my view he was correct in so doing.
13. In his very careful judgment the learned trial Judge recorded a series of remarks made by Dr Grimes in the course of his submissions to him. They included the following:-
1 “I was determined to screw the Revenue no matter what it took.”
2 “I was prepared to blow up anyone who got in my way.”
3 “I was going to make an example of Mr Cahill.”
4 “I would not obstruct the liquidator but I would not help”.
5 “Whatever tactics it took I was going to bring the Revenue to book.”
14. Whilst Dr Grimes did not use the same extreme language in this Court, the terms in which he explained his approach to the problem were entirely consistent with the observations aforesaid. Dr Grimes explained that Readymix employed twenty-four people and he was willing to do everything in his power to preserve their employment. He was engaged in a battle with the Revenue authorities. He explained that he had a feud with them but it was not malicious. He asserted that no creditor of the company – other than the Revenue authorities – made any complaint about his conduct. Indeed he explained that he had engaged in many liquidations and that it had never been alleged that he was unfit to act as liquidator. It is common case that Dr Grimes destroyed – or dumped with a view to their destruction – documents relating to the financial affairs of Readymix. In my view the inescapable conclusion is that those documents included the books and records of that company and that this was done with a view to depriving the official liquidator of access thereto. An experienced liquidator – and Dr Grimes rightly claims to be such – would immediately appreciate the importance of the records to which Dr Grimes admits he had access.
15. The present application was brought by Mr Cahill under s.160 of the Companies Act, 1990. As this is the first occasion on which that section has come before this Court for consideration it may be helpful to set out the material parts of that section as follows:-
“160 (1) Not relevant.
(2) Where the court is satisfied in any proceedings or as a result of an application under this section that:-
(a) a person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company of any fraud in relation to the company, its members or creditors; or
(b) a person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any breach of his duty as such promoter, officer, auditor, receiver, liquidator or examiner; or
(c) Not relevant
(d) the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company; or
(e) Not relevant
(f) Not relevant
The court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.”
(3) Not relevant
(4) Not relevant
(5) Not relevant
(6) Not relevant
(7) Where it is intended to make an application under subsection (2) in respect of any person, the applicant shall give not less than ten days’ notice of his intention to that person.
(8) Any person who is subject or deemed subject to a disqualification order by virtue of this Part may apply to the court for relief, either in whole or in part from that disqualification and the court may, if it deems it just and equitable to do so, grant such relief on whatever terms and conditions it sees fit.
(9) Not relevant
(10) Not relevant
A “disqualification order” is defined in s.159 of the Companies Act, 1990, as meaning:-
“(a) An order under this Part that the person against whom the order is made shall not be appointed or act as an auditor, director or other officer, receiver, liquidator or examiner or be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company or any society registered under the Industrial and Provident Societies Acts 1973 to 1978; or
(b) Not relevant”
16. The learned trial Judge concluded that the applicant had made out a case under s.160 for a disqualification order. The order made by Smyth J directed that Dr Grimes “be disqualified from being concerned in the management of the company as a liquidator, receiver or examiner for a period of seven years from the 20th day of July 2001” but in relation to the other offices to which s.160 extends, namely, auditor, director or secretary provided that Dr Grimes “may act as an auditor, director or secretary of a company if he complies with the following conditions”: –
“(I) That he has such professional qualifications as are necessary or required by law so to do.
(II) That at no stage or time is he to have possession, custody or control of the seal of any such company or any of its books or records of any kind whatsoever, so however he is entitled to have access to such books and records only as are necessary to enable him to discharge his legal obligations.”
17. It was further ordered that Dr Grimes “may only act as a director of a company whose constitution and management provide for a board of directors of three or more persons”.
18. In submissions made with a clarity and brevity which might be envied by barristers and a moderation which should be emulated by other lay litigants – Dr Grimes argued:-
1 That the order of the learned trial Judge was misconceived because it was in part a
disqualification and in part a restriction.
19. He contended that the only order which could be made under s.160 was a disqualification order which would prevent the person to whom it applied from holding any of the offices comprised in the definition of a disqualification order. It was, as he said, “an all or nothing section”. The Court had no power to differentiate between the different offices or to impose conditions as to the terms on which anyone or more of the offices might be exercised.
20. Dr Grimes properly recognised the dangers of this argument. He appreciated that if it succeeded he – or persons in a similar position – might be wholly disqualified for the prescribed period from all relevant offices. Moreover, he was fully conscious of the care which the learned trial Judge had taken to balance the need for a sanction with the desirability of the respondent continuing certain commercial activities. Dr Grimes submitted that his rigid interpretation of the section was correct whatever consequences flowed from it.
21. In my view this argument is refuted by the provisions of subsection 8 of section 160 (see above). The express power of the Court to grant relief to a person who is subject or deemed subject to a disqualification order “either in whole or in part” and to “grant such relief on whatever terms and conditions it see fit” would enable the Court to review a disqualification order in the days immediately following the making thereof by imposing precisely those terms which Mr Justice Smyth had required in the first instance. In my view it would be unthinkable that the Court could have a power to revise its own order in that way and in that time frame and not have the same powers in the first instance. I am fully satisfied that the learned trial Judge did have the powers which he purported to exercise so humanely in disqualifying the respondent from filling certain offices and yet permitting him to fill others subject to stipulated conditions.
(2) That s.160 had no application to Dr Grimes as he never was an officer or liquidator of the company.
22. Whilst the members purported to so appoint him it seems clear on the facts and confirmed by the order of Mr Justice Barron that he was never validly appointed. In Re Lo-line Electric Motors Ltd [1988] 2 All ER 692 the High Court in England concluded that the disqualification provisions contained in s.300 of the UK Companies Act 1985 – which is similar but by no means identical with s.160 of the 1990 Act – applied or extended to de facto directors. Sir Nicolas Browne-Wilkinson VC expressed his views (at p. 699) as follows:-
“As a matter of construction, I would hold that the word ‘director’ in section 300 does include a person who is de facto acting as a director even though not appointed as such. [Counsel for Mr Browning] submitted that as the disqualification of a director is a penal process the words should be strictly construed. But, as I have said, the paramount purpose of disqualification is the protection of the public not punishment. I therefore approach the question of construction on the normal basis. Section 300 requires the court to have regard to ‘conduct as a director’. I can see no reason why Parliament should have intended that the decision to disqualify should turn on the validity of his appointment. The conduct relevant to future suitability to act as a director depends upon a man’s past record as a director irrespective of the circumstances in which he came to act as such. [Counsel for Mr Browning] relied on section 733 (2) of the Act of 1985 as showing that when Parliament intended to include a de facto director it referred expressly to ‘any person who was purporting to act in any such capacity’. But section 733 extends the criminal liability of a company to others and it is not surprising that in an exclusively penal provision the criminal liability of a de facto director has to be expressly referred to.”
23. The decision of the Vice Chancellor was supported by earlier authorities cited in his judgment and is, in my opinion, fully vindicated by a purposive reading of the relevant English and Irish legislation and it is, in my view, as applicable to a de facto liquidator as it is to a de facto director.
3 That the section is draconian and accordingly there is a heavy onus on the applicant to establish that the matter falls within the section and that there should be a corresponding reluctance on the Court to exercise its undoubted discretion against making a disqualification order.
24. In principle this argument is correct. The onus does fall on the applicant to establish the allegations on which he relies and, even where a case is made out, the use of the word “may” in s.160 (2) confers a discretion on the Court whether or not to make the order as was pointed out in Re Newcastle Timber Ltd (Unreported, High Court, McCracken J, 16th October, 2001).
25. The appropriateness of the sanction imposed by the learned trial Judge must be considered in the light of the conduct of the respondent and the purpose for which the section was enacted.
In Lo-line Motors ( supra, at p.696) Browne-Wilkinson VC provided a general approach to the application of the UK disqualification provisions in the following terms:-
“What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies has shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
26. That passage was quoted with approval by the learned trial Judge and likewise was adopted by Shanley J in La Moselle Clothing Ltd .v. Soualhi [1998] 2 ILRM 345 by McGuinness J in Squash (Ireland) (Unreported, High Court, McGuinness J, 8th February, 2001) and in the judgment of McCracken J in Re Newcastle Timber Ltd ( supra).
27. It is I believe a correct statement of the law and represents a proper approach to the application and interpretation of s.160 of the Companies Act 1990.
28. The fact that Dr Grimes deprived the official liquidator of the books and records of Readymix was, to my mind, extremely serious. The grace with which Dr Grimes defended his conduct was attractive but alarming. His apparent belief that the commendable motive of saving employment would justify the destruction of documents and the frustration of the liquidation of a company shows a completely mistaken view as to the duties of a liquidator and would undoubtedly raise concern as to the propriety of his being involved in the management of companies which are subject to detailed regulations for the protection of the interests of the public whether as shareholders, creditors or employees.
29. Carrying on business as a corporate entity necessarily involves meetings of shareholders and meetings of directors. Of its nature this type of enterprise must generate substantial documentation. In addition, since the formation of corporate status by registration, the Companies Acts have required the creation, maintenance and preservation of documents relating to the affairs and finances of companies and public access to much of that information. The obligation to maintain such records is imposed on directors and failure to do so may, in addition to particular penalties, leave directors open to a charge of acting irresponsibly. In Business Communications Ltd .v. Baxter & Anor (Unreported, High Court, Murphy J, 21st July, 1995) I pointed out that:-
“To obtain exemption from the restraint which must otherwise be imposed by virtue of section 150 of the 1990 Act, all that is required is the exercise of a suitable degree of responsibility. Ordinarily responsibility will entail compliance with the principal features of the Companies Acts and the maintenance of the records required by those Acts. The records may be basic in form and modest in appearance. But they must exist in such a form as to enable the directors to make reasonable commercial decisions and auditors (or liquidators) to understand and follow the transactions in which the company was engaged.”
30. The fortuitous reference in that passage to the importance of appropriate documentation being available for liquidators underscores the gravity of the misconduct of Dr Grimes in the present case. Adequate records are necessary to enable a liquidator to perform his statutory functions properly and some records are necessary to enable him to perform his functions at all. Whilst I accept that Dr Grimes did not act maliciously, his decision to destroy or permit the destruction of the books and records of Readymix was a very serious wrong indeed. Dr Grimes did argue that a liquidator or director should not be severely penalised for one error in relation to a particular company in a context where no allegations of inappropriate conduct are made against him in respect of many other such offices held by him. That argument has considerable force. However a significant feature of the judgment of Mr Justice Smyth was his statement that he allowed time to Dr Grimes to reconsider the argument which he made to the Court and notwithstanding the opportunity given to him he, Dr Grimes, “continued in a vein as to betoken a total disregard in his conduct complained of”. It was the fact that Dr Grimes could not then – and does not now – appreciate the gravity of his misconduct that justifies the conclusion that he is unfit to hold the office of liquidator and casts serious doubt upon his suitability to participate in the management of any company.
4 Dr Grimes contended that subsection 8 of s.311 of the Companies Act 1963 was unconstitutional because it provided that a company which had been struck off the Register but was restored pursuant to the order of the Court was “deemed to have continued in existence as if its name had not been struck off”. Dr Grimes argued that this deeming provision could create a retrospective criminal liability and was accordingly unconstitutional. As I understand it, that argument might have been made in the outstanding appeal to this Court which Dr Grimes indicated he does not now intend to pursue. Clearly it would not be possible for this Court in the present proceedings to consider this argument as it was not made in the High Court and could not be argued in the absence of notification to the Attorney General.
5 It was submitted that the imposition of conditions on Dr Grimes acting as an auditor, director or other officer of the company was an unwarranted and unfair interference with the regulation and management of companies which might wish to retain the services of the respondent.
31. In particular Dr Grimes contended that the condition which permitted him to “only act as a director of a company whose constitution and management provided for a board of directors of three or more persons” was an impermissible intrusion into the affairs of a company which was not a party to the proceedings. In my view this is a mistaken analysis of the particular condition. It does not of itself impose any obligation on any company. It imposes a limitation on Dr Grimes with the result that any company seeking to avail of his managerial skills can only do so if its corporate structure is such that will permit Dr Grimes to comply with the condition.
32. The other conditions imposed on the respondent acting as auditor, director or secretary of a company, namely, “that he should not have possession, custody or control of the seal of the company or any of its books or records of any kind whatsoever so however he is entitled to access to such books and records only as are necessary to enable him to discharge his legal obligations” will be, as Dr Grimes has pointed out, difficult to police. On the other hand, having regard to the facts of this case as found by the learned trial Judge I believe that the inclusion of such a condition is entirely appropriate. The only alternative would be a comprehensive disqualification order which the learned trial Judge was reluctant to make. In the final analysis it is a matter for Dr Grimes to comply with these conditions. If he fails to do so it must be anticipated that a comprehensive order will then be made.
33. In these circumstances I would dismiss the appeal and affirm the order of the learned trial Judge.
Director of Corporate Enforcement v. D’Arcy
[2005] IEHC 333
JUDGMENT of Mr. Justice Kelly delivered on the 26th day of October, 2005
The Reliefs Sought
The Director of Corporate Enforcement (the Director) seeks a disqualification order under s. 160(2) of the Companies Act, 1990, as amended, against the respondent, Nigel D’Arcy, (Mr. D’Arcy).
The effect of such an order is far reaching. It disqualifies the person against whom it is directed from being in any way, directly or indirectly, concerned in the management of any company. Such a person is also disqualified from taking part in the promotion or formation of such a company or from acting as an auditor, director, officer, receiver, liquidator or examiner of such a company. Similar restrictions apply in respect of any society registered under the Industrial and Provident Society’s legislation.
Background to the Application
In 1998 this court appointed inspectors (the Inspectors) to investigate the affairs of National Irish Bank (the bank) and National Irish Bank Financial Services Limited (NIBFS).
On 9th July, 2004, the Inspectors completed their report. By order of the court of 23rd July, 2004, their report was published.
The Inspectors’ Conclusions
The Inspectors summarised the conclusions which they had reached in their report as follows:
1. Bogus non-resident accounts were opened and maintained in the bank’s branches enabling customers to evade tax through concealment of funds from the Revenue Commissioners.
2. Fictitiously named accounts were opened and maintained in the branches, enabling customers to evade tax through concealment of funds from the Revenue Commissioners.
3. Clerical Medical Insurance (CMI) policies were promoted as a secure investment for funds undisclosed to the Revenue Commissioners.
4. Special saving accounts had Deposit Interest Retention Tax (DIRT) deducted at the reduced rate, notwithstanding that the applicable statutory conditions were not observed.
5. There was improper charging of interest to customers.
6. There was improper charging of fees to customers. (See page (i) of Report)
The Inspectors also concluded that responsibility for the improper practices which existed rested with senior management of the bank during the period covered by the investigations. It was their view that senior management had the duty to ensure that the business of the bank was so conducted that such practices did not occur and, if they did, that they were stopped immediately.
The Inspectors also concluded that the head of the bank’s Financial Advice and Services Division, and a number of the Financial Services Managers in that division, were responsible for the promotion of the CMI policies as a secure investment for funds undisclosed to the Revenue Commissioners.
The Financial Advice and Services Division
The Financial Advice and Services Division (FASD) of the bank was set up in 1989. It was separate from the branch network of the bank. FASD was responsible for the marketing of financial products which prior to its creation had been sold to bank customers through manager’s insurance agencies. The bank acquired the interest in the manager’s insurance agencies with effect from 1st January, 1990.
As the Inspectors made clear the role of the FASD was to generate income for the bank from a) the sale of high value insurance products used for tax planning, business planning and personal financial planning and b) the development through the bank’s branch network of sales of high volume insurance products such as endowment policies, regular premium savings and protection plans. (See page 83 of Report)
Mr. D’Arcy’s role
On 1st May, 1989, Mr. D’Arcy commenced employment with the bank. He was recruited by the then Chief Executive Mr. Jim Lacey to establish FASD. He held the position of head of FASD from 1st May, 1989, onwards.
During his time Mr. D’Arcy reported to Mr. Lacey as Chief Executive and thereafter to Mr. Seymour as Executive Director until 1st January, 1995. From then until 23rd May, 1997, he reported to the General Manager – Banking, and thereafter, up to the date of appointment of the Inspectors, to the Chief Operating Officer.
All the financial services managers within the FASD reported directly to Mr. D’Arcy.
CMI and other policies
At pages 115 and 116 of the Report the Inspectors made the following findings in respect of CMI policies. They found:
1. Monies which were undisclosed to the Revenue Commissioners, including funds held in bogus non-resident accounts and fictitious and incorrectly named accounts, were targeted by bank personnel for investment in CMI policies.
2. Bank personnel promoted CMI policies as a secure investment for funds which had not been declared to the Revenue Commissioners, thereby engaging in a practice which served to facilitate the evasion of revenue obligations by third parties.
3. Prospective investors were given an assurance by bank personnel that their investment would be confidential from the Revenue Commissioners and, if made the subject of a trust, would pass to their beneficiaries without probate having to be obtained, thus making it possible for the funds invested to be kept hidden from the Revenue Commissioners even after the investor’s death.
4. The role of the branch personnel of the bank was to identify likely investors, and the role of the FASD personnel was to introduce customers to CMI and induce them to take out policies with CMI.
5. The purposes for the bank behind the execution of such policies were:
(i) The earning of commission
(ii) The retention of deposits
(iii) The gaining of new deposits
Mr. D’Arcy’s responsibility
Part 8 of the Inspectors’ Report is devoted to dealing with those who had knowledge and responsibility for the improper practices identified by them. In dealing with Mr. D’Arcy the Inspectors said as follows:
“Mr. D’Arcy was head of the FASD during the entire of the period from 1st May, 1989, to the date of the appointment of the Inspectors on 15th June, 1998 to investigate the affairs of National Irish Bank Financial Services Limited. All the financial services managers reported directly to him.
Mr. D’Arcy’s evidence to the Inspectors, at his interview on 7th September, 2000, can be summarised as follows:
As head of the FASD, Mr. D’Arcy became aware in 1992 that funds undisclosed to the Revenue Commissioners were being targeted by bank personnel for investment in CMI.
Prospective investors were being assured by the FASD managers that their investment would be confidential from the Revenue Commissioners.
They were also being assured that if their investment was made the subject of a trust, the beneficiaries could obtain the funds invested, after the death of the investor, on production of a death certificate, thus avoiding the necessity of probate having to be taken out.
He also became aware that CMI was being used by the bank to regularise bogus non-resident accounts and fictitious and incorrectly named accounts.
The manner in which the CMI policies were being promoted served to facilitate the evasion of tax by the persons investing in the policies.
The Inspector’s findings concerning Mr. D’Arcy’s knowledge and responsibility are:
Mr. D’Arcy was aware that monies which were undisclosed to the Revenue Commissioners, including funds held in bogus non-resident accounts and fictitious and incorrectly named accounts, were being targeted by bank personnel for investment in CMI policies, and he failed to stop the practice.
Mr. D’Arcy was aware that the FASD financial services managers were promoting CMI policies as a secure investment for funds which had not been declared to the Revenue and failed to stop the said practice, which served to facilitate the evasion of revenue obligations by third parties.
Mr. D’Arcy was aware that prospective investors were being given an assurance by the FASD financial services managers that their investment would be confidential from the Revenue Commissioners and, if made the subject of a trust, would pass to their beneficiaries without probate having to be obtained, thus making it possible for the funds invested to be kept hidden from the Revenue Commissioners even after the investor’s death.
In his evidence to the Inspectors Mr. D’Arcy stated that from 1992 he was fully aware of the manner in which the CMI policies were being promoted by the financial services managers, and since as head of the FASD he could have stopped the practice, he was, in the opinion of the Inspectors, primarily responsible for the continuation of the practice. The responsibility of the financial services managers has to be judged against this background. They were operating with Mr. D’Arcy’s tacit approval.”
It is clear that this practice went on to the knowledge of Mr. D’Arcy over a period of approximately six years.
It is in these circumstances that the Director seeks a disqualification order against Mr. D’Arcy.
Relevant statutory provisions
Section 160 of the Companies Act 1990, as amended by the Company Law Enforcement Act 2001, confers an entitlement on the Director to seek a disqualification order pursuant, inter alia, to s. 160 (2) (b), (d) and (e).
Section 160 (2) insofar as its relevant provides that:
“(2) Where the court is satisfied that in any proceedings or as a result of an application under this section that…
(b) A person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any breach of his duty as such promoter, officer, auditor, receiver, liquidator or examiner…
(d) the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company; or
(e) in consequence of a report of inspectors appointed by the court or the Director under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company…
the court may, of its own motion, or as a result of the application, make a disqualification order against such person for such period as it sees fit.”
A disqualification order is defined in s. 159 of the Act. It means:
“(a) An order under this Part that the person against whom the order is made shall not be appointed to act as an auditor, director or other officer, receiver, liquidator or examiner or be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company, or any society registered under the Industrial and Provident Societies Acts, 1893 to 1978, or
(b) an order under section 184 of the Principal Act.”
That section also contains the following definition of the term ‘officer’. It reads:
“Officer”, in relation to any company, includes any director, shadow director or secretary of the company.”
Two other provisions of s. 160 are relevant on this application. The first is sub-s. 8 which provides that:
“(8) Any person who is subject or deemed subject to a disqualification order by virtue of this Part may apply to the court for relief, either in whole or in part, from that disqualification and the court may, if it deems it just and equitable to do so, grant such relief on whatever terms and conditions it sees fit.”
Finally sub-s. 9(A) confers a power on the court where it adjudges that disqualification is not justified, to make a restriction order under
s. 150 of the Companies Act 1990.
Onus of proof
In In Re Newcastle Timber Limited and Companies Acts [2001] 4 IR 586 McCracken J. in this court pointed out a number of distinctions between applications under s. 150 and 160 of the Act. He said:
“A very important distinction between these two sections is that under s. 160 where, as in the present case, an application is made by a liquidator for a disqualification order, the onus is clearly on the liquidator to satisfy the court that the conditions of the section have been complied with, while on the other hand, under s. 150, the court must make a restriction order unless it is satisfied that the person acted honestly and responsibly, and therefore the onus is on the director concerned to satisfy the court as to his honesty and responsibility. It is probably also relevant to note that s. 150 applies only to directors and secretaries of companies, while s. 160 applies to a much wider range of persons connected with a company. Even more relevant in the present case is that the use of the word “may” in s. 160 gives the court a discretion which does not exist under s. 150.”
That approach of McCracken J. was approved by the Supreme Court in In Re Readymix Limited Cahill v. Grimes [2002] 1 IR 372. There Murphy J. speaking for the court said:
“The onus does fall on the applicant to establish the allegations on which he relies and, even where a case is made out, the use of the word “may” in s. 160(2) confers a discretion on the court whether or not to make the order as was pointed out in Re Newcastle Timber Ltd. [2001] 4 IR 586.”
In the light of these authorities it is hardly surprising that the Director fully accepts that the onus is upon him to satisfy the court that the necessary conditions prescribed in the relevant provisions of s. 160(2) are established.
His task in this regard is somewhat assisted by the attitude which has been adopted by Mr. D’Arcy since he was first notified that the Director was contemplating the bringing of this application. Long prior to its institution he made it clear in correspondence from his solicitor that he did not intend to contest this application. Neither did he, and in fact he consented to a disqualification order being made. Nonetheless as the power given to the court is a discretionary one the court has to be satisfied that the statutory conditions have been met and the onus of proof discharged by the Director.
I will consider each of the statutory subheadings under which he applies in turn.
Section 160(2)(b)
This subsection applies to a person who has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any breach of his duty as such promoter, officer, auditor, receiver, liquidator or examiner.
The only way in which Mr. D’Arcy could come within the ambit of this subsection would be if he were “an officer” of either the bank or NIBFS.
The terms “officer” is defined in s. 159 as I have already pointed out. It is clear that the definition is non-exhaustive. An officer includes any director, shadow director or secretary of the company. As the definition is non-exhaustive it clearly covers other categories of person. The Director contends that a person in an elevated management position such as Mr. D’Arcy comes within the meaning of the term “officer”. In that regard he cites a number of English authorities supportive of that notion.
The principal authority relied upon is the decision of the Court of Appeal in Re: A Company [1980] Ch. 138.
There the Court of Appeal was dealing with an appeal from a decision of Vinelott J. who had refused an application made by the Director of Public Prosecutions under s. 441 of the Companies Act 1948. That section enabled the Director of Public Prosecutions to apply to a High Court judge where there was shown to be reasonable cause to believe that any person had, while an officer of a company, committed an offence in connection with the management of the company’s affairs and that evidence of the commission of the offence was to be found in any books or papers of or under the control of the company. The section provided that an application might be made in such circumstances for an order authorising inspection of the books or papers of the company. Lord Denning M.R. described such an order as being “analogous to a search warrant”.
In the course of his judgment he had to consider the meaning of the word “officer” in relation to a body corporate. He said:
“The word “officer” in relation to a body corporate is defined in
s. 455 of the Act. Not really “defined” for it only includes a director, manager, or secretary.”
Its meaning may depend on the context in which it is used and in this case on the whole phrase ‘while an officer of the company, committed an offence in connection with the management of the company’s affairs….’.
The officer here referred to is a person in a managerial situation in regard to the company’s affairs. I would not restrict these words too closely. The general object of the Act is to enable the important officers of the State to get at the books of the company when there has been a fraud or wrongdoing. It seems to me that whenever anyone in a superior position in a company encourages, directs or acquiesces in defrauding creditors, customers, shareholders or the like, then there is an offence being committed by an officer of the company in connection with the company’s affairs.”
The Director relies on this statement in support of his argument that a person in an elevated management position such as Mr. D’Arcy falls within the meaning of the word “officer” in the Companies Act 1990. He may very well be correct in that assertion but it must be borne in mind that the dictum of Lord Denning dealt with an admittedly non-exhaustive definition of “officer” but one which included a “manager.” The term “manager” is not included in the definition of “officer” in the Irish legislation. It is therefore arguable that having regard to this distinction Mr. D’Arcy does not fall within the definition of “officer” as prescribed by the Irish legislation.
In the concurring judgment of Shaw L.J. he said by reference to Vinelott J.
“He also considered that the party said to be an officer of the company of whom it was alleged that he had committed some offence in connection with the management of the company’s affairs was not to be regarded as an officer or a manager within the definition of s. 455 of the Companies Act 1948. The expression “manager” should not be too narrowly construed. It is not to be equated with the managing or other director or a general manager. As I see it, any person who in the affairs of the company exercises a supervisory control which reflects the general policy of the company for the time being or which is related to the general administration of the company is in the sphere of management. He need not be a member of the board of directors. He need not be subject to specific instructions from the board. If he fulfils a function which touches the central administration of the company, that is sufficient in my view to constitute an “officer” or “manager” of the company for the purposes of s. 441 of the Act.”
I do not think that this statement brings us any further since once again the court is dealing with a different definition of the term “officer”, that with which I am concerned.
If s. 159 of the Companies Act 1990 defined “officer” in the same terms as did the English Companies Act of 1948 as including a “manager” there would be no doubt but that Mr. D’Arcy would fall within that definition.
As s. 159, although framed non-exhaustively, does not include the term “manager”, it is arguable that Mr. D’Arcy does not fall within it. In the present case he has chosen not to make any such argument. The Director has quite properly drawn my attention to English authorities of relevance. They were not confined to Re a Company but extended to In Re: Johnson and Co. Builders Limited [1955] Ch. 634 where Lord Denning M.R. said that the meaning of the word “manager” for the purposes of the Companies Act meant “a person who is managing the affairs of the company as a whole. The word “officer” has a similar connotation….” and R. v. Boal [1992] Q.B. 591 all of which dealt with the term as defined in the English Companies legislation. English authorities are at best persuasive but their persuasive value must be lessened when they are dealing with a different definition to that which obtains in the Irish legislation.
I think that the Director is probably correct in his submissions but I do not propose to make a finding on the issue since it is not necessary. Such a finding would be of little precedent value as the question was not argued before me. A point not argued is a point not decided.
I note that in the case of In Re A Company Queen’s Counsel appeared as amicus curiae to argue the matter. Such a facility is not readily available in this jurisdiction.
If Section 160(2)(b) were the only provision under which the Director was applying I would have to reach a conclusion on this question without the benefit of argument contra. I am satisfied that it is not necessary to do so here since Mr. D’Arcy is clearly covered by one of the other provisions relied on by the Director to which I will turn presently.
Section 160(2)(d)
This subsection deals with the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, where his conduct makes him unfit to be concerned in the management of a company. Again the success of the Director’s application turns upon him being able to satisfy me that Mr. D’Arcy was an “officer” of the relevant companies. This is the same issue which I have just considered. I will adopt the same approach to it.
Section 160(2)(e)
This subsection applies where in consequence of a report of Inspectors appointed by the court or the Director under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company.
Mr. D’Arcy was clearly a person who was animadverted upon by the Inspectors appointed by this court. Was his conduct such as to make him unfit to be concerned in the management of a company?
In order to satisfy the onus of proof in this regard the Director relies exclusively upon the report of the Inspectors. He does so pursuant to the provisions of s. 22 of the Companies Act 1990.
Section 22
This section provides that:
“A document purporting to be a copy of a report of an inspector appointed under the provisions of this Part shall be admissible in any civil proceedings as evidence –
(a) of the facts set out therein without further proof unless the contrary is shown, and
(b) of the opinion of the inspector in relation to any matter contained in the report.”
The Director is clearly entitled to rely on the findings of the Inspectors’ report which have not been contested in any way by Mr. D’Arcy.
Is Mr. D’Arcy unfit?
I have already set out the findings made against Mr. D’Arcy by the Inspectors. Can it be said that these findings make him unfit to be concerned in the management of a company?
In attempting to answer that question I derive assistance from the observations of the Supreme Court in Re: Readymix Limited (in liquidation) [2002] 1 IR 372 where Murphy J. quoted with approval the dictum of Browne-Wilkinson V.C. (as he then was) In re: Lo-Line Limited [1988] Ch. where he said:
“What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
That passage has been cited with approval on a number of occasions in this jurisdiction quite apart from the reference made to it by Murphy J. He went on to say as follows in relation to it:
“It is I believe a correct statement of the law and represents a proper approach to the application and interpretation of s. 160 of the Companies Act 1990.”
Whilst of course the observations of Browne-Wilkinson V.C. were related to the unfitness of a director and dealt with an insolvent company it seems to me that a similar line of reasoning is applicable to the question of the disqualification of a person whose conduct is alleged to have made him unfit to be concerned in the management of a company. His conduct must show a lack of commercial probity or gross negligence or total incompetence before disqualification can be ordered.
I also derive assistance from the dictum of Henry L.J. in Re: Grayan Building Services Ltd., Secretary of State for Trade and Industry v. Grey [1995] Ch. 241 where he said:
“The concept of limited liability and the sophistication of our corporate law offer great privileges and great opportunities for those who wish to trade under that regime. But the corporate environment carries with it the discipline that those who avail themselves of those privileges must accept the standards laid down and abide by the regulatory rules and disciplines in place to protect creditors and shareholders… The parliamentary intention to improve managerial standards…is clear. The statutory corporate climate is stricter than it has ever been, and those enforcing it should reflect the fact that Parliament has seen the need for higher standards.”
That statement, whilst made in the context of the law of England and Wales, applies with equal force to the position in this jurisdiction.
My attention has been drawn to a number of Irish cases where the court has been asked to make disqualification orders. They include Re: Newcastle Timber Limited (op. cit.) where the court found that whilst the respondents had failed to make returns, traded whilst insolvent for four years, and discharged trade creditors in priority to the Revenue, their conduct warranted a restriction order pursuant to s. 150 but not a disqualification order under s. 160. The essence of the finding appears to have been that the respondents there had acted incompetently and irresponsibly.
In the case of Director of Corporate Enforcement v. McGowan (21st February, 2005) Laffoy J. declined to make a disqualification order in circumstances where she found that the respondents had acted irresponsibly and described their conduct as reprehensible insofar as they as directors of the relevant company failed to discharge the company’s tax liabilities to the Revenue. She took the view that the conduct of the respondents had come very close to the threshold of warranting disqualification but had not quite reached it.
On the other hand in Re: Readymix Limited (op. cit.) the Supreme Court upheld the decision of Smyth J. in this court to make a disqualification order in respect of the respondent who had acted as liquidator of a company. He took control of the books and records of the company and deprived the official liquidator of them. He then destroyed them. He swore in an affidavit that no money whatever was due to the Revenue Commissioners and embarked on a course of conduct which he explained to the trial judge in the course of his submissions as follows:
“1. I was determined to screw the Revenue, no matter what it took.
2. I was prepared to blow up anyone who got in my way.
3. I was going to make an example of the applicant.
4. I would not obstruct the liquidator but I would not help.
5. Whatever tactics it took I was going to bring the Revenue to
book.”
He was disqualified for seven years.
It is a truism that every case has to be decided upon its own facts and whilst these cases are helpful in demonstrating the general approach of the court, ultimately I have to decide whether on the material put in evidence here Mr. D’Arcy’s conduct was such as to make him unfit to be concerned in the management of a company.
I have already set out the inspector’s findings concerning Mr. D’Arcy’s knowledge and responsibility.
From 1992 onwards he was fully aware of the manner in which the CMI policies were being promoted by the managers who reported to him. The Inspectors concluded that he could have stopped that practice but did not do so. They also found him to be primarily responsible for the continuation of the practice. The financial services managers who were actually carrying out these operations on the ground were held to be doing so with Mr. D’Arcy’s tacit approval.
This practice went on over a long period of time. The sums involved were large. Mr. D’Arcy was in the upper echelons of bank management. True, he was not at the very top level of management but was at just one remove from it.
An extremely serious element of the conduct was that all of it was taking place within a bank. Banks are not just ordinary corporate entities of the type that the court had to deal with in the various cases which I have cited. They occupy a special position in society.
They are licensed to carry out financial transactions which ordinary corporate entities are not.
The edifice of banking is built on a foundation of trust. On the Inspectors findings there was a breach of trust by dishonesty on the part of the bank in the operation of the CMI policies. That operation was carried out over a period of years in a deliberate fashion. The Inspectors held that Mr. D’Arcy could have stopped the practice but did not do so. They held him primarily responsible for the continuation of this practice.
This is demonstrative of a lack of commercial probity on his part. I am of opinion that the Director has proved that the conduct of Mr. D’Arcy as found by the Inspectors was such as to make him unfit to be concerned in the management of a company. I therefore propose to accede to the application to make a disqualification order under s. 160(2)(e).
This is not a case in which to make the lesser restriction order contemplated by s. 150 of the Act.
Length of disqualification
It is clear from the statutory provisions that the court may make a disqualification order “for such period as it sees fit.”
In considering this aspect of the matter Finlay Geoghegan J. said in the case of Re: Clawhammer Limited (Unreported, 15th March, 2005):
“In determining a period of disqualification the court must have regard to the fact that the Oireachtas intended such order as a more serious sanction than a declaration of restriction under s. 150 of the Act of 1990. This follows from the express wording of s. 160(9A) of the Act of 1990.
The mandatory period for the declaration of restriction under s. 150 is five years.
Whilst a full disqualification order is in its terms more restrictive than a declaration of restriction, in practice the latter may operate to prevent certain respondents from acting as directors. This depends upon the particular circumstances of a respondent director. In the absence of a respondent putting before the court any relevant evidence, it is difficult to conclude that a disqualification order for any period less than five years will be a more onerous sanction for the respondent than a declaration of restriction which must be for five years.
If a respondent by failing to offer any evidence to the court has overlooked putting before the court evidence which might have persuaded the court to either make a disqualification order for a lesser period or grant a declaration of restriction there is available an application for relief under s. 160(8).
Hence in the absence of any relevant evidence in relation to a respondent, other that (sic) the minimum proof to satisfy s.160(2)(h) of the Act of 1990, a period of disqualification for 5 years appears appropriate”.
No evidence has been put before the court on this application by Mr. D’Arcy. He has not availed himself of the entitlements given by s. 160(8). Such being so, it appears to me that the rationale of the decision of Finlay Geoghegan J. is that in such a case the minimum disqualification period ought to be one of five years.
In fixing the period I derive some assistance from the observations of the Court of Appeal in England In re: Seven Oaks Stationers (Retail) Limited [1991] Ch. 164.
In that case the court was dealing with a potential disqualification period which by statute has an upper limit of fifteen years. As I have already pointed out there is no such upper limit in this jurisdiction. In the course of his judgment Dillon L.J. divided the potential fifteen-year disqualification into three (as follows):
“(i) The top bracket of disqualification for periods over 10 years should be reserved for particularly serious cases. These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.
(ii) The minimum bracket of two to five years’ disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.
(iii) The middle bracket of disqualification for from six to ten years should apply for serious cases which do not merit the top bracket.”
That approach provides some guidance, albeit that the statutory regime under which it is given differs in a number of material respects from that which is applicable here.
I also derive some assistance from the observations of Lord Woolf M.R. (as he then was) in Re Westmid Packing Services Limited [1998] 2 All ER 124.
Having quoted the well-known dictum from Browne-Wilkinson V.C. which I have already set forth in this judgment, he said:
“…other factors come into play in the wider interests of protecting the public, i.e. a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned. Despite the fact that the courts have said disqualification is not a ‘punishment’, in truth the exercise that is being engaged in is little different from any sentencing exercise. The period of disqualification must reflect the gravity of the offence. It must contain deterrent elements. That is what sentencing is all about, and that is what fixing the appropriate period of the disqualification is all about. What Vinelott J. (in re: Pamstock Limited [1994] 1 B.C.L.C. 716 at 737) called ‘tunnel vision’, i.e. concentration on the facts of the offence, is necessary when considering whether a director is unfit. In relation to the period of disqualification the facts of the offence are still obviously important but many other factors ought and (in reality do) come into play.”
Later in the judgment he said:
“We do not consider that it would send out a wrong message to fix the period of disqualification by starting with an assessment of the correct period to fit the gravity of the conduct, and then allowing for the mitigating factors, in much the same way as a sentencing court would do”.
In the present case, taking into account the findings made by the Inspectors and the other factors which I have identified I am of opinion that the appropriate period of disqualification should be one of twelve years. I am satisfied that it must have, as the Director urges upon me, a deterrent element to it.
I have no idea what impact this order will have on Mr. D’Arcy insofar as his own personal circumstances are concerned. He has chosen not to put any material before me dealing with them. I afforded him a further chance to do so at the hearing but he did not avail himself of that opportunity.
I am satisfied that Mr. D’Arcy should be given credit for the approach which he has taken to the Director’s complaints. He is entitled to allowance for the fact that he indicated from the outset that he would not contest this application and, in fact, consented to the disqualification order being made.
He went somewhat further than that because even before these proceedings were commenced his solicitors wrote, on his instructions, tendering his resignation with immediate effect from the two companies of which he is a director. He also indicated a willingness to give an undertaking in writing to the Director that he would not act as director, promoter, officer or involve himself in any way in the formation or management of both those companies or any company whatsoever.
In these circumstances, I am satisfied that the approach taken by Mr. D’Arcy is a mitigating factor and that that should be reflected in the length of the disqualification. I will therefore reduce the disqualification period by two years.
I make a disqualification order against Mr. D’Arcy pursuant to s. 160(2)(e) with a duration of ten years from today’s date.
Barnroe Limited v Companies Act
[2005] IEHC 443 (21 December 2005)
JUDGMENT delivered by The Honourable Mr Justice O’Leary on the 21st day of December 2005
This is an application for an order pursuant to s. 106 (2) of the Companies Act 1990 seeking the disqualification of the respondent and ancillary relief. It is made on foot of a notice of motion dated 21st December, 2004, in the following terms;
1. An Order pursuant to ss. 160 (2) (a) – 160 (2) (b) and/or s. 160 (2) (d) of the Companies Act 1990 declaring each of the respondents to be disqualified from being appointed or acting as an auditor, director or other officer, liquidator, receiver or examiner or being in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company or any society registered under the Industrial and Provident Societies Acts 1893 – 1978 for such period as the Court sees fit.
2. If necessary an Order for directions as to pleadings and mode of trial.
3. Such further or other relief as the Court may deem meet.
4. An Order providing for the costs of the within applications.
5. An Order pursuant to s.160 (9B) of the Act of 1990 providing for the costs of the investigation carried out by the applicant in respect of the matters grounding the within application.
GROUNDS UPON WHICH THE APPLICANT IS BROUGHT
The applicant alleged and submitted as follows
1. The respondents are directors of Barnoe Limited (hereafter “the Company”).
2. Subsequent to receiving certain complaints in relation to the Company the applicant appointed George Maloney (hereafter “the Officer”) as an officer of the Director of Corporate Enforcement to carry out certain enquiries in relation to the Company.
3. The Officer commenced an investigation into the affairs of the Company on 26th May, 2004. As part of such investigation a search of the Company’s premises was carried out on 10th June, 2004, during the course of which the books and records of the Company were seized.
4. On foot of an examination of those books and records and subsequent enquiries of third parties a number of serious breaches of the Companies Acts came to light, to wit:
(a) The respondents had failed to keep proper books of account within the meaning of s. 202 of the Companies Act, 1990;
(b) The respondents operated a bank account for the Company which was not recorded in the Company’s books or records and failed to notify the Company’s auditor of its existence.
(c) The respondents misappropriated Company funds to personal bank accounts and used a Company bank account for the purposes of personal expenditure. Additionally the respondents caused the Company to expend monies in relation to property owned personally by them;
(d) The respondents maintained or created twin sets of financial statements for the same accounting periods for the purpose of giving a false impression of the Company’s position;
(e) The Company failed to file revenue returns on a timely basis;
(f) The respondents caused the Company to trade over an extended period of time when the Company was insolvent.
The said breaches are as more fully particularised in the affidavit of the Officer. The breaches as outlined above amount to breaches of the respondents’ duties as directors of the Company. The breaches as outlined at (b), (c), (d) and (f) above amount to fraud on the part of the respondents in connection with the operation of the Company.
5. The applicant will rely upon the above breaches as evidence of the respondents being persons unfit to be concerned in the management of a company. The applicant will further rely upon the conduct of the second named respondent in relation to the manner in which he dealt with the creditors and customers of the Company as evidence of the second named respondent being a person unfit to be concerned in the management of a company.
An alternative application under s. 150 of the Companies Act 1990 seeking the restriction of the respondents is also before the Court.
Evidence
The following evidence has been submitted in relation to these proceedings.
1. Affidavit George Maloney sworn 20th December, 2004.
2. Affidavit of Marc Dolan sworn 20th July, 2005. This affidavit exhibited documentation relating to the operation of the company which originated from
the respondents and on which the applicant relied in reaching certain of the conclusions in his affidavit. The Court has not considered it necessary to itself consider these documents in view of the uncontested nature of evidence in this case.
The respondents have been represented in these proceedings and have participated in the hearing but for reasons which will be later considered have not submitted any evidence in support of their submissions.
The Court, mindful that the onus of proof in this case rests with the applicant, has considered each of the allegations made in the affidavit of George Maloney and either accepted the matters set out as having been proved or in the alternative rejected any allegation not proved to its satisfaction.
Background to the application
This application must be considered in the context of the appointment of the deponent George Maloney as an ‘Authorised Officer’ capable of exercising the powers of the applicant under s. 19 of the Companies Act 1990. Those powers were exercised by Mr Maloney and a requirement for the production of documents made. These documents were in due course accessed on foot of a search warrant procured by the Authorised Officer. In related proceeding this Court has considered a challenge by the respondents to the right of the Authorised Officer to retain the documents (by reason of alleged deficiencies in the search warrant) and/or to make use of any information gained on foot of that warrant. For the reasons set out in the judgment in record number 638JR/2004, delivered immediately before this judgment, the Court has decided that the Authorised Officer was properly appointed, that the requirement made under s. 19 of the Companies Act 1990 was properly made and that, notwithstanding any alleged defect in the warrant or its execution, the documents covered by the s. 19 requirement should remain with the Authorised officer. The Court further decided that these documents could be used for any legitimate reason arising from the fulfilment of a s. 19 request.
In so far as any submission of the respondents relate to matters already decided this judgment will apply mutatis mutandi its conclusions in record no 638JR/2004 to such issues. In so far as further consideration of discrete legal submissions is required these are separately considered in this judgment.
In so far as it is submitted that the evidence on which this application is based has been unlawfully obtained this issue has been decided in the related proceedings and need not be revisited again.
There are two further and separate points made by the respondents on which decisions are required. These are;
1. Whether, in view of the manner in which the evidence was obtained, permitting its use in a s. 160 application (or in a s.150 application) would amount to an abuse of process
2. The proceedings, if brought to a conclusion on the basis of the information available, breaches the rule of law relating to self incrimination.
Abuse of Process
The submission of the respondents is that the evidence on which the s.160 application is based was obtained by invoking a statutory power and the purpose of that power was to gather evidence for a possible criminal prosecution. In such circumstances the respondents submitted that use the material so obtained is not permissible for the purpose of a civil application such as s.160.
The respondents submitted that R v Secretary for State for Trade and Industry ex parte McCormick [1998] All E R 30; established that the nature of the application was civil rather than criminal and this submission is accepted by this court.
The basis of the requirement is a matter to be assessed in the light of the appropriate statutory provisions in this jurisdiction and the reasons given in this instance.
A close examination of the paper trail leading to the requirement on the company discloses the following:
(I) A number of reasons are given for the Requirement of production of documents. These include the following matters; s. 19 (2) (a) the necessity to examine books, s.19 (2) (b) (ii) affairs of the company been conducted with intent to defraud creditors and s. 19 (2) (f) unlawful acts of the company and or its officers.
(II) The Requirement of 27th May, 2004, is in the first place made of the Company. While the directors and secretary are notified, the Requirement to produce documents rests with the person who owns the documents i.e. the Company. It is however true that as officers of the Company the applicants were in possession of the books and were, in that capacity, under an obligation to produce.
The focus of the respondents on the validity of the search warrant has in the view of this Court obscured the prime purpose of the Director of Corporate Enforcement’s application, which was to remedy a default both of the Company (through its officers) and the respondents own personal default in meeting the Requirement. The matter considered by the District Judge and recited in his order was the failure of the company to obey the Requirement to produce the documents on 31st May, 2004, which arose out of the communication of the 27th May, 2004. When the search warrant was issued it was to seize the company records not the personal property of the respondents. Their personal property could also be seized (if material). The status of any such personal material in the event of a criminal or civil action involving the respondents could be argued if necessary.
In this case the Court is assured that no material other than company records are used for the s. 160 application. These records are not the property of the respondents. Therefore there is no reason why they cannot be used in the s.160 application. This application does not involve the company itself or expose the company to any adverse finding.
Self Incrimination
The basis of this submission appears to be that as the respondents may still be charged on indictment they should not be required to answer questions or render explanations such as would be required to defend these civil proceedings. That the respondents have (subject to such exceptions as are provided by law) a right to silence and a right not to be forced to make incriminating statements is beyond doubt. At issue is whether the inconvenience which these proceedings present to the respondents breaches the legal right against self incrimination.
It was submitted on behalf of the respondents that it did compromise the legal rights of the respondents.
This submission appears to this Court to be without merit. The processing of civil claims arising out of tort or civil wrongs of any kind does not await the commencement or determination of criminal proceeding where the wrong alleged is also potentially a crime. Many drivers must decide whether to give evidence in a civil action in circumstances where a criminal charge on indictment is still possible. The respondents in this case have exercised their right not to proffer evidence and so exercised in this civil matter their right to remain silent and question the extent to which the applicant has discharged the onus of proof.
Any decision to reject this application on the basis of ‘the rule against self-incrimination’ would render impossible any civil proceedings where criminal charges remained a possibility. As criminal charges on indictment have no statutory limit in this jurisdiction this would postpone actions beyond the Statute of Limitations and make civil remedy impossible in any case where there is the possibility of a charge on indictment.
Nature of alleged grounds for Disqualification
The application in this case is based on ss. 160 (2) (a) – s. 160 (2) (b) and/or
s. 160 (2) (d) of the Act of 1990. Both s. 160 (2) (a) and s. 160 (2) (b) refer to the person to be disqualified as being ‘guilty’ of either a fraud or breach of his duty. It is submitted by the respondents that the meaning of ‘guilty’ in this context is ‘guilty of a criminal charge’ of fraud of breach of a company law duty. It is submitted by the applicant that the word should be given a meaning which includes ‘civil guilt’. The Court will if necessary decide the issue but first the alternative of s. 160 (2) (d) will be considered.
Factual Matters
Facts found by the Court based on the evidence submitted (references are to George Maloney’s affidavit 20th December, 2004, but the complete affidavit is relevant under many headings).
1. The respondents failed to keep proper books of accounts: pp. 7 – 10, 12 & 14.
2. The respondents operated a bank account not recorded in the company’s books: p.11.
3. The respondents failed to disclose the aforementioned account to the Company’s auditor: p.11
4. The respondents appropriated funds of the Company for personal use: p.13.
5. The company failed to file revenue returns as required by law: p.15.
6. The respondents caused the company to trade while insolvent for a considerable length of time: pp. 17 – 30.
The Court is not satisfied that the figures set out in para. 16 are accurate but is satisfied that there is some evidence of the existence of two sets of books. However, on the basis of the affidavit as filed and bearing in mind the onus of proof on the applicant the court is not willing to include this heading in its assessment.
Whether to apply s. 150 or s. 160 of the Companies Act 1990?
Section 160 deals with disqualification while s. 150 refers to the lesser order of restriction. On the basis of the facts as found the Court is satisfied that an order of one kind or the other should be made. The matters set out in paras. 2, 3 and 4 above are of the utmost seriousness. They are qualitatively different to the serious but more frequently occurring complaints at 1, 5 & 6.
In order to decide if in all the circumstances the matters proved merit a s.160 disqualification the purpose of that order must be considered.
Law Relating to s. 160 of the Companies Act 1990
The leading case on the purpose of disqualification, which has formed the basis of many decision in this jurisdiction and elsewhere, is Re Lo-line Electric Motors Ltd [1988] 2 All E R 692. The purpose is set out at p.696 in the following terms:
“What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies has shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
This was confirmed as a correct statement of law in this jurisdiction by Murphy J in The Matter of CB Readymix Cahill v Grimes (Unreported, Supreme Court, 1st March, 2002).
The Court is satisfied that the matters set out above, in particular the operating of a bank account in the company’s name outside the books and records of the company, the failure to disclose this account to the auditor and the appropriation of company funds, each are evidence of a lack of commercial probity. Taken together they represent a formidable body of evidence on the lack of commercial probity of the respondents. For these reasons the Court is satisfied that the protection of the public from the respondents’ future misuse of the company law structure requires a lengthy period of disqualification. The Court has considered the alternative s. 150 restriction and is of the view that it would be an inadequate protection in this case
Period of disqualification
The period of disqualification has been considered in The Director of Corporate Enforcement and Martin Forristal and Linda Forristal (Unreported, High Court, Finlay Geoghegan J., 15th March, 2005). In the course of a comprehensive judgment the learned judge concluded in respect of the length of disqualification orders as follows;
“4. The scheme of s. 160 (2) (h) is such that the Director may satisfy the court that the circumstances for the making of a disqualification order exist without the court having any evidence of the extent of the liabilities of the company in question or any information as to the role of the respondent directors in the affairs of the company or leading up to the striking off of the company other than that such person was a director of the company. It appears appropriate that the court should attempt to apply a consistent period of disqualification in such cases.
5. In determining a period of disqualification the court must have regard to the fact that the Oireachtas intended such order as a more serious sanction than a declaration of restriction under s. 150 of the Act of 1990. This follows from the express wording of s.160 (9A) of the Act of 1990.
6. The mandatory period for the declaration of restriction under s. 150 is five years.
7. Whilst a full disqualification order is in terms more restrictive than a declaration of restriction in practice that latter may operate to prevent certain respondents from acting as directors. This depends upon the particular circumstances of a respondent director. In the absence of a respondent putting before the court any relevant evidence, it is difficult to conclude that a disqualification order for any period less than five years will be a more onerous sanction for the respondent than a declaration of a restriction which must be for five years.
8. If a respondent by failing to offer any evidence to the court has over looked putting before the court evidence which might have persuaded the court to either make a disqualification order for a lesser period or grant a declaration of restriction there is available an application for relief under s.160(8).
9. Hence in the absence of any relevant evidence in relation to a respondent, other that the minimum proofs to satisfy s.160(2) (h) of the Act of 1990, a period of disqualification for 5 years appears appropriate.”
This Court is conscious of the logic of this decision which may well be a correct interpretation of the law. If required the Court would also have to give some weight to its own view that a disqualification, no matter for how short a period, will be seen in the business community as a far greater sanction than a restriction. The balancing of these two approaches can however await another case as in this case the court has arrived at a period of disqualification independently of any perceived minimum. This issue is mentioned only because the Court wants to make clear that the length chosen in this case was independently arrived at and did not depend on the “Director of Corporate Enforcement and Martin Forristal and Linda Forristal” formulae.
The Court is of the view that a period of 5 years is appropriate. The period will commence from today’s date save that the respondent will have a period of one month during which they can take actions necessary to divest themselves of any company involvement inconsistent with this order.
Costs to follow the event.
National Irish Bank & Anor -v- Companies Act HC
[2007] IEHC 102 (20 March 2007)
Judgment of Mr. Justice Roderick Murphy dated the 20th day of March, 2007.
1. Background
1.1 The office of the Director of Corporate Enforcement was established pursuant to the provisions of s. 7 Presenting Officer the Company Law Enforcement Act, 2001.
The functions of the Director, under s. 12(1) of that Act, are
(a) to enforce the Companies Acts, including by the prosecution of offences by way of summary proceedings,
(b) to encourage compliance with the Companies Acts,
(c) to investigate instances of suspected offences under the Companies Acts,
(d) at his or her discretion, to refer cases to the Director of Public Prosecutions where the Director of Corporate Enforcement has reasonable grounds for believing that an indictable offence under the Companies Acts has been committed,
(e) to exercise, insofar as the Director feels it necessary or appropriate, a supervisory role over the activity of liquidators and receivers in the discharge of their functions under the Companies Acts,
(f) for the purpose of ensuring the effective application and enforcement of obligations, standards and procedures to which companies and their officers are subject, to perform such other functions in respect of any matters to which the Companies Acts relate as the Minister considers appropriate and may by order confer on the Director,
Sub-section 2 of the section provides:
(2) The Director may do all such acts or things as are necessary or expedient for the purpose of the performance of his or her functions under this or any other Act
The above mentioned functions refer to compliance by a company, through its offices, including liquidators and receivers, with the provision of the Companies Act enforcement and investigation is not limited to cases of insolvency.
Subsection 2 enables the Director to take action (“to do all such acts or things”) which are necessary to perform the above functions or to perform functions given under any other act. No reference has been made to any other Act.
However, it seems clear that the Oireachtas may assign other functions to the Director. The functions which the Minister may, by order, confer on the Director relate to the Companies Acts and no other legislation.
1.2 Disqualification
Disqualification of certain persons from acting in relation to a company is provided for in s. 160 of the Companies Act, 1990.
Sub-section 1 relating to conviction for indictable offences in relation to a company, or involving fraud or dishonesty is not relevant to the present application.
Subsection 2(b),(d) and, in particular, (e) are relevant.
The paragraphs of that subsection provide as follows:
(2) Where the court is satisfied in any proceedings or as a result of an application under this section that –
(a) …
(b) where a person has been guilty, while a … officer … of a company of any breach of his duty as such … officer … ; or
(c) …
(d) the conduct of any person as … officer … of a company, makes him unfit to be concerned in the management of a company; or
(e) in consequence of a report of inspectors appointed by the court or the Director under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company.
(f) …
The court may, of its own motion, or as a result of the application, make a disqualification order against such person for such period as it sees fit.
…
(7) Where it is intended to make an application under sub-section (2) in respect of any person, the applicant shall give not less than ten days’ notice of his intention to that person.
(8) Any person who is subject or deemed subject to a disqualification order by virtue of this part may apply to the court for relief, either in whole or in part, from that disqualification and the court may, if it deems it just and equitable to do so, ground such relief on whatever terms and conditions it sees fit.
1.3 Section 160 as amended by s. 42 of the 2001 Act provides that the Director may make such application.
Section 22 of the Companies Act, 1990 provides that a report of an inspector appointed shall be admissible in any civil proceedings as evidence
(a) of the facts set out therein without further proof unless the contrary is shown, and
(b) of the opinion of the inspector in relation to any matter contained in the report.
1.4 By notice of motion dated 25th July, 2005 the applicant sought an order pursuant to s. 160(2)a, (d) and (e) declaring the respondent to be disqualified from:
– being appointed or acting as an auditor, director or other officer, receiver or examiner, or
– being in any way, whether directly or indirectly, concerned or taking part in the promotion, formation or management of any company or any society registered under the Industrial and Provident Acts, 1893-1978, for such period as the court should deem appropriate.
The grounds upon which the relief is sought is the conclusion of Inspectors, appointed by the court, that responsibility for the six improper practices of the Bank summarised in the introduction of their report rested with senior management. The Inspectors made findings relevant to Mr. Seymour in respect of five of the six mentioned practices which are detailed at 3.2 below.
Affidavits were filed by Mr. O’Rafferty and Mr. Seymour. An application was granted by the court for the cross-examination of Mr. Seymour.
2. Mr. Seymour’s position
Mr. Seymour was appointed to the position of Executive Director of National Irish Bank (NIB), with effect from the 22nd April, 1994. His formal appointment was recorded in the minutes of the board of directors as being “on an interim basis”. He had undertaken due diligence work for National Australia Bank in relation to its proposed acquisition of Trustee Savings Bank in Dublin. That bank had acquired NIB in 1987.
Prior to that appointment he had no management role and had no executive responsibility of any kind in NIB. He said he took over executive responsibility at very short notice following his predecessor’s departure. There was no transition period during which the reins were transferred to him. He said that he inherited an organisation that had been managed in an autocratic fashion and a business that had embedded in it certain problems, which had prevailed for many years before he arrived, but of which he was unaware for many months after his arrival. He believed that the management style, culture and focus on control and procedures which he introduced, facilitated significant progress towards the resolution of those problems, both during his tenure in the bank from 22nd April, 1994 in succession to Mr. Jim Lacy until 15th July, 1996, a period of twenty-seven months.
3. Inspector’s Report
3.1 Mr. Justice Blayney and Mr. Tom Grace FCA were appointed by the court on the 30th March, 1998, on the application of the Tanaiste and Minister for Enterprise, Trade and Employment, to investigate the affairs of NIB from 1988 to the date of their appointment.
On the 15th June, 1998, the Inspector’s powers were broadened in order to allow them to investigate the affairs of National Irish Bank Financial Services Limited (NIBSF).
Both NIB and NIBSF were, at that time, and since 1987, subsidiaries of National Bank of Australia.
By order of the court made on the 23rd July, 2004, the Report of the Inspectors was published.
3.2 The Report concluded that NIB and NIBSF (collectively referred to as “the bank”) were involved in a number of inappropriate practices which were summarised in the grounding affidavit of Dick O’Rafferty, an Officer of the Director of Corporate Enforcement as follows:
· Bogus non-resident accounts were opened and maintained in the branches, enabling customers to evade tax through concealment of funds from the Revenue Commissioners;
· Fictitiously-named accounts were opened and maintained in the branches, enabling customers to evade tax through the concealment of funds from the Revenue Commissioners;
· CMI (Clerical Medical Insurance) policies were promoted as a secure investment for funds undisclosed to the Revenue Commissioners;
· Special savings accounts had DIRT deducted at the reduced rate, notwithstanding that the applicable statutory conditions were not observed;
· There was improper charging of interest to customers. The Inspectors did not make any adverse finding that Mr. Seymour was responsible for this practice.
· There was improper charging of fees to customers.
3.3 In response to the draft findings and Report of the Inspectors, the banks submitted a “Reaction Paper” dated the 24th March, 2004, to the Inspectors which is appended to the Report. This paper outlined the remedial action taken or action being taken to address the identified improper practices. The reaction paper was, of course, submitted almost eight years after Mr. Seymour’s departure from the bank. The following statement was included:
“It is the matter of the deepest regret to the bank that during the period under investigation events took place which fell short of the standard customers and third parties dealing with the bank were entitled to expect. The bank is profoundly sorry that these events could have occurred, and apologises to all who have been effected by these events. The bank believes that the programmes put in place for those affected by the reason of the practices described by the Inspectors have remedied or will remedy any disability that they may have unfairly suffered as a result of the events described. The changes made in the operational structures of the bank which have been explained to the Inspectors are designed to ensure that the bank operates at all times to high standards of governance. The bank considers that it is also appropriate to mark the debt it owes to its employees who have had to work under the shadow of the investigation. Their dedication has been an essential building block in creating a new bank and maintaining customer confidence.”
4. Details of findings particular to Mr. Seymour
4.1 The grounding affidavit of Mr. O’Rafferty details the findings of the report.
In relation to bogus non-resident accounts the report indicated that, during his period as Executive Director of the bank, a period of almost 27 months, Mr. Seymour was copied with internal audit reports, the majority of which referred to the failure of branches to hold properly completed declarations for all accounts classified as DIRT – exempt non-resident accounts.
He accordingly had notice of the deficiencies or “irregularities” which existed in the operation of these accounts. Audit reports referred to instances where the residential status or non-residential declarations were at variance with other branch records. Others referred to instances where lending to resident customers were secured by letters of lien over deposit accounts with non-resident status. It was the Inspectors’ opinion that these internal audit reports pointed to the likelihood that the non resident accounts referred to therein were, in fact bogus. The extent of the reported documentary non-compliance was on such a scale, that, in the Inspectors opinion, it constituted a further indication that a substantial proportion of non-resident accounts could be bogus.
In December, 1994 some eight months after Mr. Seymour’s appointment, theme audits were introduced at the behest of the bank’s holding company, National Bank of Australia. The DIRT theme audit of December, 1994 highlighted the extent of the irregularities. Mr. Seymour was made aware of certain significant issues. These were documentary non-compliance and lack of understanding at branches of the bank’s duty to satisfy itself on non-residential status. As a result there was failure to deduct DIRT at the standard rate from interest paid or credited. Moreover, conditions for the operations of accounts as DIRT exempt non-resident accounts were breached.
Mr. Seymour had attended the meeting of senior management of the bank on the 9th February, 1995, which was convened to consider what corrective action was needed to remedy the situation disclosed by the DIRT theme audit. The Inspectors found that he, as well as everyone else who attended that meeting, failed to address or even to raise the question of the potential liability of the bank to the Revenue Commissioners resulting from the irregularities.
The Inspectors found that, through the receipt by him of the branch audit reports and the DIRT theme audit report, Mr. Seymour should not only have been aware of the failure of the branches to hold properly completed non-residential account declarations but should also have been aware of the fact that bogus non-resident accounts existed throughout the branch network.
In spite of the corrective action taken by the bank following the DIRT theme audit, there continued to be non compliance by the branches with the requirements of DIRT exempt status during the remainder of Mr. Seymour’s term of office. While DIRT compliance procedures improved during his term of office, nonetheless as Executive Director the inspectors found that, he held ultimate responsibility to ensure that DIRT was deducted from interest paid or credited on all accounts as provided by the Finance Act, 1986. Mr. Seymour failed to discharge this responsibility.
(At pp. 175 and 176 of the Inspectors’ report).
4.2 In the area of fictitious and incorrectly named accounts, the findings of the Inspectors were that these accounts were opened and maintained by the bank and existed throughout the branch network during the period of the investigation up to the end of 1996 after Mr. Seymour had left.
The Inspectors found that the opening and maintenance of such accounts served to encourage the evasion of tax as it concealed the true ownership of the funds in the accounts.
In 1995 and 1996, when branch managers were directed that all fictitious and incorrectly named accounts should be regularised and/or closed, even where there was a possibility that business might be lost, managers sought to retain for the bank the funds on deposit in such accounts by proposing to customers that they invest in CMI, or by suggesting that they deposit the funds in another branch of the bank in their correct names. In the opinion of the Inspectors, these “solutions” were improper because they served to encourage customers to continue to evade tax. Bank personnel were either aware or ought to have been aware of the reason for the opening of such accounts.
However, the Inspectors indicated that Mr. Seymour may not have had knowledge of the existence of fictitious or incorrectly named accounts in the branches until late 1995, over a year and a half since he had been appointed in April, 1994. However they say that he must nonetheless bear ultimate responsibility for the practice opening and maintaining fictitious or incorrectly named accounts for the period during which he was Executive Director. During the period when he held his position, the general managers of the bank took action to eliminate these accounts.
4.3 The Special Savings Accounts.
The Inspectors found that the bank failed to deduct DIRT at the standard rate from interest paid or credited on accounts designated special savings accounts (SSAs), where the branch did not hold a properly completed declaration in a form prescribed or authorised by the Revenue Commissioners, or where there had been a been a breach of the statutory requirement relating to withdrawals.
The inspectors found that, although senior managers were aware of the breaches of the relevant statutory requirements, the bank took no steps to calculate and remit to the Revenue Commissioners arrears of DIRT due, being the difference between tax at the standard rate, which ought to have been deducted, and tax at the reduced rate, actually applied (p.80) of the Inspector’s Report.
During the period when Mr. Seymour was Executive Director at the bank he was made aware, through audit reports circulated to him, of the deficiencies which existed in the operations of SSAs at branches both in relation to documentary non-compliance and breaches of the withdrawal notice requirements.
He was also circulated with the DIRT theme audit report of December, 1994 and attended the meeting on the 9th February, 1995, to discuss the results of the audit and the issues relating therefrom. He was thus aware of significant issues of documentary non-compliance in relation to the SSAs, the widespread failure to ensure adherence to the notice requirements for withdrawals from such accounts, and the result and failure to deduct DIRT at the standard rate from interest paid or credited where the conditions for the operation of such accounts as SSAs were breached. The report continued:
As Executive Director, Mr. Seymour bears ultimate responsibility for the failure of the bank to deduct DIRT at the standard rate from interest paid or credited on all accounts classified as special savings accounts, where the conditions to which such accounts were subject were not observed.
4.4. Sale of Clerical Medical Insurance, Scottish Provident and National and old mutual international policies.
The Inspectors found that that certain deposits, including funds held in bogus non-resident accounts in fictitious and incorrectly named accounts, were targeted by bank personnel for investment in CMI policies. These were promoted as a secure investment for funds which had not been declared to the Revenue Commissioners, thereby engaging in a practice which served to facilitate the evasion of revenue obligations by third parties.
Prospective investors were given an assurance by bank personnel from the Financial Advice and Services Division (FASD) that their investment would be confidential from the Revenue Commissioners and, if made subject of a trust, would pass to their beneficiaries without probate having to be obtained, thus making it possible for the funds invested to be kept hidden from the Revenue Commissioners even after the investor’s death.
The role of the branch personnel of the bank was to identify likely investors, and the role of the personnel in the FASD was also to introduce customers to CMI and induce them to take out policies with CMI (see pp. 181-82 of the report).
The inspectors found that the purpose behind the execution of such policies was the earning of commission, the retention of deposits and the gaining of new deposits as outlined in the findings on pp. 115 and 116 of the Inspector’s Report.
The report addressed Mr. Seymour’s responsibility in this regard by indicating that on his appointment as Executive Director he inherited the practice whereby customers of the bank, and others, were being facilitated in evading tax through investment in the CMI product and as indicated on p.187 of the report, that as Executive Director he had to bear responsibility for the continuation of the practice.
4.5 Improper Charging of Fees
Between 1998 and April, 1996 (three months before Mr. Seymour’s departure from the bank) there was no system in operation at the branches, for the contemporaneous recording of administration and management time. The Inspectors were of the opinion that the manner in which such fees were charged was improper, resulting in some customers being overcharged, across the branch network. The new system introduced in March, 1996 which was to take effect from May/August did not become fully operational in the branches on schedule, and extensive manual adjustments were still being effected in a number of branches in November, 1997.
The report addressed Mr. Seymour’s responsibility by indicating, inter alia, that;
– he was made aware, through his receipt of branch audit reports, of consistently reported shortcomings concerning the lack of explanations supporting the increases recorded on the Fees to be Applied Reports; and that, in relation thereto, the Customer Action Plan introduced in July, 1992 was not being used;
– he was responsible for ensuring that there was a system in place in the branches for the contemporaneous and recording of management and administration time which was chargeable to customers. Such a system was introduced in March, 1996 following pressure on the banks from the Director of Consumer Affairs to provide customers with an itemised breakdown of bank charges before they were applied to customer accounts;
and that, during his period as Executive Director, he bore ultimate responsibility for the failure of the bank to put in place in the branches an appropriate system for recording management and administration time which was chargeable to customers.
4.6 Mr. Rafferty avers that, over a prolonged period, the bank inter alia; had:
4.6.1 Unlawfully and improperly operated and maintained bogus non-resident accounts on a widespread basis in the branch network which served to encourage the evasion of Revenue obligations by its customers, both on the funds deposited and on the interest earned, and failed, contrary to the Finance Acts, to account to the Revenue Commissioners for DIRT properly payable and to deduct DIRT at the standard rate, despite the fact that senior management were aware or ought to have been aware of these practices;
4.6.2 Opened and maintained fictitious and incorrectly named accounts which served to encourage the evasion of tax by its customers as it concealed the true ownership of funds in those accounts;
4.6.3 Promoted to its customers CMI polices as a secure investment for funds which had not been declared to the Revenue Commissioners, thereby engaging in a practice which served to facilitate the evasion of revenue obligations by its customers;
4.6.4. Improperly charged its customers fees and failed to return any of these funds prior to the commencement of the Inspector’s investigation, despite senior management being regularly informed by internal audit reports of these practices.
Insofar as Mr. Seymour was concerned, Mr. O’Rafferty averred that it was evident from the Inspectors Report that
– he had inherited, on his appointment of Executive Director, a situation where various improper practices prevailed within the bank;
– progress was made during his tenure to correct a number of practices of which he was aware;
– he was responsible (with others) for the continuation of these practices and for the failure during his tenure to address the banks retrospective liabilities arising from a number of those improper practices and that, by virtue of his position as Executive Director, Mr. Seymour was ultimately responsible for the banks associated legal and professional failures.
In all the circumstances, Mr. O’Raffery concluded that it was clear that by his actions and omissions, Mr. Seymour, while acting as an officer of the bank for a period of over two years, breached his duty as such an officer in failing to ensure the company’s legal requirements were complied with and of failing to carry out his common law duties with due care, skill and diligence (s. 160(2)(b)) and engaged in conduct which made him unfit to be concerned in the management of a company (s. 160(2)(d) and (e)).
5. The Respondent’s Representations
5.1 By letter dated 21st April, 2005 Mr. Seymour’s Solicitor’s replied to the Director of Corporate Enforcement’s Notice of Intention to make application under s. 160(2) together with the draft of a proposed notice of motion (s. 160(7) notice).
The letter stated that none of the provisions referred to in s. 160 of the Act, applied to Mr. Seymour in the capacity in which he worked in the bank and in respect of which he was mentioned in the report of the Inspectors. In particular sub-s. (2)(b) did not apply as Mr. Seymour did not breach any of his duties; sub-s. (2)(d) did not apply because Mr. Seymour’s acts and omissions, even on the Inspectors accounts (which he disputes), could not reasonably be seen to render him unfit to be concerned in the management of a company and that the test of conduct for the application of subs. (2)(e) is on the same terms as in subs. (2)(d) and the same response therefore applies.
5.2 Even on the Inspectors’ accounts of events, the sanction of disqualification would be wholly disproportionate to the nature and duration of any culpable acts or omissions. In particular, the Inspectors make no allegation, express or implied, of impropriety or dishonesty on the part of Mr. Seymour, nor do they draw any adverse conclusions as to his competence, whether as a director, an employee or an executive. Instead they refer principally to areas where Mr. Seymour, as the senior executive in the Bank, must bear “ultimate responsibility” for the alleged acts or omissions of others, and they infer no criticism of his ability, professionalism or bona fides. To seek to have applied to Mr. Seymour a sanction, that the courts have held is designed to punish “a lack of commercial probity”, or perhaps “extreme case of gross negligence or total incompetence” and to protect the public against persons who have shown themselves to be a danger to creditors, would be wholly unjustifiable.
It was submitted that much of the contents of the grounding affidavit was unfair and prejudicial to the respondent and failed to take account of the true nature, extent and duration of his involvement in the Bank and, what was termed the very limited role in relation to any of the matters which were subject to the report.
It was stated that the report made no reference to Mr. Seymour in connection with the improper charging of interest. In other areas the only adverse comment was that Mr. Seymour must bear “ultimate responsibility” as executive director.
The inspectors expressly acknowledged that action was taken to eliminate fictitious and incorrectly named accounts during Mr. Seymour’s tenure and they acknowledged that DIRT compliant procedures improved during that period.
The opportunities to effect change to existing practices and the culture in which they developed and prevailed were very limited.
In addition, it was unfair to Mr. Seymour to omit from the quoted extracts the full findings of the inspectors.
Issue was taken with some of the findings of fact and the inferences and opinions expressed by the inspectors.
Mr. Seymour had taken over the responsibilities for a business that, over a period of many years, had developed the practices that gave rise to adverse findings. His appointment was “on an interim basis” and that he had no previous executive experience with the Bank. Notwithstanding, he put in place initiatives, the effect of which was to address and significantly reduce or eliminate the incidence of the matters that were the subject of the criticisms of the inspectors. His initial focus, understandably, was on the core banking business and the issue of credit risk. His work resulted in a significant review of lending and the making of provisions against doubtful balances. Moreover, he was required to pay significant attention to the proposed merger involving the Bank’s parent Bank, National Australian Bank, and the Trustee Savings Bank. He had taken over an organisation that had been managed in an autocratic fashion with embedded problems.
The inspectors sought to impose responsibility on Mr. Seymour for the acts and omissions of the Bank during his tenure.
5.3 Non-resident and fictitious accounts
The detailed submissions on the specific findings regarding non-resident accounts, fictitious and incorrectly named accounts, sale of policies, special savings accounts and the improper charging of fees to accounts of customers, resulted in findings where Mr. Seymour was held to have ultimate responsibility in terms of the convenient categorisation submitted. In addition, a separate category where retrospective tax liability was referred to. This was the failure to address or raise the question of potential liability of the Banks to the Revenue Commissioners, resulting from irregularities.
In relation to the DIRT related matters it was submitted that when and to the extent that the existence and prevalence of practices relating to bogus non-resident accounts and the application of reduced or nil rates of DIRT to accounts not qualified for such rates, came to his attention, Mr. Seymour acted quickly, decisively and effectively to address those issues. Details were given in relation to audit reports that rated two to three per month, the DIRT theme audit, meeting of 9th February, 1995, action plan as per circular S.11/1995 dated 8th March, a field test and help desk. This action resulted in an improvement from 751 to 524 (a 30% reduction) in the six month period from the middle to the end of 1995. A system of twice yearly certification of key matters showed that by 31st March, 1996, only one branch indicated a failure to enter appropriate tax codes for DIRT and hold relevant statutory documentation.
Fictitious/incorrectly named accounts were first brought to Mr. Seymour’s attention during the first half of 1995. Memoranda addressing the issue were issued on 7th December, 1995 and 30th May, 1996 and substantial progress was made. While there were 87 such accounts in mid-1996, these had reduced to 37 as of 30th September, 1996 and to zero on 31st December, 1996.
5.4 Retrospective Tax Liability
Mr. Seymour accepted that neither he nor his colleagues at the Bank adverted to the existence of a liability, actual or contingent, for DIRT due but not deducted and paid over. It was submitted that he was entitled to place reliance on his financial management personnel and on the tax functions carried out in relation to the Bank by National Australian Bank European tax personnel; that he was less familiar with Irish revenue law and that no Bank in Ireland, who had failed properly to deduct tax and pay over DIRT in circumstances similar to the Bank had, he believed, calculated and recorded a liability or contingent liability for DIRT at the time. He had no direct responsibility to raise the issue of possible retrospective tax liabilities. This was the function of branch management, internal and external auditors and the audit committee.
It was submitted that the inspectors’ findings were based on an assumption that the Bank had, in fact, an obligation to account for and pay over DIRT on a retrospective basis, when such a question had not arisen either in the Bank or, to his knowledge, in the Irish banking sector. Mr. Seymour had been advised that the inspectors’ assumption that a retrospective DIRT liability arose might not be valid insofar as breaches of withdrawal notice requirements may have amounted to no more than waivers by the branches of the Bank; that the absence of appropriate declarations might not have resulted in accounts classified as DIRT-exempt, failing to satisfy the conditions necessary to be classified as non-resident and that accounts may not have given rise to retrospective liability for DIRT, on the grounds that the Bank had properly satisfied itself of their status initially and had not previously come into possession of information casting reasonable doubt on that status.
5.5 Insurance policies
The CMI product was launched in 1992 and its so-called shelf life was nearly over when Mr. Seymour arrived. He was not aware that a substantial amount of the funds being invested in those policies was “hot money”. Nor was he aware of any mis-selling and that there was no audit report of any non-compliance by the Financial Advice and Services Division during his tenure and that no compliance issues relating to that division were ever otherwise brought to his attention. He had no involvement in the development or selling of the product and very little knowledge of any aspect of it. The “ultimate responsibility” attributed to Mr. Seymour ignored the reality that the scheme was the product of a culture and set of practices that predated his arrival and which he worked actively to eliminate.
5.6 Charging of fees
He believed that it was unfair of the inspectors to criticise him where there was no appropriate system for the recording of management administration time chargeable to customers. There was a manual system which he regarded as workable and that there was, in the culture of the Bank and of its branch managers, a leaning “more towards the customer than the Bank”. He was therefore justified in expecting that instances of overcharging of fees would be few. Mr. Seymour believed that the Bank had a policy of operating low charges to attract business and to refund charges where they could not be justified.
Mr. Seymour was not aware of any complaints of overcharging by customers. He was satisfied there was not a policy of making excessive or inaccurate charges. A more accurate and supportive system was introduced in 1996. He introduced the customer action pad which largely overcame the problem.
5.7 The letter concluded that Mr. Seymour could bear no responsibility for any problems that existed at the time of his arrival. There was no issue of any adverse finding, as originating during his term of office. Substantial progress was made towards the resolution of each of the issues identified by the inspectors. It was unreasonable to expect Mr. Seymour to have effected all of the changes in culture, management and procedures necessary to completely eliminate the practices criticised by the inspectors. It would be unwarranted in view of his short tenure, the absence of any business interests in Ireland and the fact that he had now retired following a distinguished career of over forty years to make the order sought.
The order sought is designed to protect the public from persons who have shown themselves to be a danger to creditors, and to have been guilty of a lack of commercial probity or perhaps an extreme case of gross negligence or total incompetence. It was manifest from the submissions made, and indeed from the findings of the inspectors, that Mr. Seymour is very far from being such a person. He was, in fact, the executive who, in a short period, began the transformation of the culture of the Bank from one that was undoubtedly a danger to certain creditors and facilitated improper practices, to one that encouraged compliance and facilitated the cessation of improper practices. He addressed the issues referred to by the inspectors and made substantial progress. His efforts resulted in further positive progress after his departure.
Accordingly, the proposed application would not only be unjustified on the findings of the inspectors, it would be manifestly unsupported in the context of all of the relevant facts. Moreover, the sanction of disqualification would be entirely disproportionate.
6. Respondent’s Affidavit
6.1 By affidavit sworn 29th September, 2005, Mr. Seymour confirmed and reiterated the matters of fact set out in his solicitor’s letter of 15th April, 2005.
In that affidavit he set out a summary of his 42-year career in banking during which, he averred, he had carried out his duties with as much skill, competence and integrity as he could and that his fitness to be concerned in the management of any company at all levels had never been impugned. Although his career was at an end and he had no current involvement in, nor intention to involve himself in, the promotion or direction of any commercial entity, he resisted the application strongly and believed that an order against him would be entirely unjust and would cast a significant and undeserved blemish on his career. He says he did not breach any duty as an officer of the Bank or of any other company during his career.
He said that he was undertaking due diligence work in Dublin for the National Australian Bank, in connection with its proposed acquisition of the Trustee Savings Bank, when he was asked to assume the senior executive position at the Bank to “hold the fort” pending the appointment of a permanent chief executive. He explained his role in the Bank from 22nd April, 1999 until he retired over two years later on the 15th day of July, 1996. He continued for several months managing aspects of the proposed acquisition by National Australian Bank of the Trustee Savings Bank and was required to monitor and report to the former on a daily basis regarding progress and the dealings with the considerable uncertainty amongst Bank staff associated with the proposed merger. He had also responsibility for dealing with the media.
6.2 His immediate day to day responsibilities included:
monitoring the performance of the business at a detailed level;
visiting branches and regional offices;
attending board meetings and maintaining regular contact with the non-executive chairman;
daily contact with general managers and head of human resources in the Bank;
regular meetings with senior managers across the Bank;
managing the Bank as a core asset of National Australian Bank and keeping in regular communication with senior National Australian Bank management in other jurisdictions;
attending meetings of National Australian Bank Group Management in London, Australia and other locations;
maintaining contact with external regulators and agencies, including the Central Bank, and
managing the implementation of National Australia Bank Group initiatives in the Bank.
He accepted that he was responsible for the overall management and direction of the business during that time but was not aware and could not have been aware of every detail in the operation of the Bank which, he said, had a management structure designed to ensure that all areas of responsibility were properly managed by appropriately qualified and experienced personnel and that adequate resources were available to do so. He said that he was entitled to rely on the Bank’s existing systems, procedure and controls and on the internal audit function, to detect and report accurately and comprehensively on the implementation and operation of appropriate procedures, controls and practices and on departures therefrom.
He says that it would have been impossible for him to bring about total elimination of the small number of departures from acceptable practices referred to in the internal audit reports in the summer of 1994. He arrived in the Bank with no knowledge of the existence of the practices criticised by the inspectors. No member of the Bank informed him of the widespread existence of those practices. He did not otherwise become aware of the possible extent of them until, in the autumn of 1994, the head of internal audit at the Bank briefed him on continuing occurrences of non-compliance with DIRT regulations. On the information furnished to him he believed that the problem appeared to be one of poor compliance with proper administration procedures rather than anything more serious. He carried out the special audit – the DIRT theme audit – in or about December, 1994.
6.3 He said that once the practice as later criticised by the inspectors came to his attention he acted with as much determination and speed as was reasonably possible to eradicate non-compliance and to alter the prevailing culture.
He referred to the liability for DIRT in relation to which the inspectors were critical and referred to the matters contained in the letter of 15th April, 2005. It was unfair of the inspectors to criticise him for failing to raise the issue of retrospective liability in circumstances where Irish tax was outside his area of direct knowledge and expertise and where he had relied on other expert personnel and when it was far from certain that such a liability in fact arose at all.
He referred to the affidavit of Mr. O’Rafferty and the steps taken by him as already summarised in the letter of 15th April, 2005 in relation to the other matters summarised in the report and in Mr. O’Rafferty’s affidavit.
In relation to other matters raised in the grounding affidavit of Mr. O’Rafferty he says that he notes that it is accepted that he inherited the various practices referred to and that progress was made. To ascribe responsibility to him for the continuation of practices in such circumstance was unfair and unjustified. He was unaware of the “associated legal and professional failures” referred to in the grounding affidavit which had concluded that Mr. Seymour, by virtue of his position as executive director, was ultimately responsible for the Bank’s associated legal and professional failures.
6.4 Mr. Seymour accepted that most senior executives of the Bank had a duty, as part of a team of senior executives, to ensure that the company complied with its legal obligations in all material respects. He accepted that he had a duty to carry out his duties with due care, skill and diligence, to establish and maintain an appropriate corporate ethos and insofar as possible to entrench values of integrity, professionalism and legal compliance throughout the company. He believed he had discharged those duties appropriately. He never suggested that a chief executive could abrogate a duty to ensure compliance with legal and professional obligations but that it was normal and entirely acceptable to delegate responsibilities and to place reliance in people, systems, procedures, controls and internal and external audit processes in so doing.
In conclusion he said that he did not believe that he had conducted any aspect of his career in such a way as to justify the making of the order sought by the Director for Corporate Compliance and he would be greatly saddened were his unblemished business life to culminate in a finding of that sort.
7. Second affidavit of Mr. O’Rafferty
7.1 By affidavit filed 3rd November, 2005 in response to Mr. Seymour’s affidavit Mr. O’Rafferty averred to the serious nature of the practices condemned in the report. Immediate steps should have been taken at the highest level to ensure that such practices were ended and, where appropriate, remedial action taken. In respect of the period of 6th April, 1986 to 5th April, 1999, (which included Mr. Seymour’s tenure of office) the Bank paid the Revenue some €6.7 million by way of settlement of its DIRT liabilities.
The Bank had or was in the process of refunding customers some €12.5 million in respect of the overcharging of fees and interest.
It was clear that practices continued during Mr. Seymour’s period of office. This continuation attracted the criticism of the inspectors in their report which was at the root of the application.
Ultimate responsibility rested with the chief executive to ensure that the company carried out and complied with all its obligations imposed on it by law. It was Mr. Seymour’s failure in this regard during his term of office that attracted the criticism of the inspectors.
In relation to the culture and operational environment of the Bank, the report had concluded that responsibility for the improper practices which existed rested with senior management of the Bank during the period covered by the investigations. It was their duty to ensure that the business of the Bank was so conducted that such practices did not occur and, if they did, that they were stopped immediately.
7.2 Bogus non-resident accounts
Mr. O’Rafferty counterposes the inspectors’ findings in relation to bogus non-resident accounts with the position of Mr. Seymour. The numerical references are to the paragraphs in Mr. Seymour’s replying affidavit.
Inspectors’ Findings in Summary Respondent’s Position in Summary
“Through his receipt of the branch
audit reports referred to above, and
the DIRT Theme Audit report, Mr
Seymour should not only have been aware of the failure of the branches
to hold properly completed non-
resident account declarations, but
should also have been aware of the
fact that bogus non-resident
accounts existed throughout the
branch network.
Mr Seymour attended the meeting of
Senior management of the Bank on 9th
February 1995, convened to consider
what corrective action was needed
to remedy the situation disclosed by
the DIRT Theme Audit, but he
failed at the meeting, as did
everyone else who attended it, to
address, or even to raise, the
question of the potential liability of
the Bank to the Revenue
Commissioners resulting from the
irregularities.
In spite of the corrective action
taken by the Bank following that
DIRT Theme Audit, there continued
to be non-compliance in the
branches with the requirements for
DIRT-exempt status during the
remainder of Mr Seymour’s term of
office.
Whilst the Inspectors accept Mr
Seymour’s submission that DIRT
compliance procedures improved
during his term of office,
nonetheless, as Executive Director,
Mr Seymour held ultimate
responsibility to ensure that DIRT
was deducted from interest paid or
credited on all accounts subject to
DIRT under the Finance Act, 1986.
He failed to discharge this
responsibly.” (Page 176 of the Report). “17. I was not aware when I took up the
position of Executive Director of the existence of any of the practices that have been criticised by the Inspectors, notwithstanding that they all appear to have been prevalent by then. Although I had received some internal audit reports in the summer of 1994 referring to a small number of departures from acceptable practice, no member of NIB informed me of the widespread existence of those practices and I did not otherwise become aware of the possible extent of them until, in the autumn of 1994, the Head of Internal Audit in NIB briefed me on continuing occurrences of non-compliance with DIRT regulations. Even then, on the information furnished to me, the problem appeared to be one of poor compliance with proper administration procedures rather than anything more serious. In any event, I authorised a special audit of area, which was the DIRT Theme Audit carried out in or
about December 1994.”
“22. The area of compliance with Irish tax legislation was neither under my direct supervision nor within my detailed knowledge during my time in NIB. Although, as the senior executive in NIB, I was responsible generally for compliance within the Bank, detailed day-to-day responsibility for various compliance-related matters was held by others. I say and believe that I was entitled to rely upon, and did so rely
upon, the appropriate members of senior management to ensure compliance and to identify any areas of retrospective or prospective liability for taxation.”
“26. I say and believe that, even if the issue of a possible retrospective liability
for DIRT ought to have been raised, the failure of senior management to do so cannot of itself render those managers unfit to be involved in the management of a company. Further, I am advised and believe that it is far from clear that the effect of the relevant legislation at the time would have been to impose a retrospective liability on the Bank for DIRT in the circumstances described by the DIRT Theme Audit report of December 1994.”
“35. The results of the DIRT Theme Audit revealed continuing non-compliance in certain areas. However, the report on the audit made no reference to tax evasion and did not conclude that any accounts were bogus. I do not accept that a render of the report at the time, without the benefit of the considerable hindsight now available to both the Inspectors and the applicant, ought to have concluded from that report that bogus non-resident accounts existed throughout the Bank’s branch network.”
“40. With regard to the Inspector’s conclusion that I, as the senior executive in NIB, had ultimate responsibility to ensure the proper deduction of DIRT pursuant to the 1986 Finance Act, I say that I discharged that responsibility to the full extent reasonably possible in the circumstances and in the time available to me; that I achieved very significant progress during my tenure; and that I left the Bank with a fundamentally changed culture and in a significantly better state than I found it with regard to the matters that are the subject of the Inspectors’ report.”
In relation to the comparison above, Mr. O’Rafferty says that the Bank had an established senior management team who had considerable experience in the Bank and in banking generally. The assertions of Mr. Seymour that he continued to be unaware of the scale and prevalence of the improper practices with respect to DIRT in particular after the findings of the DIRT theme audit had been made known to him in late 1994 and early 1995 were untenable.
Mr. Seymour had averred that the DIRT theme audit report made no reference to tax evasion. Mr. O’Rafferty referred to s. 32 of the Finance Act, 1986 regarding the deduction of tax from relevant interest which imposed an obligation to deduct unless it was actually satisfied that the deposit in question was not a relevant deposit. The duty to ensure compliance with a clear statutory requirement rested with senior management including the respondent. Mr. O’Rafferty continued:
“18. … if the Bank and its managers failed in this duty, then even if it were otherwise correct (which in any event is not accepted as appears below) that there was nothing to alert the respondents to the fact that the tax evasion was prevalent, or that the bank held bogus non-resident accounts, the failure of the statutory duty outlined above is sufficient to render the respondent liable in respect of these practices. It is untenable for Mr. Seymour to say he could not have not have known of the existence of tax evasion following the theme audit report. The conclusion of the management’s summary, a copy of which was reproduced in Appendix 9 of the Inspector’s Report, referred to very significant penalties envisaged as a result for non-compliance:
The result of this audit are very disappointing and management must take immediate steps to improve the situation. The structure of the whole area can be improved but the level of non-compliance is too high. It appears that there needs to be an organisation-wide change in attitudes to the whole area. This is a risk area and the penalties for non-compliance at the level shown in this report would be very significant.”
Mr. Seymour was at the meeting of 9th February, 1995, convened to consider the report. At that meeting Mr. Frank Brennan, a general manager, confirmed as accurate the finding of the report that a fundamental attitudinal change at branch level with respect to “possible tax evasion” was necessary. The relevant minute states:
“JFB stated that he felt that there was a need to change the attitudes at bank level so that possible tax evasion could be eliminated to the greatest degree possible. This means that we deduct DIRT at the standard rate (27%) unless the necessary clear documentation is held.”
Mr. Seymour’s assertion that the DIRT theme audit report did not conclude that any accounts were bogus was not tenable in view of the report which stated:
“Instances have been reported in branch audits where non-resident details were at variance with other branch records. Some branches appear to be of the opinion that once a non-resident declaration form is held there is no obligation on the branch to confirm the residency of the account holder.
A significant number of non-resident accounts had a statement dispatch flag of ‘B’ i.e. statement is sent to branch. (This area was not reviewed in detail as it would be subject to a separate theme audit later).”
Mr. O’Rafferty also found untenable the statement of Mr. Seymour that it was far from clear that the effect of the relevant legislation at the time would have been to impose retrospective liability on the Bank for DIRT. Given the obligation imposed by s. 32, the content of the conclusion to the report and earlier correspondence among the Bank’s senior management referred to Appendix 8 of the Inspector’s Report being copy memorandum dated 18th November, 1993, from Gerry Hunt, head of financial control, to Michael Brennan, Michael Keane and Dermott Boner with copy to ‘Mr. Lacey re non-resident accounts’.
It does not appear that Mr. Seymour was copied with this memorandum which was referred to but not exhibited in the affidavit of Mr. O’Rafferty.
The memorandum at Appendix 8 to the Inspector’s Report stated as follows:
“I have recently received three separate phone calls from senior officials in the Department of Finance and Revenue on the 1993 tax amnesty and they are clearly unhappy about the alleged actions of a number of bank officials. I am now convinced that the Revenue will commence detailed audits of the major banks in 1994 with particular attention on non-resident accounts. The U.K Revenue did a similar exercise in Northern Bank in 1990 and made claims for negligence based on inadequate documentation.
Over the past twelve months non-resident deposits in branches have increased from £80 million to £110 million (detailed analysis attached) and it is difficult to explain why such a high proportion of new funds are from non-residents. I have spoken with R. Bowden and P. Harte and both share my concerns that our documentation may be weak in the following areas:
1. c/o Branch addresses,
2. Non-resident declaration forms missing, incomplete or inaccurate,
3. Unusual addresses that clearly warrant closer scrutiny, e.g. Main Street, Swansea, Wales,
4. Obvious errors, e.g. non-res. deposit and resident loan in same name.
It is essential to advise all managers of the immediate risks and the personal penalties. There can no longer be excuses for sloppiness in this area and we have been given advance warning.”
Mr. O’Rafferty believed that Mr. Seymour exaggerated the impact of his leadership of the bank. While the inspectors acknowledge in their findings the DIRT compliance procedures improved during his tenure, the respondent’s assertion is undermined by the findings of the theme audit of compliance of tax legislation and bank internal procedures which was conducted by the European Audit Division of the National Australia Bank in late 1998.
The overall conclusion of the report on this theme Audit, issued in January, 1999, assessed the standard of compliance as unsatisfactory with a high number of errors in overseas residents accounts, 18% of which had been found to be erroneous when tested against current legislative requirements.
The report also states that these errors “do not in themselves suggest that the customers were ineligible for the payments of interest without deduction of tax but do indicate a need for immediate remedial action.”
In addition the significant audit issues identified included blank declarations signed by customers and not subsequently completed. The procedures for ensuring that customers’ identity was verified did not provide evidence that this, in fact, had occurred. The six-monthly branch declaration process gave a false picture of compliance in the bank.
Mr. Rafferty referred to the early actions of Mr. Seymour’s successor, after the latter left on the 15th July, 1996, in circulating all bank staff with a warning of the consequences of their breaching banking procedures in their participation in fraudulent acts (a circular dated the 18th September, 1996) that undermined the respondents assertions that “substantial progress” was achieved and that the banks culture had been “fundamentally changed” for the better during his tenure as Executive Director.
While there may have been improvements Mr. Seymour should have been aware of the failure of the banks’ branches to hold properly completed non-resident account declarations and should also have been aware that bogus non-resident accounts existed throughout the branch network.
In this regard the affidavit contrasts the Inspector’s position with the corresponding position of Mr. Seymour as follows:
Inspectors’ Findings in Summary Respondent’s Position in Summary
“Barry Seymour, Executive Director of the Bank from 22 April 1994 to 15 July 1996, may not have had knowledge of the existence of such accounts until late 1995.
Nonetheless, as… Executive Director…. Mr. Seymour must bear ultimate responsibility for the practice of opening and maintaining fictitious or incorrectly named accounts during the (period he held his position).
During the period Mr. Seymour held the position of Executive Director, the General Managers took action to eliminate such accounts.” Page 178 of the Report). “42, I confirm that instances of fictitious named appearing on customer accounts were first brought to my attention during the second half of 1995. Memoranda addressing this issue were subsequently issued on 7 December 1995 and on 30 May 1996 in the names of other members of senior management and substantial progress was made. I gave express instructions to my senior management to sort out the question of fictitious accounts.”
“45. The Inspectors found that fictitious and incorrectly named accounts existed in the branch network since 1988. In circumstances where my employment by the Bank commenced approximately 6 years later and the practice ceased within approximately one year of the date one which I became aware of it, I say and believe that it would be completely unreasonable to ascribe to me responsibility for the organisation, existence of, continuation of the practice.”
Mr. Rafferty avers that there is no dispute between the Inspectors and the respondents in relation to the state of knowledge of the problem of fictitious and incorrectly named accounts. On becoming aware of the problem in late 1995 the Inspectors have acknowledged that actions to eliminate the problem were taken during Mr. Seymour’s tenure but that, as Executive Director, he was ultimately responsible for the continuation of this improper practice. The existence of accounts in a Licensed Bank which were fictitious and were incorrectly named was as such a serious matter that the practice should have been discontinued immediately once their existence became known.
7.3 Special Savings Accounts
In relation to special savings accounts, Mr. Rafferty compares the Inspectors’ findings with corresponding position of the respondent as follows:
Inspectors’ Findings in Summary Respondent’s Position in Summary
“Barry Seymour held the position of Executive Director of the Bank from 22 April 1994 to 15 July 1996 and during that period was made aware, through audit reports circulated to him, of the deficiencies which existed in the operation of SSAs at branches, both in relation to documentary non-compliance and breaches of the withdrawal notice requirements.
Mr. Seymour was also circulated with the DIRT Theme Audit report of December 1994 and attended the meeting on 9 February 1995 to discuss the results of the audit and the issues arising therefrom. He was thus aware of significant issues of documentary non-compliance in relation to SSAs, the widespread failure to ensure adherence to the notice requirements for withdrawals from such accounts, and the resultant failure to deduct DIRT at the standard rate from interest paid or credited were the conditions for the operation of such accounts as SSAs were breached.
As Executive Director, Mr. Seymour bears ultimate responsibility for the failure of the Bank to deduct DIRT at the standard rate from interest paid or credited on all accounts classified as Special Savings Accounts where the conditions to which such accounts were subjected were not observed.” (Pages 180 and 181 of the Report) “47. I have dealt herein before with the circulation of internal audit reports to me, my authorisation of the DIRT Theme Audit, my convening of the meeting on 9 February 1995 and the various other steps taken by me, at my direction, with my authorisation and/or with my approval to address and resolve DIRT-related practices. Those averments apply equally to the area of SSA accounts, as DIRT-related issues were identified, investigated and addressed actively in the same way and at the same time in relation to both non-resident accounts and SSA accounts.”
“48. I say and believe that it is unreasonable to ascribe responsibility to me for the origination, existence or continuation of practices in circumstances where such long-standing practises were addressed actively within a short period of their coming to my attention and where, under my leadership, the continuation of those practices was changed within a short period of time.”
While there is no dispute between the Inspectors and the respondent in relation to his state of knowledge and to the special circulars dealing with qualifying criteria, it is evident from the DIRT theme account report of December 1995 that the scale of non-compliance was very serious. Mr. Rafferty refers to the uncontroverted findings of that audit in relation to withdrawal notices, SSA declarations and account holders. The report had, as already stated, identified this as a risk area, the penalties of which were very significant.
The respondent’s contention that very significant progress was made is undermined by the theme Audit on compliance which was conducted by the European Audit Division of the National Australian Bank in late 1998. This rated compliance standard as unsatisfactory and noted in relation to SSAs that 21% of sample SSA accounts were in error against legislative requirements and that in 79% of the samples tested withdrawals made in 1998 from accounts (were) being allowed without the required notice been given.
Mr. O’Rafferty averred that the Director had no further information on the matter but it appeared that the results of 39% and 91% from the DIRT theme Audit of 1994 and the corresponding figures of 21% and 79% from the theme Audit of 1998 on compliance were comparable figures. There remained a continuing problem of substantial non-compliance with respect to SSAs after Mr. Seymour had left the bank. Fear of losing deposits was one of the reasons established by the Theme Audit to explain why many branches were finding it difficult to impose the notice requirements. Mr. Seymour, having notice of these facts, ought to have known that there were potential legal consequences for the banks’ participation in this failure. It was difficult to avoid the conclusion that Mr. Seymour and other senior management to the bank were careful not to damage business retention and growth prospects in the interest of legal compliance.
7.4 Sale of CMI policies
Mr. Rafferty compares the Inspectors’ finding with the corresponding position of the respondent in relation to the sale of the Clerical Medical Insurance and similar policies in the following tabulation:
Inspectors’ Findings in SummaryRespondent’s Position in Summary
“Barry Seymour held the position of Executive Director of the bank from 22 April 1994 to 15 July 1996. On his appointment, he inherited the practice whereby customers of the Bank, and others, were being facilitated in evading tax through investment in the CMI product. As Executive Director of the Bank he has to bear responsibility for the continuation of the practice.” (Page 187 of the Report) “50. I confirm that I had no knowledge at any time during my tenure that customers of the Bank or others were being facilitated in evasion of tax through investment in the CMI product that there was no audit report of any non-compliance or other issue relating to that division was ever otherwise brought to my attention. The CMI product had been launched some years before my arrival at the Bank, and declining commissions indicated that its shelf-life was almost expired by the time I joined NIB. The product was relatively unimportant to the Bank’s performance by then and received little management attention.”
“51. In these circumstances, I say and believe that it is unreasonable to ascribe responsibility to me in relation to the use of the CMI product which the Inspectors acknowledge I inherited and to ignore the reality that the culture and set of practices that pre-dated my arrival and that facilitated such use was fundamentally altered under my leadership.”
The Inspectors had not made an explicit finding that Mr. Seymour was aware that such Insurance products were being marketed or promoted by the Bank so as to facilitate tax evasion. They have acknowledged that he inherited the practice but have, nevertheless, indicated that he must bear responsibility for its continuation in the light of the direct reporting relationship with which Mr. D’Arcy, the Manager responsible for those products, had with Mr. Seymour until the 1st January, 1995; the testimony of Senior Management and Branch Mangers to the Inspectors that the CMI product was marketed to people with “revenue sensitive” funds; the volume and nature of the documentation circulated regarding the benefits of those products and the open manner in which publicity for such products extolled the advantage for the beneficiary of clients being able to obtain the proceeds of the investments after death with no probate requirement, thereby facilitating concealment of the funds from the Revenue Commissioners.
7.5 Improper charging of fees
Finally, Mr. Rafferty compares the Inspectors’ findings with the corresponding position of the respondents in relation to the practice of improper charging of fees which include the table in page 22 and 23 of 26 which I include.
The Inspectors’ had recorded 25 internal audit reports from the period April, 1994 to May, 1996 which showed shortcomings in the justification for the fees being levied in customer accounts. That figure being about 60% of the internal audited accounts for the years in question. It was clear that there was a significant and longstanding systemic weakness which required the attention of the Bank’s Senior Management, including Mr. Seymour, given the implicit risk to bank/customer relationships. Mr. O’Rafferty pleads that Mr. Seymour was not in a position to deal persuasively with the Inspectors’ findings, that this practice was only addressed after pressure from the Director of Consumer Affairs on the banking industry in general. Mr. Seymour was ultimately responsible, during his tenure, for the failure of the bank to introduce an appropriate system for the recording of management time chargeable to its customers.
In conclusion Mr. Seymour’s contentions that the Inspectors’ findings were or are incorrect, unfair or unreasonable or untenable. The Inspectors’ had properly defined his level or responsibility for those failings based on the level of knowledge attributed to him and the seriousness of the identified failures.
Mr. Seymour had presided over the bank which had breached its obligations under the Finance Acts, facilitated others to defraud the Revenue Commissioners, applied fees to customers’ accounts, which were not properly justified and facilitated the sale of certain insurance products. Neither of the insurance companies was authorised to carry on life assurance business in the State at any time in the period up to the 15 June, 1998. Further, there was a failure to make return of those sales to the Revenue Commissioners as is required by law.
The Inspectors’ report, at 94/95, in relation to the obligation to make returns to the Revenue Commissioners stated that it appeared that none of the Financial services Managers had been instructed by Management of the provisions of the Finance Act, 1993 (s. 24, subsequently s. 594 of the Tax Consolidation Act, 1997) which obliged any Irish resident person acting as an intermediary in connection with the issuing of foreign life assurance policies on or after the 20th May, 1993 to deliver returns specifying certain details in respect of each resident.
Mr. O’Rafferty says that the findings in the Inspectors reports in aggregate are correct in stating that Mr. Seymour was aware of the significant level of non-compliance in the operation of both DIRT exempt non-resident accounts and SSAs and that like other members of Senior Management, he failed at the meeting of the 9th February, 1995 to address, or even to raise the issue of potential retrospective liability for DIRT resulting from the irregularities. Companies are required to comply with law and officers of the company are obliged to carry out their functions with due care, skill and attention. Notwithstanding ample warnings as to the real risks which existed with respect to compliance in a number of areas. The Inspectors correctly found that Mr. Seymour failed to discharge properly his responsibilities in his position as Executive Director from 22nd April, 1994 to the 15th July, 1996 in a number of respects. This was particularly serious for a licensed bank which occupied a unique position of trust and which is required to adhere to the highest possible standards of conduct. Having regard to the findings of the Inspectors and the banks acknowledgment of its past failures, there is sufficient evidence of illegality to indicate that Mr. Seymour demonstrated unfitness, lack of commercial probity, negligence and/or incompetence on the discharge of his duties as an Executive Director of the bank. Mr. O’Rafferty averred that his disqualification under s. 160(2) of the Companies Act, 1990 was warranted for a period of time.
8. Second Affidavit of Barry Seymour filed the 18th June, 2006
Mr. Seymour says that he did not deny that the practices criticised by the Inspectors were of a very serious nature. He had set out in his previous affidavit details as to how he addressed those practices, as soon as they came to his attention. He introduced a change in culture within the Bank, such that the importance of compliance received a much greater emphasis than it had previously.
He had no direct knowledge of the payment of €6.7 million in respect of DIRT liabilities relating to the period of 13 years from the 6th April, 1986, to the 5th April, 1999. The relevance of the size of the payment to whether he was fit to be a Director was not clear to him.
The amount that the Bank decided to refund to customers in respect of overcharging of fees in interest was of little or no relevance to the application. He had introduced an improved system for capturing management administration time and making accurate and supportable charges to customers. No finding of any kind was made against him by the Inspectors in the area of the improper charging of interest.
He took exception to his assertions being regarded as untenable with regard to the DIRT practices. He did not see the relevance of the Public Accounts Committee. He had no information regarding the improper practices of the Bank prior to his arrival when he was asked to look after the bank for a short period, following the departure of his predecessor. His first weekend was spent obtaining legal advice in relation to his predecessors’ challenge to his removal.
In addition to dealing with the issues, internal and external, arising as a result of Mr. Lacey’s departure, he continued working on the proposed merger between the parent company, National Australian Bank and TSB which ultimately did not proceed. From April, 1994 when he took over, until late 1995, the absence of any additional or dedicated resources from the parent company, demanded a vast amount of his time and that of Senior Management, over and above that required in the normal daily running of the bank. In the absence of any information as to the practices criticised by the Inspectors, he said that it would be wholly unreasonable to inspect him to have anticipated and to have sought out information concerning such issues in the early months of his tenure.
He outlined the compliance issues as being, not the only areas required to be addressed and improved in the Bank during that tenure. Liability, asset and human resource management as well as branch performance communication were indicated by him.
In relation to the DIRT theme audit report he said that the extracts quoted by Mr. O’Rafferty did not contain any conclusion the tax was in fact being evaded. The extracts refer to penalties that “would be very significant” and to “possible tax evasion”.
Notwithstanding Mr. O’ Rafferty’s assertion that he had exaggerated the impact of his leadership, he said that it was evident that a substantial improvement in compliance had occurred during his short tenure.
He took issue with the statement that it was difficult to avoid the conclusion that he was careful not to damage business retention and growth prospects in the interest of legal compliance. This was untrue, without foundation and totally unjustified. The Inspectors had made no finding of this kind against him, nor could they. He introduced an emphasis on the importance of legal compliance that had previously been lacking and thereby brought about a significant improvement in the bank’s culture.
The Inspectors had made no finding of knowledge on his part of the insurance products. His direct reporting relationship with Mr. D’Arcy lasted only for a matter of months following his arrival. The bank’s parent had in place a system for vetting new products. He assumed all of the bank’s products had been vetted.
He did not deny that, as Executive Director, he had ultimate responsibility for the operation of the bank generally for a period of almost 27 months. The practice, as criticised by the Inspectors, did not justify finding that he had conducted himself in a manner that displayed any lack of commercial probity, such as to justify an order that he was unfit to act as director of a company.
9. Third Affidavit of Mr. O’Rafferty
9.1 (This affidavit arose as a result of a discovery of certain documents held by the bank as ordered by the Court on the 29th May, 2006).
Mr. Rafferty referred to the transcript of evidence and submissions made by Mr. Seymour together with book of correspondence, copy extracts of branch internal audit from April, 1994 to July, 1996.
Mr. O’Rafferty averred that the length of the tenure of Mr. Seymour could not dilute the duties imposed upon him as the most Senior Executive Director of a Licensed Bank. On the 18th July, 1994 the Group Manager of National Australian Bank in Melbourne faxed Mr. Seymour asking him to report back on the matters raised in the Audit Committee by the non Executive Chairman. Mr. O’Rafferty said that it was clear from the exchange of correspondence that the parent company regarded Mr. Seymour as the person responsible for addressing their concerns.
9.2 Mr. O’Rafferty says that in late 1995, Mr. Seymour was responsible for major restructuring of the business in terms of the regional management. And accordingly, was involved both in day to day and longer term issues.
In relation to DIRT regulations and non-resident accounts he had been copied with internal audit reports and had notice of the deficiencies or irregularities which existed in the operation of DIRT exempt non-resident accounts. Through the DIRT theme Audit report of December, 1994 he was aware of the significant issues of documentary non-compliance in the branches. He interpreted such reports as disclosing errors or omissions in compliance with the banks documentation standards and did not accept that the reader of the report at that time, without the benefit of considerable hindsight, ought to have concluded that bogus non-resident accounts existed throughout the bank network.
In this regard Mr. O’Rafferty referred to the first internal audit report received by Mr. Seymour, in respect of the Blanchardstown bank in April, 1994 which not only referred to the fact that in a number of non-resident accounts the non-declaration forms were missing but that also a number of instances were noted where the declaration forms were not completed or dated. The risk rating given to this report item is five stars, which is the highest risk category within internal audit.
Mr. O’Rafferty also refers to non-compliance in Mullingar, Athlone, Strokestown, Killarney, Ballybofey, Raphoe, Ballinamore, Mohill, Swords, Cork and Fermoy, which showed a serious, usually meriting a four or five-star rating, problem with non-resident forms. Furthermore, the fact that such failings expose the bank to risk of penalties was highlighted. All of those related to May to September, 1994. Five to six internal audits were performed per quarter. Accordingly, the irregularities referred to could only have been interpreted as having been widespread throughout the network unless the branches audited were in some way representative.
The branch audit reports received from April to December, 1994 each highlighted significant concerns over DIRT and non-resident accounts. The DIRT theme audit report issued on 24th January, 1995, concluded that in the twelve branches audited, an “unacceptably high proportion of declarations were missing or incomplete”. The report, having concluded that the results of the audit were very disappointing and that management must take immediate steps to improve the situation, concluded that it was a risk area and the penalties for non-compliance at the level shown in this respect would be very significant.
Mr. Seymour, when examined by the inspectors regarding the issue and how he felt replied:
“Well DIRT itself we have the responsibility to an external body, principally the Revenue, and we weren’t complying.”
On 9th February, 1995, Mr. Frank Brennan, General Manager, sent a memo to Mr. Seymour specifically addressing the issue of DIRT and the theme audit which commenced as follows:
“Having wrestled with DIRT for a number of years I do believe that we must introduce a change of attitudes of our management staff to the legal requirement. It is an Irish failing that there is considered little harm in closing one’s eyes to tax evasion and to confusing evasion with avoidance.”
The minutes of that meeting refer to Mr. Brennan as saying:
“He felt that there was a need to change attitudes at branch level so that possible tax evasion could be eliminated to the greatest degree possible …”
In the course of his evidence given to the inspectors Mr. Seymour was asked what steps had been taken arising out of that meeting and out of Mr. Brennan’s memo. He said:
“We were aware of the problems of DIRT. That meeting discussed those problems thoroughly and, in my view, came out with procedures well intended to attack it, and indeed I think did begin to attack the problem. The reference to it being endemic, again I was the only non-native there, all the other people who were well aware of the endemic nature of taxation and the desire of people to avoid, wherever they can, to pay their tax. I think also what is not here, of which by that time I was fully aware, that wasn’t just an NIB problem – again I think what Frank Brennan is saying there – it was an industry problem …”
Mr. O’Rafferty says that, accordingly, it was clear that at the very least from 9th February, 1995, Mr. Seymour was or ought to have been aware that the bogus non-resident accounts were widespread throughout the network and that the problem was not one of technical non-compliance with formalities.
He believed that the steps taken to eradicate the DIRT non-compliance was inadequate as found by the inspectors. Mr. Seymour had held ultimate responsibility to ensure that DIRT was deducted from interest paid or credited on all accounts subject to DIRT under the Finance Act, 1986. He failed to discharge that responsibility.
The averment by Mr. O’Rafferty to the concession made by Mr. Seymour as to the inherent liability to the Revenue is based on his replies during examination of 14th January, 2003 at pp. 79 to 80 as follows:-
“195.Q. Mr. Clarke: I suppose there is potentially another question which,
with the benefit of knowing what’s now happened, we are all aware of. We know that all of the deposit-taking institutions have paid not insignificant sums to the Revenue to make good the deficiency. That was a long time after any involvement you had. It’s perhaps almost unnecessary, in the light of what Judge Blayney had indicated. But do I take it that, apart from there being no discussion, none of the advisers, whether internal advisers or external advisers such as the external auditors, made a suggestion to you that this was something which should be done?
195. A. Regrettably, no. If I were seeking to avoid blame or a share of the blame, it would be to say yea, there was one or two financial experts around me who should have thought of it, but it wasn’t discussed and I don’t wish to.
196. Q. Insofar as people didn’t think about it, you were one of the people who didn’t think about it, but there were others?
196. A. Yea, yea.
197. Q. Yes, but I think you do accept that, with the benefit of hindsight, there was clearly an inherent liability to the Revenue there?
197. A. Yes, I do, but I don’t think it’s a mission (sic) need necessarily be determined or translated as a form of intent to avoid. I certainly don’t believe that.”
It would appear that the transcription of ‘a mission’ should have read ‘admission’ and the addition of the word ‘which’ before “need necessarily be determined” might make more sense.
Counsel for Mr. Seymour submitted that this was not an admission. While he stated that it need not necessarily be understood as a form of intent to avoid, he agreed that there was an inherent liability to the Revenue.
Mr. Grace asked whether the DIRT theme audit which identified the risk area and the penalties for non-compliance. Mr. Seymour had replied:
“153. A. I think there is no room for any misunderstanding and that would be taken to executive committee and we would discuss it and we would lay down a plan to attack it and in due course I believe we came out with a brand new circular. We came out with some new procedures, I think, in terms of certification.
…
156. Q. I think – or would it be fair to say that effectively it looks like that there was a situation where tax that is, that is due, is not being paid?
156. A. I read that conclusion slightly differently.
157. Q. Sure, ok?
157. A. I don’t think it pulls punches. Therefore I think anyone who reads that within the bank realises the seriousness of that.
158. Q. And what did you regard the seriousness of it, I mean, what did you feel it was saying?
158. A. Well DIRT itself we have responsibility to an external body, principally the Revenue, and we weren’t complying.
…
162. Q. Sure, the first, the question that I would have in relation to it is: at the time would it have appeared right from what the conclusion says, ‘that this is a risk area and the penalties for non-compliance at the level shown’ – that appears to suggest that tax which should have been deducted wasn’t being deducted?
162. A. I think there is non-compliance but in fairness it’s not quantified there in punts.”
Mr. O’Rafferty referred to the failure to consider the issue of retrospective liability as a very serious breach.
In relation to fictitious accounts, the inspectors had recorded that Mr. Seymour may not have had knowledge of fictitious accounts until late 1995. Memos from Mr. Keane dated 7th December, 1995 and Messrs. Keane and Brennan of 30th May 1996 clearly linked the issue of fictitious accounts with tax evasion. The problem was specifically addressed in the former and was still continuing in the latter.
Mr. Keane’s memo to all branch management of 7th December related to account names/descriptions and stated that a small number of cases had come to his notice where account descriptions and/or addresses were not correct. He stated that this was a serious matter and was not acceptable, inter alia, because there was a possibility that accounts operated in this manner could be aiding and abetting tax evasion; tax evasion is a crime and further referred to money laundering legislation.
The second memorandum of 30th May, also to “all branch management re fictitious/incorrectly named accounts”. The memo stated:
“As a result of findings in recent audits we have decided that it is necessary to again write to you on this important subject.
Fictitious or incorrectly named accounts cannot be tolerated under any circumstances and every staff member is forbidden from knowingly operating or maintaining such accounts. The importance of the subject and the reasons why these accounts are not acceptable were covered in Michael Keane’s note dated 7/12/95.”
During the course of his interview on 13th April, 2000, Mr. Seymour was asked what he understood by the term “fictitious accounts” and replied:
“256. A. Mickey Mouse, genuinely names of personalities that didn’t exist.
257. Q. And from the bank’s perspective what was your concern in relation to that?
257. A. Well, I am not naive. One would have thought, immediately thought it would be, would have been tax related and safer than keeping money under the bed so they would open a fictitious account but I was offended principally by the fictitious nature. I have got no room for that. I didn’t allow the thought process to go beyond that ‘it is wrong, let’s put it right’. We did encounter difficulties in trying to put that right, in trying to put that right, bank managers would feel intimidated by some customers whom they perceived as wealthy. They were aware that it was a fictitious account.
258. Q. And would you have been aware that some of the fictitious accounts might have been taken as securities for borrowings?
258. A. Oh, now you are frightening me. No, I wasn’t aware of that but I would have been doubly anxious of that. No, I think that when something is wrong I don’t worry about the peripheral things. It was wrong and we had to put it right.”
The inspectors then referred to the above mentioned memo of Michael Keane, General Manager, and asked how he thought the problem could be rectified. He replied:
“267. A I had a very simplistic approach, close the account and get rid of it. I didn’t want to be associated with that. Now the last two hours have been instructive, if nothing more. They were obviously secondary questions but as I have said before, if you are offended by a practice, you get rid of it.”
The exchange between Mr. Grace and Mr. Seymour shows the response of Mr. Seymour in a positive light and shows his degree of exasperation in respect of the response from branch managers.
Having been confronted with the problems in various branches over the period Mr. Grace had said, at Q. 271, that “at the time there was no doubt that when you were there in December, ’95 that you were aware of the problem. You have told us that you take a dislike to it, an intense dislike to it?” Mr. Seymour replied, “I do.” and added that:
“Some managers feel intimidated by certain customers.”
Mr. O’Rafferty says that given the acknowledged seriousness of the practice and the fact that it was not stopped immediately but persisted even after Mr. Seymour’s tenure the conclusion was properly made that he was responsible for the practice during his term (para. 39).
9.3 With regard to the CMI product the inspectors, while acknowledging that the practice had been inherited by Mr. Seymour, held that he had to take responsibility for its continuance during his time as chief executive. The deposit at that time amounted to £20 million which was centralised, having been previously deposited at individual branches. It appears that Mr. Seymour was responsible for that change. The reason for the centralisation, according to Mr. Seymour, was that it made sense from a treasury and balance sheet perspective. Mr. Nigel D’Arcy had said that the centralisation occurred because a branch manager had allowed a customer to make a withdrawal, even though the funds were in fact owned by CMI.
Mr. O’Rafferty said that that matter had not been put directly to Mr. Seymour by the inspectors though it appeared, from the transcripts, that he had known that the money had been previously held by the bank’s customers.
It is clear, from the evidence of Mr. D’Arcy, that there was no doubt that they were all non-resident accounts because they were all CMI accounts. An investor invested in CMI. It was CMI who placed money back on deposit. CMI would sign the non-resident declaration. Clearly CMI was non-resident. It had been well known that a lot of these were accounts that had been tidied up using that mechanism. The memo to Frank Brennan from Geoff Bell, Head of Management Services (Q. 237 of the examination of Mr. D’Arcy) in 1994 refers to the launch “whereby funds are invested for Irish residents … by insurance company … based in the Isle of Man … in deposits, securities or stocks and shares in accordance with the individual customer’s requirements. Funds are introduced by the financial services division and client confidentiality is of the utmost importance.”
Mr. D’Arcy believed that senior people within the bank were aware that Irish residents were investing in CMI. He agreed that funds that were invested were sensitive from a Revenue Commission position.
Mr. Seymour was not aware of a customer seeking a refund of the £500,000 in CMI and seeking a refund and complaining of a commission of £45,000.
It is acknowledged that Mr. Seymour did not have direct knowledge but had to bear the responsibility of the continued practice, particularly given his background knowledge and the level and source of the deposits.
Finally, Mr. O’Rafferty, in this affidavit, expanded on the issue of improper charging of fees. He believed it to be clear, from the branch audit reports received by Mr. Seymour, that the existing system was not being used for branch audit reports which are referred to in this regard. Mr. O’Rafferty believed that the changes introduced in 1996 were as a result of a demand for pre-notification of fees made by the Director of Consumer Affairs. Significant refunds were made to customers in respect of overcharging, some of which arose during Mr. Seymour’s term of office.
10. Evidence in cross-examination and re-examination
In his evidence to the court over two days Mr. Seymour accepted that from the moment he took up his position he was receiving branch audit reports that indicated weaknesses in respect of controls and non-compliance with the requirements of the 1986 Act. He accepted that by July, three months after his appointment in 1994, he received six reports in relation to DIRT problems, two of them with five-star (the highest risk) rating and two with four-star risk ratings. He believed that the DIRT theme audit would assess how widespread the problems were. When asked if, in November, 1994 when he authorised the theme audit, that he knew that there was widespread non-compliance throughout the branches that that could have had implications for the Bank’s liability to Revenue and could present a potential loss, he replied in the affirmative that it would have implications to Revenue where revenue was not being collected and should have been. No consideration was given at any stage to sending in either internal audit or someone else from outside the branches to review all of the non-resident accounts to make sure that they and the special savings accounts were in fact properly compliant with the law.
He said that the word “bogus” was never common vocabulary within the Bank. There was no report evidencing that the accounts were bogus.
He said he knew that if, as we found out, that there were widespread documentary deficiencies, we were non-compliant. He recognised that when Mr. Brennan referred to the problem of tax evasion at the meeting in February he thought he was referring to evasion of all sorts of which documentation would be one aspect.
He agreed that he did not consider the question of how Revenue was going to be paid the taxes that should have been retained. He did not consider retrospective liability to tax. He never informed the audit committee that there was a possible liability for the Bank to Revenue as a result of irregularities nor informed the board of that fact. He agreed that he had a role in the signing-off of accounts in the company in the making of representations to the board in that connection and that they relied on him in relation to the accounts. He agreed that the statement that accounts gave a true and fair view was, to some extent, influenced by the reliance that was placed on him by the board to give them information. He did not give them information about retrospective liability nor tell the Board nor the Audit Committee that there was a serious systemic problem with Revenue compliance.
He accepted that there was a serious problem in the Bank with documentary compliance in relation to DIRT. He knew that the theme audit had shown that there was a risk that such practices were occurring and were continuing. It was regrettable but the situation was improving. He still contended that throughout the process the emphasis was upon documentary deficiencies which could have hidden the nature of accounts. The theme audit had demonstrated that there were deficiencies but it did not highlight them as bogus.
By the end of 1995 he acknowledged that he was aware that there were fictitious and incorrectly named accounts in the branches and he acted promptly, as the Inspectors had acknowledged.
He did not necessarily believe that this was clear evidence of a symptomatic problem within the Bank in relation to those accounts and the way they were being used or abused. The audit reports were all given the risk rating they deserved. They were taking a larger sample of accounts. He believed that by the end of 1995 they were on course to resolving the problem.
Mr. Seymour was aware from the internal audit reports of the deficiencies and irregularities which existed in the operation of bogus non-resident accounts at branches at least from the time of the DIRT theme audit and the meeting of 9th February, 1995.
The audit reports showed that branch records were at variance with the apparent non-resident status of the account holder. This, at least, raised the suspicion that those non-resident accounts were bogus and put a responsibility on the bank in general, senior management, nd Mr. Seymour, in particular, on notice that a significant proportion of non-resident accounts did not comply with the provisions of the finance Act..
Moreover, the DIRT theme audit report confirmed and quantified the widespread nature of irregularities in relation to documentary non-compliance throughout the branch network.
When asked how long did it take to solve a problem in a bank where the branches were failing to comply with their legal obligations Mr. Seymour answered:
“At a stroke in terms of the collection of DIRT. Because you can recategorise the account. And several branch managers were doing just that, as was brought out in certain audit reports. And the circular (of February, 1995) was specific in that regard.”
He added that the mere attention to retrospective tax liability would not have solved the documentation deficiencies as there would have been ongoing issues but it would have provided a better focus. He regretted that they had not done that. He contended that the circular addressed past and future problems and had the instructions been adhered to the latter, the totality of the tax problem would have been resolved.
11. Decision of the Court
11.1 This is a contested application where the relationship arises between two revised provisions of company law enforcement and provisions.
The first is the investigative procedure provided for in Part II of the Companies Act, 1990 (ss. 7 to 24) whereby inspectors may be appointed by the court where the affairs of a company are being conducted, inter alia, with intent to defraud creditors or otherwise for a fraudulent or unlawful purpose or in an unlawful manner or where persons connected with its formation or management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct. Inspectors may also be appointed where members have not been given all the information that they might reasonably expect.
The second is the disqualification procedure provided for in Part VII (ss. 149 to 169).
Section 160(2)(e) links the two procedures (see 1.2 above).
The Companies Act, 1990 was in this and in other respects a new generation of company law.
What is critical is the enforcement of standards of management. Where the conduct of any person makes him/her unfit to be concerned in the management of a company the court may make a disqualification order.
The application is different from the cases arising under insolvent trading or where records are not kept nor returns made. It extends to a situation where a director fails to act as he is required to act, fails to take action which should have been taken and fails to realise that which ought to have been realised. Moreover, there is a more important circumstance and that is that the application applies in the context of a very particular type of business that of a licensed bank where customers, the Revenue Commissioners and the regulatory authorities place very considerable trust in the bank’s strict compliance with the law.
The Inspectors identified several serious and very significant defaults of management and legal non-compliance within the Bank. Mr. Seymour, for a period of 27 months, was the single most senior and responsible employee in the company. The Inspectors found that he knew of DIRT irregularities, that he ought to have known of the widespread bogus non-resident accounts and they found that he failed in his responsibility to eradicate them. They fond that he knew of the special savings account irregularities and that he bears ultimate responsibility for the failure to eradicate them. They also found that he knew of the shortcomings concerning the lack of explanation supporting fee increases and that there was no system in place for contemporaneous recording of management of administrative time and that he was ultimately responsible for that also.
The Inspectors’ report and the transcripts showed that the inspectors were aware of the length of tenure and the steps taken by Mr. Seymour to deal with non-compliance within the Bank. The Inspectors had expressly acknowledged the action taken by Mr. Seymour which improved but did not resolve non-compliance.
Section 22 of the Companies Act, 1990 provides that the facts set out in an inspectors’ report are admissible unless the contrary is shown. The inspectors’ opinion is also admissible.
The counterposition of the Inspectors’ findings and the position of Mr. Seymour derived from the latter’s replying affidavit, as tabulated in Mr. O’Rafferty’s second affidavit has not been contradicted nor significantly disputed in the hearing before this Court for the reasons given hereafter.
Mr. Seymour should have been more decisive and effective in eliminating issues of non-compliance and redressing the consequence of improper practices. His successor adopted a tougher stance by giving bank staff a warning of the consequences of breaking bank procedures and of participating in fraudulent acts. As a result of the Inspectors’ report the Bank made a substantial payment to the Revenue.
Notwithstanding, the court does not assess the application with the benefit of hindsight. (See decision in Barings at 10.6 below)
The applicant has emphasised the first and the fourth findings of the Inspectors of inappropriate practices detailed at 4.1 to 4.6 above. These were bogus non-resident and fictitiously-named accounts opened and maintained in the Bank’s branches which enabled customers to evade tax through the concealment of funds from the Revenue Commissioners and the treatment of special savings accounts.
The evidence in cross-examination and in re-examination also concentrated on these practices. They appear to the court to be the practices which are most serious. The Inspectors held Mr. Seymour to be directly responsible, as distinct from being ultimately responsible.
No responsibility was levied against Mr. Seymour in respect of the improper charging of interest.
The Inspectors had found that it was his responsibility to ensure that there was a system in place for the contemporaneous recording of management and administrative time before March, 1996. The court is satisfied that Mr. Seymour was aware of the failure of the branches to utilise the Customer Action Pad introduced in March, 1992 which allowed arbitrary charging of fees, failed to redress the problem until 1996 or to account for refunds.
Notwithstanding that the Inspectors found that Mr. Seymour had to bear responsibility for the continuance of the CMI policies they acknowledge that internal audit did not identify or report any improper practices. The significant role of Mr. D’Arcy has been the subject of a disqualification order. It does not seem to the court that Mr. Seymour’s responsibility for the continuance of the practice, on its own, is a ground for disqualification. There was no evidence that he could have stopped the practice.
A director must familiarise himself or herself with the business of the company in order to carry out his or her duties. The business of banking requires adherence to and compliance with the statutory provisions relating to deposit taking. While a director may rely on delegating to others, there remains an ultimate responsibility with regard to the discharge of the statutory obligations. In does not appear, from the written records of the bank, and in particular in relation to the DIRT theme audit report and the meeting of 9th February, 1995, and the circulars emanating therefrom, that the issue of retrospective liability for DIRT tax or the necessity to get specific advice in relation thereon was addressed by Mr Seymour, let alone the making of a provision in relation thereto.
It is clear from the taxation of credit interest audit of January, 1999 which was, of course, compiled after Mr. Seymour had left the bank, that the standard of compliance in overseas resident accounts continued to be unsatisfactory for a further four years after the DIRT theme audit report.
The fact that after he left office the bank made a substantial settlement with the Revenue Commissioners regarding its liability for DIRT incurred, in part, during Mr. Seymour’s tenure, further highlights the non-compliance by the bank and its directors, particularly its executive director, in discharging its, their and his statutory duty.
The Bank’s failure effectively assisted tax payers to avoid their legal responsibilities to the Revenue and contributed to, if not caused, a further liability of the bank in discharging its statutory duties in relation to tax.
The court does not accept the suggestion by Mr. Seymour in his affidavit that it was not clear that such a liability existed. Nor was this a suggestion that was made by him to the Inspectors.
The court is of the view that the duty of care and skill owed by a director in relation to these matters is a serious responsibility and cannot be compared to the oversight of an individual tax payer or the reliance of an individual tax payer on his accountant or tax adviser. While, of course, such an oversight does not excuse the tax payer from discharging his liability, including interest and penalties, the duty of a director is more explicit and demanding. Not alone is there an obligation towards the members of the company there is also a duty towards its creditors, especially to the Revenue Commissioners in respect of retention tax preferential debts. Directors of a bank have a particular responsibility to its customers to advise and account for such tax from a relevant deposit where they are aware of circumstances where it was obliged to deduct.
11.2 The clear and specific duties imposed on the bank by statute with regard to the collection and remittance of deposit interest retention tax is provided for in s. 32 of the Finance Act, 1986.
That section provides as follows:
“(1) Where a relevant deposit taker made a payment of relevant interest it shall deduct out of the amount of the payment the appropriate tax in relation to the payment; and any person to whom such payment is made shall allow such deduction upon the receipt of the residue of the payment; and the relevant deposit taker shall be acquitted and discharged of so much money as is represented by the deduction as if that amount of money had actually been paid to the person.
(2) A relevant deposit taker shall treat every deposit made with it as a relevant deposit unless satisfied that it is not a relevant deposit; but where it has satisfied itself that a deposit is not a relevant deposit it shall be entitled to continue to so treat the deposit until such time as it is in possession of information which can reasonably be taken to indicate that the deposit is, or may be, a relevant deposit.”
A relevant deposit does not include a deposit from a genuine non-resident depositor who complies with the requisite provisions and makes an appropriate declaration.
The obligation on the relevant deposit taker, the bank in this instance, is very clear. The bank is obliged to deduct relevant interest. It is also obliged to treat every deposit as a relevant deposit, unless satisfied that it was not. The obligation would appear to be to collect interest as agent of the Revenue Commissioners just as employers are obliged to deduct PAYE and PRSI from employees. Once payment was made by the bank under these provisions the bank is expressly discharged from any obligation to account to the customer for the tax deducted and remitted.
The Director of Corporate Enforcement submitted that the Bank had a special relationship to the Revenue which was fiduciary in nature. It does not follow, however, that Mr. Seymour, as Executive Director had such a relationship.
A director’s fiduciary duty is to the company and, in limited circumstances, may also extend to members (see Palmer 8.502-3). Such a duty involves personal liability which is not contended in this case.
Mr. Seymour, as director, owes a duty of care, diligence and skill to the Bank as fully considered by Romer J. in City Equitable fire Insurance Co. Ltd. re (No. 1) (1925) Ch. 407, 427.
The application before the court is not, however, an allegation of breach of such duty but that the director’s conduct makes him unfit to be concerned in the management of a company. The former duty is owed to the company, the latter to the public.
In order to ascertain the duties that a person appointed to a board of an established company undertakes to perform, it is necessary to consider not only the nature of the company’s business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances. In discharging the duties of his position as ascertained, a director must, of course, act honestly, but he must also exercise some degree of both skill and diligence.
City Equitable decided that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life assurance company, for instance does not guarantee that he has the skill of an actuary or of a physician. In the words of Lindley M.R.: “If directors act within their powers, if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company.” It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment.
City Equitable is also the authority for the proposition that in respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. (See Palmer, 8.401).
There is an overlap between the breach of duties to the company and breaches leading to disqualification. City Equitable recognised both equitable and legal duties owed to the company.
11.3 Section 160(2) of the Companies Act, 1990 provides that where the court is satisfied in any proceedings under the section that –
(c) where a person has been guilty, while an officer of a company of any breach of his duty, or
(d) where the conduct of any person as officer of a company makes him unfit to be concerned in the management of a company, or
(e) in consequence of a report of inspectors appointed by the court of the Director under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company, then the court may make a disqualification order against such person.
Sub-section (2)(d) appears wider in scope. There is no requirement of guilt or of breach.
Sub-section (2)(e) is not restricted to officers, nor is there any requirement of guilt or of reach. Where a person’s conduct, in consequence of a report of inspectors, makes him unfit to be concerned in the management of a company, the court make a disqualification order.
11.4 In Continental Assurance Company of London Plc [1996] BCC 888, the first respondent was chairman and managing director. The second respondent was disqualified for four years under a summary procedure and the third was a non-executive director in the latter half of the relevant period when the company went into insolvent liquidation with a deficiency of Stg. £8 million.
Chadwick J. disqualified the first and third respondents for nine and three year respectively on the basis that the first named respondent, as the only full-time director, was in day to day control of the company and knew that the company was lending its funds interest and security free to its holding company in clear breach of the Companies Act and channelled further monies to his own use. This conduct made him unfit to be a director. Any competent director in his position would have known what was going on. His failure to know displays serious incompetence or neglect in relation to the affairs (of the company). (at 895).
In relation to the third respondent, the court accepted that as non-executive director he may not have known what was going on but held that any competent director in his position should have known what was going on in relation to the Companies Act and in relation to the signing of misleading accounts. This showed such incompetence or neglect as made a finding of unfitness appropriate.
The unfitness in this context included incompetence in allowing to happen what the statutory regime of directors’ disqualification was designed to prevent.
11.5 In Re Barings Plc [1999] 1 BCLC 433 (referred to in Vehicle Imports and in Kavanagh v. Delaney) the following propositions arose in the judgment of Jonathan Parker J.
Unfitness might be shown by conduct which was dishonest, (including conduct showing want of probity or integrity) or by conduct which was merely incompetent. In every case the function of the court in addressing the question of unfitness is to decide whether the conduct of which the complaint was made, viewed cumulatively and taking into account any extenuating circumstances had fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.
The respondent’s conduct had to be evaluated in context. The burden was on the applicant to satisfy the court that the conduct complained of demonstrated incompetence of a high degree assessed in the context of, and by reference to, the role in the management of the company which was assigned to the respondent and by reference to his duties and responsibilities in that role. While it might be said that there was a universal standard, that standard had to be applied to the facts in each particular case.
There was no defence to a charge of unfitness based on incompetence to contend that, in discharging the management role assigned to him or which, in fact, he assumed, he had not been shown to be unfit to be concerned in the management of a company. It was not a prerequisite to a finding of unfitness that a respondent should have been guilty of misfeasance or breach of duty in relation to the company. Unfitness might be demonstrated by conduct which did not involve a breach of any statutory common law duty.
In Barings no challenge of any kind was made as to the honesty and integrity of any of the respondents. The case against them was based solely on incompetence. It was submitted that incompetence was a departure from the ordinary standards of conduct expected of a director or officer to such an extent that the court concludes that a respondent in the circumstances is unfit to be involved in the management of a company.
In Barings at 497 the court held:
“… in assessing the conduct [of the respondents] there is in this case a particular risk of applying the wisdom of hindsight. The collapse of Barings was a commercial catastrophe of epic proportions, and that fact alone makes it, perhaps, easier in the instant case than in others to fall into the error of looking at what happened prior to the collapse in the light of the collapse itself. This is not the correct approach. I have to put aside completely the wisdom of hindsight and judge the conduct of the respondents in the context of the circumstances which existed at the time.”
11.6 Conduct which makes an officer unfit to be concerned in the management of a company has been considered by this Court in Re Readymix Limited (In Liquidation), Cahill v. Grimes [2002] 1 IR 372 at 381 where the Supreme Court, following Shanley J. in La Moselle Clothing Company v. Soualhi [1998] 2 ILRM 345, McGuinness J. in Re Squash (Ireland) Limited [2001] 3 IR 35 and McCracken J. in Re Newcastle Timber Limited [2001] 4 IR 586 all quoted with approval the general approach of Browne-Wilkinson V.C. in relation to the English disqualification provisions:
“What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
The Supreme Court believed this to be a correct statement of the law which represented a proper approach to the application and interpretation of s. 160 of the Companies Act, 1990 as amended by ss. 14 and 42 of the Act of 2001.
Murphy J. in Business Communications Limited v. Baxter & Parsons (Unreported, High Court, 21st July, 1995), involved an application pursuant to s. 150 providing for a restriction on directors of insolvent companies and noted that such restriction was mandatory, while in the case of s. 160 applications, the court had a discretion.
Laffoy J. in Director of Corporate Enforcement v. McGowan, (Unreported, High Court decision Laffoy J., 21st February, 2005) at 16, 17, having found that the respondents acted irresponsibly posed the question whether they had displayed a lack of commercial probity or, as it was sometimes put, whether they had fallen below the standards of commercial morality. In her view, the conduct of the respondents had come very close to that threshold, but had not quite reached it as they had remedied the breaches of the Companies Act and the Taxation Code in relation to making returns when faced with an application by the Director for a disqualification order. Both parties combined in restructuring the corporate governance of the company, which, the court hoped, would prevent a repetition of the defaults which occurred in the past. In the circumstances of the restructuring of the company and in the interest of employees and creditors the court considered it appropriate not to make a disqualification order against either respondent. The court was satisfied that it was not necessary to do so to protect the public.
11.7 The first application for disqualification of directors of the Bank was uncontested. It is necessary to consider it extensively. In that case, Director of Corporate Enforcement v. Nigel D’Arcy, (Unreported judgement of Kelly J., 26th October, 2005) at p. 28, Kelly J., having considered the authorities, stated that it was a truism that every case had to be decided upon its own facts. Ultimately he had to decide whether on the material put in evidence the director’s conduct was such as to make him unfit to be concerned in the management of a company. Mr. D’Arcy had, of course, been recruited by the then Chief Executive of National Irish Bank, Mr. Jim Lacey, to be the head of the Financial Advice and Service Division (FASD). He reported to Mr. Lacey as Chief Executive and thereafter to Mr. Seymour as Executive Director until 1st January, 1995. From then until 23rd May, 1997, he reported to the General Manager – Banking and thereafter, up to the date of the appointment of the inspectors, to the Chief Operating Officer. All the financial service managers within the FASD reported directly to Mr. D’Arcy.
As head of the FASD, Mr. D’Arcy became aware in 1992 that funds undisclosed to the Revenue Commissioners were being targeted by bank personnel for investment in CMI. Certain assurances were given regarding confidentiality and the avoidance of the necessity of probate. Mr. D’Arcy became aware that CMI was being used by the bank to regularise bogus non-resident accounts and fictitious incorrectly named accounts. The manner in which the CMI policies were being promoted served to facilitate the evasion of tax by persons investing in the policies.
The inspectors’ findings concerning Mr. D’Arcy’s knowledge and responsibility were that he was aware that the monies which were undisclosed to the Revenue Commissioners, including funds held in bogus non-resident accounts and fictitious and incorrectly named accounts, were being targeted by bank personnel for investment in CMI policies and he failed to stop that practice.
He was also aware that FASD financial services managers were promoting CMI policies as a secure investment for funds which had not been declared to the Revenue. He failed to stop the said practice which served to facilitate the evasion of Revenue obligations for third parties.
Mr. D’Arcy was also aware that respective investors were given an assurance that their investment would be confidential from the Revenue Commissioners, even after their death.
He was aware of the manner in which the policies were being promoted. As head of the FASD he could have stopped the practice. He was, in the opinion of the inspectors, primarily responsible for the continuation of the practice.
The responsibility of the financial services managers had to be judged against this background. They were operating with Mr. D’Arcy’s tacit approval according to the inspectors.
It was in such circumstances that the Director had sought a disqualification order against Mr. D’Arcy.
Having considered the relevant statutory provisions the court noted that the onus was on the Director to satisfy the court that the necessary conditions prescribed were assisted by the attitude adopted by Mr. D’Arcy who made it clear that he did not wish to contest the application. Indeed, he consented to his disqualification order being made. Nonetheless, as the power given to the court was a discretionary one, the court was satisfied that the statutory conditions had been met and the onus of proof discharged by the Director.
The point regarding whether “manager” was included in the definition of “officer” was not argued and the court did not propose to make a finding on the issue since it was not necessary. Mr. D’Arcy was clearly covered by one of the other provisions relied upon by the Director. The practice had gone on over a long period and the sums involved were very large. Mr. D’Arcy was in the upper echelons of bank management, just one remove from the top level of management. An extremely serious element of the conduct was that all of it was taking place within a bank. The court held that banks were not just ordinary corporate entities, of the type that the court had to deal with in the various cases, but occupied a special position in society being licensed to carry out financial transactions. In this regard the court held:
“The edifice of banking is built on a foundation of trust. On the inspectors’ findings there was a breach of by dishonesty on the part of the bank in the operation of the CMI policy. The operation was carried out over a period of years in a deliberate fashion. The inspectors held that Mr. D’Arcy could have stopped the practice but he did not do so. They held him primarily responsible for the continuation of this practice.
This is demonstrative of a lack of commercial probity on his part. I am of the opinion that the Director has proved that the conduct of Mr. D’Arcy as found by the inspectors was such as to make him unfit to be concerned in the management of a company. I therefore propose to accede to the application to make a disqualification order under section 160(2)(e).”
Having considered the disqualification orders under s. 150, restriction orders and the assistance derived from previous cases the court was of the opinion that the appropriate period of disqualification should be one of twelve years. The court was satisfied that it must have, as the Director had urged upon him, a deterrent element. The court was satisfied that Mr. D’Arcy should be given credit for the approach which he had taken to the Director’s complaints. He was entitled to allowance for the fact that he indicated from the outset that he would not contest the application and, in fact, consented to the disqualification order being made. In those circumstances he was satisfied that the approach was a mitigating factor and that the disqualification period should be reduced by two years.
11.8 In Director of Corporate Enforcement v. Collery (Unreported, High Court, Finlay Geoghegan J., 9th March, 2006) an application was made in relation to the report of the inspectors appointed to inquire into the affairs of Ansbacher (Caymen) Limited which was published by order of the court made 24th June, 2002.
In that case the Director relied exclusively on the content of the report and submitted that certain findings and conclusions therein established, as a matter of probability, that Mr. Collery was guilty of a serious lack of commercial probity, in relation to the affairs of the company under investigation, such that it made him unfit to be concerned in the management of a company within the meaning of s. 160(2)(e) of the Act of 1990. Mr. Collery did not contest any of the findings, nor seek to dispute the contents of the report.
Ms. Justice Finlay Geoghegan referred extensively to the judgment of Kelly J. in Director of Corporate Enforcement v. D’Arcy. References to the extracts of the report were made.
The conclusions of the inspectors as set out at p. 207 of their report were as follows:
“The Inspectors have concluded that there is evidence tending to show that after Hamilton Ross took over the memorandum accounts in late 1992/early 1993 Mr. Collery:
(a) knowingly assisted Hamilton Ross in its unlicensed banking activities in Ireland;
(b) knowingly assisted Hamilton Ross in its breaches of sections 352, 353, 355 and 357 of Part XI of the Companies Act, 1963
(c) knowingly assisted Hamilton Ross in evading tax due on its own activities;
(d) knowingly assisted Hamilton Ross in carrying on business in this jurisdiction in such a manner as to defraud creditors (that is, the Revenue authorities) or other persons.”
In relation to the Ansbacher business after the death of Mr. Traynor (whom Mr. Collery had succeeded) the inspectors conclude that the Ansbacher business was reducing at that stage but concluded at p. 209:
“To the extent that Ansbacher continued to act illegally during this period, Mr. Collery has a residual responsibility. The Inspectors are mindful of the difficult circumstances created by the death of Mr. Traynor in this period of running down of the Ansbacher operation. Mr. Collery in this period, in view of his experience, was or ought to have been fully aware of all the wrongs of Ansbacher’s Irish operation.”
The Inspectors state that Mr. Collery received substantial sums from Hamilton Ross after the death of Mr. Traynor. They concluded that Mr. Collery, as an experienced banker and businessman, must have been aware of the nature of the business being carried out by Hamilton Ross after the death of Mr. Traynor.
The court held that the conduct of Mr. Collery in the period of 1991 to 1997, in relation both the Ansbacher and Hamilton Ross, as found by the inspectors was such as to make him unfit to be concerned in the management of a company.
The principles applicable to determining the appropriate period of disqualification were considered as follows:
(1) The primary purpose of an order of disqualification is not to punish the individual but to protect the public against future conduct of companies by persons whose past record has shown them to be a danger to creditors and others.
(2) The period of disqualification should reflect (in relation to an order under s. 160(2)(e)) the gravity of the conduct as found by the Inspectors which makes the respondent unfit to be concerned in the management of a company.
(3) The period of disqualification should contain deterrent elements.
(4) A period of disqualification in excess of ten years should be reserved for particularly serious cases.
(5) The court should firstly assess the correct period in accordance with the foregoing and then take into account mitigating factors prior to fixing the actual period of disqualification
Applying those principles the court concluded that the appropriate period of disqualification before taking into account any mitigating factors should be one of twelve years, on the basis of the serious nature of the conduct and the considerable experience that Mr. Collery had in banking.
The inspectors had stated that “Mr. Collery had assisted the inspectors with promptness and courtesy in difficult circumstances”. He had not sought to put any evidence before the court as to the impact of an order for disqualification on him. Accordingly, the court reduced the disqualification order by three years.
11.9 Counsel for Mr. Seymour contended that disqualification affected the constitutional right to earn a livelihood. It accordingly raised an important question regarding the balance between enforcing standards of corporate governance and that right.
The court believes that sub-section (8) of s. 160 provides a remedy to ensure that right is not denied even where it is subject to the court. Moreover, being a director is only a mode of earning a livelihood and not a trade, vocation or profession.
The case against Mr. Seymour is based not alone on the findings and opinion of the inspectors but also on the evidence given in cross- and re-examination.
Counsel had also claimed that the Inspectors were expressing an opinion and not making findings of fact where, at p. 75 of the Inspectors’ Report it is stated:
“In the opinion of the Inspectors these audit reports pointed to the likelihood that non-resident accounts referred to therein were in fact bogus. In addition, the extent of reported documentary non-compliance was on such a scale …”
The court does not agree with the submissions on behalf of Mr. Seymour that the Inspectors only expressed an opinion rather than making findings of fact. The reference at p. 175 is not sufficient, in itself, to dissuade the court regarding the finding s of the Inspectors. Even in that instance the use of the word “opinion” does not seem to me to resile from a finding of fact. Accounts were bogus, though that expression was not used in the audit reports. Nonetheless, it was clear from the audit reports and, indeed, from the evidence of Mr. Seymour himself, that there was a systemic problem in relation to compliance with the 1986 Finance Act which continued beyond the meeting of February 1995 and the subsequent S.11 circular.
11.10 Counsel for Mr. Seymour distinguished between corporate breach and personal fitness of a director on the basis of lack of commercial probity. This must involve gross incompetence which persuades the court that it would be a danger to the public if the director were to be allowed to continue. He referred to Hoffman J. in Dawson Print Group Ltd.. Ordinary commercial misjudgement does not constitute unfitness (Lagunas Nitrate Company per Lindley M.R.). In Landhurst Leasing the distinction was made between the duty of the board and of each individual director who might not be charged by the board to procure financial controls but has struggled to introduce them as Mr. Seymour did.
The court recognises those efforts. However, as Executive Director he had an overall duty to ensure compliance. It was not unrealistic to take steps to ensure that the bank became compliant within the period of over two years while he was in control. His actions did not, in fact, resolve the problem.
The court acknowledges that Mr. Seymour’s evidence was not evasive nor did he rely to the same extent as Mr. Baker did in Barings, on an internal audit report as a tabula in naufragio during the latter’s three years as director of that bank.
In Sevenoaks Dillon J. said that the Official Receiver cannot automatically treat non-payment of any Crown debt as evidence of unfitness of the directors. It was necessary to look more closely to see what the significance of such non-payment was. It is clear in the present case that the non-accounting for DIRT resulted in a significant settlement to the Revenue and led to an investigation of the Bank.
Counsel for Mr. Seymour had submitted that the internal audit reported to the non-executive Board who were exonerated by the Inspectors as were the auditors.
11.11 The knowledge, follow-up and control rested particularly on Mr. Seymour and not with the former bodies. He was in a position to require compliance.
When asked how long did it take to solve a problem in a bank where the branches were failing to comply with their legal obligations Mr. Seymour answered:
“At a stroke in terms of the collection of DIRT. Because you can recategorise the account. And several branch managers were doing just that, as was brought out in certain audit reports. And the circular (of February, 1995) was specific in that regard.”
He added that the mere attention to retrospective tax liability would not have solved the documentation deficiencies as there would have been ongoing issues but it would have provided a better focus. He regretted that they had not done that. He contended that the circular addressed past and future problems and had the instructions been adhered to to the latter, the totality of the tax problem would have been resolved.
Mr. Brennan had, however, alerted Mr. Seymour to the question of tax evasion in February, 1995. Mr. Seymour’s response was inadequate and systemic problems post-dated circular S. 11 after meeting in February 1995.
Mr. Seymour failed to make enquiries that any reasonable chief executive would have made knowing what he knew and bearing in mind the very significant and important responsibilities which the Bank had under the provisions of the 1986 Act.
Counsel submitted that Mr. Seymour was making strenuous efforts in the difficult circumstances to resolve the increasing problems that were dawning upon him during his tenure. He was broadly complying with his obligations under the Companies Act and acted with a degree of commercial probity.
It seems to the court that, broadly complying with obligations under the Companies Act is too narrow a test. This is particularly so in relation to persistent non-compliance. More importantly, in relation to an investigation by the Court the conduct of the directors may be looked at in relation to all legal compliance, including compliance with the Finance Acts and legislation generally. The courts are entitled to look into all the circumstances of the conduct within the particular business.
Moreover, there is clearly no requirement that the company becomes insolvent as a result of the director’s conduct. Nor, indeed, is it necessary that the director’s conduct involves the commission of wrongdoing. Non-feasance in relation to systemic non-compliance may be sufficient. The clear evidence was that Seymour did know of the recurrent problems and, at least in respect to the bogus non-resident accounts could have re-designated these, accounted for the DIRT unpaid and disciplined senior and branch management for non-compliance. The failure to do so is, in the opinion of the court, a lack of a proper standard of conduct.
The same would appear to apply to the other areas identified by the Inspectors which could have been resolved by the repayment of these improperly charged and by the cessation of the practice whereby bogus non-resident accounts were transferred into CMI policies.
It was remarkable that Mr. Seymour did not communicate to the Audit Committee nor to the board the extent of these failures and the potential liability of the bank to the Revenue. It is, in the view of the court, not an answer that he was making a strenuous effort in the difficult circumstances to resolve the increasing problems that were dawning upon him during his tenure. Neither is it an answer to say that the problem was endemic in Irish banking nor, indeed, that taxation matters were dealt with outside the Bank. No advice was sought in relation to potential retrospective or continuing liability.
It is clear from the decisions in D’Arcy and Collery where, notwithstanding that the applications were not contested, nonetheless were examined in detail by the courts, that a failure to comply with legislation by a person who had responsibility and who could have resolved issues of non-compliance, is sufficient to justify disqualification.
Moreover, even where a disqualification order is made a respondent can, of course, apply to the court under sub-s. (8) of s. 160 for an attenuated order. The issue raised by counsel for Mr. Seymour at the opening of his submissions related to the constitutional right to earn a livelihood and to one’s good name. It is clear that an order made under s. 160 is not penal in nature – it is not a criminal sanction nor a determination of liability in respect of any losses that accrued to members, creditors or the regulatory authorities – but an indication of a lack of commercial probity in relation to the management of a company.
11.12 The court is of the opinion that the appropriate period of disqualification before taking into account any mitigating factors should be one of twelve years given the serious nature of irregularities which were allowed to continue and the senior position of Mr. Seymour. The court is also mindful of the deterrent element of such a disqualification period.
The court notes that while in the actual hearing Mr. Seymour did not contest the findings of the inspectors, nonetheless in terms of the correspondence and the affidavit of Mr. Seymour, certain matters were in issue which required extensive evidence on affidavit. The court acknowledges the efforts he made in attempting to resolve the issues of non-compliance. The court noted the courtesy and politeness of Mr. Seymour and his frankness in relation to the hearing. The court has considered his age, his retirement and his non-involvement in banking or any commercial activities. In the circumstances the court decides that the proposed disqualification order should be reduced by three years.
Kentford Securities Ltd (under investigation) v Companies Act
[2007] IEHC 1 (23 January 2007)
Judgment of Mr Justice Michael Peart delivered on the 23rd day of January 2007:
In this application the applicant seeks a disqualification order under s. 160(b) and s. 160(d) of the Companies Act 1990 (“the 1990 Act”) in respect of the respondent, such an order being defined in section 159 thereof, as far as is relevant to this application as being “an order under this Part that the person against whom the order is made shall not be appointed or act as an auditor, director or other officer, receiver, liquidator or examiner or be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company, or any society registered under the Industrial and Provident Societies Acts, 1893 to 1978 ….”.
The provisions of s. 160 relevant to the present application provide as follows:
“160. – (2) Where the court is satisfied in any proceedings or as a result of an application under this section that –
(a) ………
(b) a person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company of any breach of his duty as such promoter, officer, auditor, receiver, liquidator or examiner; or
(c) ………, or
(d) the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company; or
(e) …….., or
(f) ………
the court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.”
The respondent qualified as an accountant around 1988, and has subsequently acted as an auditor and director of many companies as part of his employment by what is commonly referred to a company secretarial company or company formation company. In later years he acted, and continues to act, as an auditor to client companies following setting up his own accountancy practice. A disqualification order in such circumstances would have the gravest consequences for the respondent since it would prevent him earning his livelihood as an auditor to client companies, as well as attaching to him the inevitable and serious stigma which will attach to him professionally as an accountant and auditor against whom such an order has been made.
The application by the applicant is grounded upon a number of affidavits, and the respondent has filed two replying affidavits, upon which he was cross-examined at the hearing before me.
Background:
On the 9th June 1998, an authorised officer, Gerard Ryan, was appointed by the then Tánaiste and Minister for Enterprise, Trade and Employment to examine the books and documents of Kentford Securities Limited (hereinafter referred to as “Kentford”).
Kentford had come to attention when the authorised officer appointed to examine the books and documents of Irish Intercontinental Bank Ltd reported that he was satisfied that officers or agents of the company may have committed unlawful acts relating to a certain scheme of tax evasion involving the so-called Ansbacher accounts, controlled by the late Des Traynor. It was the view of the authorised officer appointed to examine the affairs of Kentford that the company was one primarily used by Mr Traynor during the period 1989-1994 to facilitate cash withdrawals by his friends and business associates from the Ansbacher deposits held in Ireland for the benefit of a small number of persons here.
He reported also that the Kentford bank accounts appear to have formed part of the Ansbacher secret ledger maintained by Mr Traynor, and that during the relevant period a sum in excess of IR£2.27 million passed through these accounts.
It appears that shortly after his appointment as authorised officer, Mr Ryan wrote to the respondent seeking production of any books and records of Kentford which he may have in his possession and to state where the remainder might be located. The respondent was written to as the records showed the respondent to have been the auditor of Kentford and a former director. It appears that the respondent replied that he had no books and documents in his possession and suggested that these would have been held by the late Des Traynor.
The report of the authorised officer dated 16th September 2002, a very lengthy document, states at the outset on page 3 thereof:
“The available documentation, and the explanations offered by various former officers point to Mr Desmond Traynor as having had total control of Kentford Securities Ltd. The circumstances suggest that he used Kentford Securities Ltd as a vehicle for withdrawing monies from and paying monies into the Ansbacher deposits, on behalf of Irish resident individuals and companies thereby facilitating the evasion of taxes by those individuals and companies. In this he was assisted by Ms. Joan Williams. The circumstances suggest that Mr Des Traynor and Ms. Joan Williams were knowingly parties to the carrying on of the business of Kentford Securities Ltd with intent to defraud the creditors of other persons, namely the Revenue Commissioners, which constitutes an offence under Section 297 (as amended) of the Companies Act 1963.”
There is no suggestion made on the present application that the respondent made any improper financial gain from his involvement with Kentford either as its auditor or as a director. But a number of matters are said by the applicant to constitute conduct as an auditor of such seriousness as to merit disqualification from holding such a position for such period as the Court would consider appropriate. The respondent has sworn in his affidavit dated 4th April 2006 that the first occasion on which he became aware that Kentford had any connection to the so-called Ansbacher accounts was when he heard it emerge at the Moriarty Tribunal, and that he was never part of any scheme to defraud the Revenue Commissioners and that at no time had he any intention of committing any wrongful act. I accept what he states in this regard.
Firstly, it is submitted by the applicant that the evidence is that the respondent acted as auditor of Kentford while still a director thereof – something which is prohibited by s. 163 of the Companies Act 1963.
Secondly, it is submitted that his resignation as a director of the company appearing to be as of the 14th March 1989 is a contrivance designed to mislead persons into believing that when he was acting as auditor of the company he was not doing so in breach of hat section. Put more bluntly, it is suggested that his resignation as a director was deliberately back-dated to make things appear in order. The Notice to the Companies Registrar notifying this resignation and change of director is dated 13th April 1992, and was filed in the Companies Registration Office on the 14th May 1992. The applicant maintains that the respondent was in fact a director until May 1992, and that the paperwork has been backdated in order to make things appear to be otherwise.
In relation to this, the applicant submits that even if the resignation is proper and valid, the respondent held himself out at various times after the 14th March 1989 to be a director, when he signed some bank mandates and other bank documents in which he has described himself alternately as director, authorised signatory, and Chairman.
Thirdly, it is submitted that the evidence is that the respondent as auditor issued unqualified auditor’s reports on Kentford’s financial statements for four successive years, namely the years ending 31st March 1990, 1991, 1992 and 1993, and that he knew or ought to have known, as auditor, prior to making those unqualified reports that the impression given by the statements that the company was a dormant company showing assets and share capital of IR£2 each was false and misleading since there were large transactions going through the company’s bank accounts, and that there were balances held in those accounts. In issuing such unqualified reports in such circumstances, it is the view of the authorised officer that the respondent committed offences under s. 22(3) of the Companies (Amendment) Act 1986 and s. 242 of the Companies Act 1990, and that by so doing he facilitated the defrauding of the Revenue Commissioners.
This Report by the authorised officer states also that the respondent stated to him that he had at all times accepted Mr Des Traynor’s assurances to him that Kentford was a trust company which did not trade and which had no assets or liabilities in its own right, that he is of the view that the accounts give a true picture, that his audits were of an acceptable standard at all times and that he had no knowledge that the company was being used as a vehicle for tax evasion. The authorised officer does not accept these assertions by the respondent.
Fourthly, it is believed that the respondent submitted to the authorised officer a forged document to support his assertion that he had been assured by Mr Des Traynor that Kentford was a trust company only with no assets or liabilities. The document itself is in the form of a letter on Mr Traynor’s office note-paper addressed to The Directors, Kentford Securities Limited, 3 Trinity Street, Dublin 2, and is signed by Mr Traynor and bears the date 23rd January 1990. It states as follows:
“Re: Preparation of Annual Accounts
I understand that it is now necessary to file accounts with the Companies Office when making an annual return.
I would appreciate if you could arrange for accounts to be prepared in respect of the year ended 31st March 1990.
Kentford Securities Limited is a trust company and as such does not trade and does not hold any assets or liabilities in its own right. I would appreciate if you would instruct the auditor accordingly.
If the status of this company should change at any time in the future I will inform you.
Yours sincerely,
J.D.Traynor”
A fatal flaw in this letter, and which totally undermines its integrity, is the fact that the headed notepaper on which it is printed bears a seven digit telephone number, and it is an undisputed fact that the number in question was changed to seven digits only in April 1993, and accordingly this letter could not have come into existence until after that date. The respondent accepts this fact, but denies that he played any part in the creation of the letter, and that he relied upon it in good faith and handed it over to the authorised officer in good faith. The applicant herein is not alleging that the respondent created the document, but he does not accept that the respondent acted in good faith in relying upon it. The respondent on the other hand states that the letter in any event states in writing only what he himself had been assured of verbally by Mr Traynor, namely that Kentford was a trust company only. He has stated in his affidavits sworn on the 4th April 2006 that if the letter was indeed backdated, it was backdated by Mr Traynor and not by him.
An important fact in the overall background to the present application is that Mr Des Traynor died in the month of May 1994.
The respondent is now aged forty eight years. He qualified as an accountant in about 1988 and had been employed in 1987/1988 in a junior capacity by Mr Sam Field Corbett in a company called Chartered Secretarial Company (“CSC). He remained with CSC in an employed capacity, but also had his own accountancy firm which he registered as a business at that time. He has stated that it was part of his business plan that persons who dealt with CSC for company secretarial matters might be approached by him so that he could act as auditor and provide accountancy services. This would appear to me to be an obvious opportunity to acquire clients for his new practice.
CSC provided company secretarial services to Kentford at all times, according to the respondent’s affidavit dated 6th April 2006. The respondent would have been in his late twenties at this stage. He has stated in his affidavit that Kentford was just one of a very large number of companies to which CSC provided secretarial services.
It is well known to me that at this time it was customary for the staff of companies such as CSC to be named as shareholders and directors of companies which were formed by them, many of which I suspect, as was common at the time, were held as so-called “shelf-companies”, and which could be bought ‘off the shelf’ by individuals wishing to form incorporate themselves, rather than starting from scratch the process of forming a company themselves, completing all the paperwork and so forth. Upon such a purchase, the staff members would sign a form of resignation as director, and would sign also a share transfer form in respect of the two subscriber shares normally held in such cases by them. The new owners of the company would then have to file a Notice of Change of Directors in the Companies Office, and the first Annual Return would reflect the transfer of shares from the subscribing shareholders to the new owners of those shares. This was a useful service to the legal profession and the business community at the time, and, for all I know, remains so. But it undoubtedly involved and had to involve a scant regard for strict compliance with the statutory obligations regarding returns and forms generally. I have no doubt that the respondent is correct when he swears, as he has done, that “it was the practice of Mr Field Corbett to obtain and maintain on file undated signed letters of resignation and share transfer forms for members of staff who acted as nominee directors”, and that “this was done in order to avoid a situation where a member of staff might leave his employment without such documentation being available.”
I mention this feature of those times because there is no doubt in my mind that the respondent finds himself facing an application for his disqualification at least partly because of the fact that it was, as he has stated in his evidence, commonplace for staff to be appointed as directors and to resign as required, and I have no doubt that this culture of signing perhaps in advance or perhaps in arrears by backdating, whatever forms were required or requested to be signed by their employer so that the business of selling shelf companies could function speedily and conveniently, spread beyond documents such as appointment and resignation of directors and share transfer forms, and included in the case of the respondent such forms as he was asked to sign by either Mr Field Corbett, his employer, or indeed Mr Traynor directly. It seems uncontroverted that these two men enjoyed a close working relationship. The respondent has stated in his evidence that he was always aware that Kentford was a Traynor company. He has stated also that Mr Traynor was in the offices of CSC on a regular basis and that he was a man of great standing and importance in the office, and I am satisfied that a person such as the respondent, a junior figure in the organisation, would certainly do as he was asked to do by either of these men and without asking questions. I also accept having heard his evidence in cross-examination and having considered his affidavit that he never was aware that anything illegal was taking place in relation to Kentford, or even what the nature of the company’s business activity.
Having said this, I am not for one moment saying that such a practice of signing blank forms and/or backdating documentation is or was acceptable practice. It never was, but it was a feature of the time, and the respondent was caught up in it as a result of his employment in such a company. It accounts for the fact that it has come about that the respondent has signed auditor’s reports for years during which he also still remained a director – at least on paper. I believe that, perhaps unwittingly on account of the matters to which I have adverted in the previous paragraphs, the respondent acted as an auditor at a time before he had in fact resigned as a director, and I am satisfied that the resignation as of the 14th March 1989 has been contrived by the filing in 1992 of a Notice of resignation retrospective to the 14th March 1989. This is fully in keeping with the sort of practices to which I have referred earlier, and I have very little doubt that this is what has happened. The respondent during the course of this application has corresponded with Mr Field Corbett and his daughter who are residing now in the Isle of Man, and he has sought from them and obtained letters which he has exhibited and in which each confirms that he resigned in March 1989. I do not accept that such letters enable the respondent to escape the conclusion that he failed to resign when he says he did. I have no reason to place any faith in the corroborative value of such letters.
I am satisfied that the reality is that at the time that the respondent signed the auditor’s report for the years 1990, 1991, 1992 and 1993, he had not in fact signed any form of resignation as a director, but on the balance of probability this was not a deliberate or conscious breach of the law. I am satisfied that in line with the lack of attention to the importance of form filling which was a feature of the firm with which he was employed, he did not pay attention or attach importance to the requirement that he should not do any act as auditor of the company while not having formally resigned as a director. I have no doubt that he arranged for some backdating of documentation in order to correct the paper record. He certainly signed bank documentation for Kentford in his capacity as a director, chairman and authorised signatory during the years for which he acted as auditor. His explanations and attempts to explain this away are unconvincing. It occurred as a consequence of the culture in which he was immersed during these years where anything required to be signed by him, or that he was requested to sign by his employer or Mr Traynor was signed without any consideration being given to such documents by him. This would have been so commonplace in his working life at the time that I doubt very much if he was always aware of what he was signing.
I do not intend to set out all the detail of the complaint made by the applicant and the authorised officer in his report as to the many ways in which the respondent failed in his duty as an auditor. Nor do I intend to set out in any detail what the respondent says in response both in his affidavit or under cross-examination. These matters are set out in those affidavits and in the transcript of the cross-examination before this Court. But I am also satisfied that the respondent failed in his duty as an auditor of Kentford by signing unqualified reports on the financial statements for the years in question. He has stated that he accepted assurances given to him by Mr Traynor that Kentford was a trust company, but even if that is true he ought not to have simply accepted that assurance as the basis for his audit. He was required to do more, and to pro-actively satisfy himself from an examination of the bank accounts and books and records of the company that what he was told was in fact the situation. The purpose and obligations of an auditor are not fulfilled by the mere going through the motions of signing off on a company’s financial statements in the same manner as he may have signed blank forms of resignation as director already referred to, without actually doing anything to verify the true position.
In relation to the letter from Mr Traynor dated 23rd January 1990 which manifestly was backdated so as to support the respondent’s assertion that he was at all times made aware that Kentford was a trust company, I am satisfied that this fabrication was not perpetrated by the respondent. That is not the allegation made by the applicant. The allegation is that he submitted it to the authorised officer knowing that it was a fabrication, and that his assertion that he acted in a bona fide way in relation to this document is false. I am satisfied on the balance of probability that the respondent must have been aware that this letter was backdated. For such a thing to happen would have been nothing unusual in the working life of the respondent. It was commonplace for documents of all kinds to be backdated, signed in blank and so forth, and this document would have been no different. I cannot accept that the respondent acted bona fide in relation to this letter when he handed over a copy of it to the authorised officer. But I would accept, again as a matter of probability, that he was never aware of the illegal nature of Kentford’s activity. As I have already referred to, I am satisfied that he failed in his duty as an auditor by not looking behind whatever assurances that he was given as to the trust nature of the company.
In respect of all the matters about which the applicant makes complaint against the respondent, I find against the respondent. But central to the Court’s decision not to make the order sought is the fact that the matters complained of occurred so long ago between 1988 and 1994 and when the respondent was an employee in CSC, and starting when he was a very recently qualified accountant. It is also important to bear in mind that the respondent made no financial gain from the illegal activity of Kentford, even if his failure to observe proper standards as an auditor facilitated the scheme of tax evasion of which he was not aware. One cannot escape the conclusion that the respondent was at the time a very small and insignificant cog in the larger wheel being turned by Mr Des Traynor. It is he and his friends and acquaintances involved in the tax evasion scheme who were the beneficiaries of the respondent’s undoubted naivety, lack of attention to his responsibilities, and carelessness at the time.
Since those times, the respondent has been engaged upon developing his accountancy practice. A great deal of his work involves acting as an auditor to company clients. His professional body has conducted audits of his practice and for all practical purposes he has a clean bill of health from that body in respect of the years for which he has been audited by that body. There are also testimonials from worthy individuals who are clients of his.
As I have already referred to, the consequences of a disqualification order being made against an accountant in private practice are devastating. The effect is worse even that the restriction of a director under s. 150 of the Act. In that case the director restricted can still pursue his livelihood by trading other than with the benefit of limited liability. In the case of the respondent, being an accountant in private practice, this is not the case, certainly as far as audit work is concerned. His capacity to earn his living from his chosen profession would be seriously compromised, and the Court must balance such consequences against the legislative intention that the public should be protected from auditors who have fallen short of the standards expected of such an important profession in the commercial life of the country.
The purpose of an order under s. 160 of the Act is not punitive in nature, but rather protective of the community. The fact that the Court is satisfied that the respondent during the years in question failed to conduct himself in a manner that was proper and responsible, is not something for which the Court must inflict a punishment. That is not the Court’s function under the section. The only function of the Court is to, where necessary, and for such period as the Court might consider necessary, prevent a respondent from acting as an auditor or other officer of a company, where the evidence is sufficient to demonstrate that as a matter of probability that the person in question would present a current risk to members of the public who may be adversely affected.
Under s. 160 the Court has a discretion whether or not to grant the order, even where findings of fact are made which are consistent with the respondent being guilty of a breach of his duty as auditor, and/or that his conduct makes him unfit to be concerned in the management of a company. It is important to note the use of the present tense in relation to unfitness to be involved in the management of a company. That is relevant in the present case where the conduct complained of and found to have occurred, did so between twelve and eighteen years ago. The question to be considered is whether at the time of this application the past conduct makes him presently unfit to be so involved. The reason for this being so is, as I have just referred to, that the section’s purpose is not to punish the respondent, but rather to ensure as far as possible that members of the public are protected from harm. If the respondent is not now somebody against who the public should be protected, then the Court ought not to make the order sought, even if the matters alleged to give rise to disqualification have been established, as they have in this case.
I have had the undoubted benefit of observing the respondent in the witness box. I have listened carefully to the manner in which he dealt with a close and exacting cross-examination by Mr Murray. I have re-read the transcript of that cross-examination, and considered it carefully. I have concluded that whatever shortcomings there may have been, and there were many in my view, in the manner in which the respondent dealt with questions asked of him by the authorised officer at interviews conducted in March 1999, September 2001 and February 2002, he was at last forthcoming as to the reality in which he finds himself facing an application of this kind. His answering of some of the questions put to him during these interviews could be characterised as vague and even at times evasive, and did not display the same candour which was evident to me during his cross-examination on his affidavits. Some of his answers during interview attempted to answer the unanswerable or justify the unjustifiable, but what emerged during his cross-examination was a situation which I am satisfied represents the reality, and that is the scenario where it was accepted and normal practice in an office of the kind in which he was employed that forms of all kinds would simply be filled in and signed as required, and without thought as to the sort of consequences which have become apparent. It would in my view have served the respondent better if at interview he had been more open in that respect, rather than try and justify what had happened.
I have concluded that whatever irregular and improper conduct he was mixed up in all those years ago at the behest of his employer and Mr Traynor is a thing of the past, and that the experience of being caught up in other peoples’ deceptions and illegality has been a chastening one for him and one to which he will never risk returning. His activity as an auditor and accountant since those days has been the subject of scrutiny by his professional body and he has been found to be of good standing, and has a clean bill of health, albeit that some fairly minor shortcomings were identified at audit, and which have been addressed by him. I believe that he does not currently present a danger from which the public ought to be protected, and in such circumstances it is appropriate that inspite of the findings of fact against the respondent the Court should exercise its discretion in favour of refusing the order sought. The position would be completely different if it were found that in more recent times he had engaged in or was engaging in the sort of unacceptable behaviour which was part and parcel of his working life in the years referable to this application.
Kentford Securities Limitied (Under Investigation) Companies Act
[2006] IEHC 57 (07 March 2006)
Judgment of Mr Justice Michael Peart delivered on the 7th day of March 2006:
For the purpose of this judgment I shall refer to the Director of Corporate Enforcement (“the Director”) as the respondent, since the Court is dealing with a motion to dismiss the application by him to disqualify Mr McCann, and I shall refer to the latter as the applicant.
In the substantive application which is the subject of the within proceedings the respondent seeks an order pursuant to s. 160(2)(b) and/or s. 160(2)(d) of the Companies Act, 1990 declaring the applicant to be disqualified from being appointed or acting as an auditor, director or other officer, liquidator, receiver, examiner or to be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company or any society registered under the Industrial Societies Act 1893 – 1978 for such period as the Court may think fit.
Such an order is sought arising out of certain alleged acts and conduct by the applicant while he acted as auditor of Kentford Securities Limited (“the Company”) during the years 1990, 1991, 1992 and 1993. In addition there is an allegation of forgery of a certain letter to which I shall refer in more detail at a later stage. I will come to all the allegations in more detail in due course.
The present matter requiring adjudication by the Court is an application by the applicant that the application for the order of disqualification against him be dismissed now on the grounds of excessive delay, and/or for want of prosecution on the basis that the delay has been inordinate and inexcusable. That is what appears in the Notice of Motion dated the 6th May 2005 in which the reliefs are set forth.
But Patrick Hunt BL on the applicant’s behalf has conceded that he is not in fact in a position to put forward an argument that there has been inordinate and inexcusable delay by the respondent in the prosecution of these proceedings post-commencement, and confines his arguments to pre-commencement delay, and the prejudice which he submits has resulted to the applicant as a consequence thereof. It is therefore a case which comes, not within the well-known Primor principles as to delay post-commencement, but rather within principles in O’Domhnaill v. Merrick [1984] IR 151, and as followed in Toal v. Duignan [1991] ILRM 135.
Factual background:
An authorised officer, Gerard Ryan, was appointed to exercise the powers conferred by s. 19 of the Companies Act, 1990, and having done so produced a Report into the affairs of the Company, which in due course came to the attention of the Director. It is stated in the first affidavit sworn to ground the substantive application for a disqualification order, that “it is clear from the Report that the Company was used by Des Traynor during the period 1989 – 1994 to facilitate cash withdrawals by certain persons from Ansbacher (Cayman) Limited deposits … held in Ireland”.
It was reported also that although the financial statements and balance sheets of the Company for the period referred to disclosed only that the Cash in Hand was £2 and that the Called Up Share Capital was also £2, the reality is that approximately £2.75 million passed through the bank accounts of the company which were effectively controlled by the said Des Traynor, and that these accounts were used in order to facilitate the evasion of taxes by those persons for whom the Company was used as a vehicle to withdraw Ansbacher Deposits.
The applicant was appointed a director of the company on the 9th March 1988. There is some dispute as to the date on which the applicant resigned as a director of the company, but there is a return filed in the Companies Registration Office which shows him as having resigned as of March 1989. However, the respondent points to the fact that this return is dated 13th April 1992 and filed on the 14th May 1992 – this date being also the date on which annual returns were filed in respect of the years 1989-1991 and the date on which the abridged financial statements for the years ending 31st March 1990 and 1991 were filed. The clear implication to be drawn is that the respondent believes that the return has been completed so as to show a date of resignation which is earlier than the date on which the applicant actually resigned.
The significance of that dispute as to the date on which the applicant resigned is that the applicant has asserted at all times that he was first appointed as auditor of the Company for the year ended 31st March 1990. In order to be the auditor to the Company, the applicant would have had to have ceased to be a director. In support of his submission in the substantive application that the applicant herein has not been truthful about the date of his resignation as a director, the respondent has exhibited a number of documents which postdate the applicant’s appointment as auditor, and in some of which he is described as “director”, and others as either “authorised signatory”, “Chairman” or “Chairperson”. These documents comprise bank mandates and facility letters. It is alleged that all but one of these documents was signed on a date which precedes the date of filing of the return in the Companies Office on the 14th May 1992.
The respondent alleges also that the auditor’s reports attached to the financial statements do not give a true and fair view of the state of the company, despite a statement by the auditor therein that they do. The respondent points also to the fact that even though the applicant has stated when interviewed that he saw no books of the company, the auditor’s report states that proper books of accounts had been kept by the Company and that financial statements were in agreement with the books.
It is also alleged that the applicant has been guilty of forgery in that he produced to the authorised officer appointed under s. 19 of the Companies Act 1990 a letter from the said Des Traynor, purporting to be signed by him and to be dated 23rd January 1990, but which contained at the top of the letterhead thereof a telephone number which has been shown to be a number which came into existence only after the date appearing on that letter. The letter purports to assure the directors of the company that the company was a trust company and that, as such, did not trade and did not hold any assets or liabilities in its own right. This letter is said by the applicant to be the basis for the financial statements and balance sheets filed showing it to be a £2 company, rather than a trading company with £2.75 million passing through its bank accounts, and that he at all times relied upon the assurances of Mr Traynor that the company was a trust company. The allegation that the applicant has fabricated this letter is hotly denied by the applicant. It is the respondent’s belief that this letter could not have come into existence until after the financial statements were filed in the Companies Registration Office for the year ended 31st March 1991.
It is also alleged by the respondent that apart altogether from the question of reliance upon assurances from Mr Traynor as to the status of the Company, the audit of the company’s as carried out by the applicant for the years in question was clearly deficient in a number of ways, including arising from the fact that the applicant has stated to him that there was a possibility that the auditor’s report on the financial statements for the year ended 31st March 1990 was not signed until 24th October 1991 which is the date on which the financial statements for the year ended 31st March 1991 were signed. This is in spite of the fact that the financial statements themselves show that they were signed on the 26th October 1990. There is also a question mark about the date of signing of other such financial statements. The financial statements for the years 1990 – 1993 are said therefore to be inaccurate, and it is contended, in addition, that in a number of respects which I need not detail, the applicant failed to comply with proper auditing standards by not obtaining evidence for his conclusions.
The above summarises adequately for the purpose of this present application the allegations made against the applicant in the substantive application for disqualification, save to refer perhaps to the fact that the applicant has exhibited letters from his professional body purporting to show that he is a member of that professional body who is regarded by it as being of good standing, and who has successfully dealt with practice reviews carried out by that body. The respondent on the other hand, in this regard, suggests that the professional body may not have been appraised by the applicant, of the existence of the report on the applicant on foot of which the present proceedings are based. The applicant on the other hand says in his second affidavit in this application that he has made that body aware of the Report.
The applicant’s submissions as to delay/prejudice:
In his grounding affidavit, the applicant states that he is a Certified Public Accountant having qualified as such in 1987, and that he is therefore qualified to act as an auditor, and has done so since that date deriving a substantial portion from that occupation. He practices under the title McCann and Associates. In his practice he employs two qualified accountants, a company secretary, a trainee accountant and a secretary/receptionist, and he states that he supports both himself, his wife and family from his income from the practice.
He states that the substantive application for his disqualification is “grossly prejudicial” since it is being sought over fifteen years after the alleged first complaint relating to his actions in 1990, and he maintains that the delay is both inordinate and inexcusable, and that it would be unjust to allow the application to proceed. Brian Murray SC on the other hand submits on behalf of the respondent that the first complaint as such made against the applicant was after November 2002 when the Report of the authorised officer was provided to the Office of the Director of Corporate Enforcement, even if the complaints themselves relate back to the early 1990s. He also points to the fact that some of the allegations relate to events occurring in the context of the investigation, such as the production of the said letter dated 23rd January 1990.
The gravamen of the applicant’s claim that he is prejudiced by the delay since 1990 to the date of commencement of the substantive application is that because Des Traynor died in May 1994, he has been deprived of the opportunity to call evidence from him to confirm that the applicant did in fact resign as a director of the Company before he commenced to act as auditor to the Company, and that Mr Traynor was, before he died, in possession of his original letter of resignation as a director. In addition he states that Mr Traynor would have been able to confirm that the applicant had discussions with him on several occasions as to the nature of the Company and that he was assured by him that it was a trust company, holding no assets and having no liabilities. He also submits that Mr Traynor would have been able to verify that he had issued and signed the said letter dated 23rd January 1990, and could have given his reasons for backdating same. He makes the point also that it was Mr Traynor who maintained and had possession of the books of the Company.
Mr Murray, however, submits that the applicant is simply speculating as to what Mr Traynor might have said if he were available to be called as a witness by the applicant. He makes the point also that even if Mr Traynor were to say what the applicant says he would be able to say, this would still not be sufficient to enable the applicant to avoid an order for his disqualification, given the entirety of the complaints and allegations made about how he conducted himself as the auditor to the Company. Mr Murray also makes the point in the context of the delay point that even if the application for disqualification had been launched in, say, 1995, the applicant would still be in the same position as he is today in as much as even then he would have been without the possible benefit of Mr Traynor’s evidence since he unfortunately had died in 1995.
The applicant also submits that it would be unfair to allow the substantive application to proceed in circumstances where the office which the respondent holds, and the functions which he performs, did not come into existence until some ten years after the date of the complaints made against the applicant, namely by virtue of the Companies Act. Mr Murray on the other hand submits that it is not accurate to suggest that the office of the Director did not exist at the relevant time since the date upon which the applicant sought to rely on the said letter dated 23rd January 1990 was February 2002, which is after the date on which that office came into existence pursuant to the 2001 Act. He also relies on the fact that the disqualification sought by the respondent is sought on the basis of statutory provisions in force at the time that the applicant acted in the manner in which the respondent now complains, and he submits that while the respondent himself was not empowered to make the application pursuant to s. 160 of the Act until the entry into force of the 2001 Act, the former Act conferred an entitlement on other entities, such as the Director of Public Prosecution to make such an application. He submits that there is no question of the respondent seeking to apply s. 160 retrospectively to the applicant, or in respect of events pre-dating the coming into force of the 1990 Act.
The applicant states that the effect of an order of disqualification being made in the substantive application would be disastrous for him since he is an accountant in private practice and that he gains much of his annual income from auditing, and the matters to which this particular matter relate go back many years, and against a backdrop where his auditing practice generally has been examined by his professional body in recent times and has been found to be satisfactory.
Conclusion:
As I have already stated, the applicant herein submits that there has been inordinate and inexcusable delay in the commencement of the application for his disqualification, and that he is prejudiced as a result in his capacity to defend the application, and that the consequences of such an order being granted by the Court would be very serious for him given the nature of his practice from which he derives a substantial amount of his annual income from acting as an auditor. It is important that in my conclusions I do not reach any conclusive findings of fact or express views on the facts which might stray into an area to be dealt with on the substantive application. For that reason alone I do not propose to deal in any detail with a number of matters raised on this present application.
I am however satisfied that even though the respondent did not commence his application to have the applicant disqualified under s. 160 of the Act until the 18th March 2005, the Report on foot of which he is proceeding did not come to his attention until November 2002, and that it is only from that date that the Court should consider whether there has been any excessive or unreasonable delay which has resulted in an unfair prejudice to the applicant’s ability to meet the application. It is worth noting that the Act provides no time limit within such an application must be brought. That of course cannot mean that in no circumstances could a person against whom such an application is brought, seek a stay or similar relief such as the present applicant seeks on the grounds of excessive delay, especially where a sufficient case of prejudice to the ability to defend against the application is made out. There must be implied an obligation on the part of an applicant for such an order to proceed with a degree of expedition which in all the circumstances is reasonable. Many factors may interfere with the capacity of the Director to proceed with the application forthwith upon receipt of the necessary information which would ground the application. In the present case, the Director has stated that after the Report of the authorised officer was received, it had to be considered and a decision as to how best to proceed had to be taken. As part of that process it was necessary for him to take legal advice, as well as to commission a report from an auditing expert. That was done and there is an affidavit in this case from such an expert whose extensive report is dated 5th February 2005. The Director commenced his application by way of Notice of Motion dated and issued on the 18th March 2005. That report sets out the work undertaken by that expert before he could arrive at his opinion on the manner in which the applicant herein carried out his duties as an auditor.
The fact that the application by the Director for disqualification relies on matters which are alleged to have taken place many years ago is not something for which the respondent can be held culpable. However, the fact that matters go back many years would, in my view, give rise to a greater need, in the interests of justice, to proceed with all reasonable and possible haste from whatever moment a decision to proceed could be made, and of course from the date of commencement to actual determination. But there is no suggestion in the present case that the application, once commenced on the 18th March 2005 did not proceed other than with reasonable expedition.
In Toal v. Duignan [1991] ILRM 135, there was undoubtedly in the exceptional circumstances of that case an inordinate delay of 25 years or more, though given the circumstances of that case, that delay may well have been regarded as excusable or understandable. Nonetheless the injustice to the defendants of allowing the claim to proceed against them was found by Finlay CJ to be “absolute and obvious” given the length of time since the aged events giving rise to the plaintiff’s claim. In his said judgment, the learned Chief Justice referred to the judgment in O’Domhnaill v. Merrick [1984] IR 151 and stated at p. 139 in that regard:
“In the High Court it was held by Keane J. that the case was governed by O’Domhnaill v. Merrick [1984] IR 151. I am in agreement with that view of the law. It is unnecessary for me to repeat here the principles laid down by this Court in that case, but they may be summarised in their application to the present appeal as being that where there is a clear and patent unfairness in asking a defendant to defend a case after a very long lapse of time between the acts complained of and the trial, then if that defendant has not himself contributed to the delay, irrespective of whether the plaintiff has contributed to it or not, the court may as a matter of justice have to dismiss the action.”
In relation to the present case I am satisfied that the Director has not contributed to the delay, and in fact I am satisfied that there has been no inordinate or excessive delay in the first place. Therefore there is none to be excused or explained by him, although he has explained how it took from November 2002 until March 2005 to commence the application. Even if I am wrong in deciding that the delay in question from November 2002 to March 2005 is not inordinate, I am satisfied that it is explained sufficiently. Furthermore, I am satisfied in any event that the applicant has not discharged the onus, which is undoubtedly upon him, to demonstrate a real prejudice to the extent that it would be unjust to require him to defend himself against the application which is brought, as a result of any delay. Even if one were to count the delay as going back as far as the date of the first alleged act of complaint back in the 1989 -1993 period, I am satisfied that if there is any difficulty presented to the applicant in the matter of resisting the application, it has not been caused by the delay between then and now, since in reality it is the death of Des Traynor in May 1994 which is the source of the alleged prejudice on account of the fact that the latter cannot give evidence which the applicant says would assist him, and because the books of account belonging to the company are said to have been in the possession of Mr Traynor up to the date of his sudden death. In my view, even if one was to conclude that there was inordinate delay to be included in the reckoning back to the early 1990s, there is little or no reality to the suggestion that the death of Mr Traynor has caused the prejudice alleged. There is also the point made by Mr Murray that there could be no circumstances in which the applicant could have reasonably expected that an application could, or even should, have been brought against him prior to May 1994 and that therefore one way or the other the applicant was always going to be without the benefit of whatever evidence of assistance the late Mr Traynor may have been in a position to offer to the applicant facing the present type application. But I emphasise again that in my view the only possible delay in this case which can be laid at the door of the applicant is that from November 2002 until March 2005 and I do not in the circumstances of this case regard that as inordinate or excessive and requiring explanation or excuse, but in so far as an explanation has in fact been provided it is a valid and reasonable explanation.
In his judgment in O’Domhnaill v. Merrick, Henchy J. stated at p. 158:
“While justice delayed may not always be justice denied, it usually means justice diminished. In a case such as this, it puts justice to the hazard to such an extent that it would be an abrogation of basic fairness to allow the case to proceed to trial.”
In my view the same cannot be said in this case. Justice is not being put to the hazard. The applicant is in a position to resist the application made in these proceedings without injustice or unfairness.
I therefore refuse the application to dismiss the proceedings.