Disqualification
Cases
Cahill v. G.
]2002] IESC 12
THE SUPREME COURT MR JUSTICE FRANCIS D MURPHY
“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 G. 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 G. deprived the official liquidator of the books and records of Readymix was, to my mind, extremely serious. The grace with which Dr G. 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 G. 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 G. 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 G. 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 G. to reconsider the argument which he made to the Court and notwithstanding the opportunity given to him he, Dr G., “continued in a vein as to betoken a total disregard in his conduct complained of”. It was the fact that Dr G. 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 G. 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 G. 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 G. 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 G. 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 G. 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 G. 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 G. 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 G. 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 G. 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.”
Newcastle Timber (In Liquidation), Re
[2001] IEHC 146
Justice McCracken
“12. The primary questions remains as to whether these actions on the part of the Directors amounted to a breach of duty or were actions which made the Directors unfit to be concerned in the management of a company, and secondly, whether, if so, I should exercise the undoubted discretion given by making an Order under the section.
13. The approach to be taken by the Court has been very clearly set out by Browne-Wilkinson V. C. in In Re: Low-line Motors Limited (1988) B.C.L.C. 698 in a passage which has been approved and applied by the late Shanley J. in La Moselle Clothing Limited (in Liquidation) and Anor. -v- Soualhi (1988) 2 ILRM 345, by McGuinness J. in the Supreme Court in Re: Squash (Ireland) Limited (unreported 8th February, 2001) and by Smyth J. in C.B. ReadymixLimited (unreported 20th July, 2001). This passage reads:-
“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 record as Directors of insolvent companies have shown them to be a danger to creditors and others. 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 the extreme case of gross negligence or total incompetence, disqualification could be appropriate.”
14. While these comments were made in the context of slightly different legislation in the United Kingdom, I, like my colleagues, have no doubt that it is the proper approach to be taken both under Section 150 and Section 160. As I have already said, many faults can be found in the conduct of the Directors 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 Liquidator has not satisfied me that the Directors 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 Liquidator 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 Directors I do not think it could be said that a Disqualification Order is necessary to protect the public against their future conduct. I say this particularly as it is now some six years since Newcastle ceased trading, during which time George S has been intimately concerned in the management of another company, which appears to be trading successfully and is complying with its obligations to the Revenue. Accordingly, I will refusean Order under Section 160.
15. I do feel, however, that the Directors have been sufficiently irresponsible to warrant a Restriction Order being made under Section 150. To trade while insolvent for 1 year, or perhaps 2 years, in the hope that the company may trade out of its problems is understandable, but to have kept Newcastle trading insolvently for some 4 years, and allowing Revenue debts to build up, appears to me to be totally irresponsible. I do not have the same discretion under Section 150 as I have under Section 160, and the Directors have not satisfied me that they acted responsibly, and accordingly I think I am bound to make an Order under Section 150. I would point out, of course, that this is not an absolute disqualification from acting as a Director, provided the company concerned has a sufficient capital to satisfy this section. I should say that, while I realise that Mrs. Madeline S played little or no part in running these companies, I think that the Order must in the circumstances of this case be made against her as well. “
Director of Corporate Enforcement v. D’Arcy
[2005] IEHC 333
Mr. Justice Kelly
“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.
Director of Corporate Enforcement -v- Walsh
[2016] IECA 2
Court of Appeal Kelly P.
Case Law
42. The first reserved judgment on the meaning and application of s. 162(2)(h) was that of Finlay Geoghegan J. in Re Clawhammer Ltd. [2005] 1 IR 503. There had been a previous ex tempore judgment of Laffoy J. given in November 2004 in a case called Re Norse Security Ltd. which is in fact referred to in Clawhammer.
43. The Clawhammer case involved three separate applications brought by the Director. Finlay Geoghegan J. considered all three together and construed the relevant statutory provisions in order to provide guidance in respect of future applications.
44. In the course of her judgment, she identified the purpose of these statutory provisions where she said:
“13 Counsel for the Director submitted that the court should have regard to the scheme of the Companies Acts and in particular Part VII of the Act of 1990 in considering the appropriate order. Further, it was submitted that the Oireachtas, by including in s. 160(2)(h) of the Act of 1990 the possibility of disqualification in the circumstances set out therein reflects a serious legislative concern about the practice whereby to the detriment of creditors, insolvent companies are allowed by their directors to be struck off the register rather than be wound up in a proper fashion. The concern for the position of creditors is reflected in s. 160(3A) of the Act of 1990 which permits directors to escape either disqualification or restriction under the section where they can show that there were in fact no creditors at the time of strike off or that such creditors have been discharged prior to the making of the application.
14 I accept the submissions. There is potential prejudice to creditors of an insolvent company if the directors, by default, permit it to be struck off the register rather than taking steps to wind it up. In such circumstances such assets of the company as remain are not applied, as a matter of course, in the discharge of creditors according to statutory priorities. Even directors who seek to discharge liabilities of the company may do so in accordance with their own preferences and possible perceived future commercial needs or future commercial intentions or to escape liabilities under guarantees. It also may be of benefit to the directors in the sense of escaping the scrutiny of their conduct of the company’s affairs which might follow an investigation by a liquidator including the possibility of being fixed with personal liability for liabilities of the company in circumstances where same is mandated by the Companies Acts. Accordingly, I accept the submission made on behalf of the Director that the Oireachtas regards the fact that directors may have permitted a company to be struck off the register as a result of their failing to make annual returns as more than a technical breach of their obligations under the Companies Acts.”
45. Paragraph 18 of the Clawhammer judgment, sets out the judge’s conclusions as to the exercise by the court of the jurisdiction conferred under s. 160(2)(h) of the Act. The judge set them out in numerical order as follows:
“1. Where the Director satisfies the court on the necessary proofs under s. 160(2)(h) of the Act of 1990 and the respondent directors do not offer any exculpatory evidence to the court either as to their involvement in the company, the circumstances leading up to the striking off of the company or the outstanding liabilities of the company an order of disqualification is probably in general justified.
2. In any application where the respondent directors appear and offer evidence to the court it will be appropriate to take that evidence into account in determining whether or not to make a disqualification order or a declaration of restriction.
3. Where the respondent directors adduce evidence of the likely quantum of the undischarged liabilities of the company or their role in relation to the company or other circumstances leading to the striking off of the company, it will be appropriate for the court to take such facts into account in determining any period of disqualification. Similarly it will be appropriate for the court to take into account any impact on the respondent directors of the making of a disqualification order in the context of any evidence offered of future proposals to earn a livelihood.
4. The scheme of s. 160(2)(h) of the Act of 1990 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 of the Act of 1990 is five years.
7. 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.
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) of the Act of 1990.
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 five years appears appropriate.”
46. The approach set out by Finlay Geoghegan J. in para. 18 of her judgment is one which has been followed in all subsequent applications under s. 160(2)(h).
47. Since the decision in Clawhammer, the Director has obtained a total of 114 disqualification orders and nine restriction orders in all of which the Clawhammer principles were applied
48. One commentator, Dr. Deirdre Ahern in her book ‘Director’s Duties, Common Law and Practice’ (Dublin, 2009), says that “the Clawhammer propositions have been regarded as authoritative ever since”.
49. The only departure from the application of those principles is that authored by Barrett J. in the present case and his decision in Chercrest Ltd. [2014] IEHC 363.
50. Before embarking on a consideration of the judgment under appeal, I list a number of authorities which were cited in argument which are enlightening and which are entirely consistent with the principles identified in Clawhammer. The court was referred to Re CB Readymix Cahill v. G. [2002] 1 IR 372; Re Wood Products Ltd; Director of Corporate Enforcement v. McGowan [2008] I.R. 598; Re NIB: Director of Corporate Enforcement v. Byrne [2010] I.R. 222; Re Kentford Securities Director of Corporate Enforcement v. McCann [2011] 1 IR 585 and Re NIB: Director of Corporate Enforcement v. Seymour [2011] IESC 45. It necessary to mention just one of those decisions at this juncture.
51. In Kentford, O’Donnell J. examining the qualification regime under s. 160, said it was important to consider it in its entirety. He went on:
“[32] It seems clear that the complexity and variety of s. 160 cannot be reduced to a single touchstone whether identified as the ‘primary purpose’ or the ‘only function’ of the Act of 1990. Instead, the Act of 1990 ranges from very serious matters requiring mandatory disqualification to matters which might, in certain circumstances, be regarded as regulatory, posing no immediate or obvious threat to the public. It is also significant in my view that the deemed disqualification under s. 160(1) is mandatory. The consequence of mandatory disqualification follows upon the conviction irrespective of the nature of the matters giving rise to the conviction, their age or any prediction as to the future risk to the public from the individual concerned.”
52. Later in the same judgment, O’Donnell J. had this to say:
“[38] A consideration of the structure of the subparagraphs of s. 160(2) is useful in seeking to interpret the subparagraphs in issue in any individual case. It is noteworthy that only subs. (d) and (e) refer expressly to the concept of unfitness. It has been observed that in one sense s. 160(2)(d) can be said to encapsulate all the other grounds. Looked at in another way, this subsection could be said to be a catch all provision capturing conduct not specifically identified in the other subsections, but which may nevertheless justify disqualification subject to the court’s discretion. It is important, therefore, that the Companies Act 1990 specifies conduct in the other subsections of s. 160(2) which the Act itself appears to consider to render a person, presumptively at least, unfit to be a director. In that way, subs. (d) sheds light on the other subsections. By the same token, the other subsections give some indication of the type of conduct unspecified in subs. (d) itself, which would justify the making of a disqualification order under that subsection. Given the vagueness of the concepts being discussed, the perspective thus provided offers a valuable degree of focus to an inquiry under s. 160 of the Act of 1990.”
53. These observations of O’Donnell J. appear to me to demonstrate that the decision in Clawhammer is in accord with them. Applying the observations of O’Donnell J., it is clear that s. 160(2)(h) identifies conduct which, by itself, the legislature identified as rendering a director presumptively unfit for such office. That intent on the part of the legislature finds expression in Clawhammer and particularly at para. 18.1 where Finlay Geoghegan J. said that a person against whom the proofs were duly satisfied under s. 160(2)(h) ought, in general, to be disqualified in the absence of exculpatory evidence. In addition, she correctly identified, at para. 18.3 of her judgment, the matters that are appropriate for consideration and which might influence a court not to make a disqualification order.”
RHS Energy Ltd (In Liquidation) v The Companies Act 2014
[2020] IEHC 82 (24 February 2020)
JUDGMENT of Mr. Justice Quinn delivered on the 24th day of February, 20201. The applicant seeks an order pursuant to section 842 of the Companies Act 2014 (“theAct”) disqualifying the respondent from being appointed or acting as a director or otherofficer of any company for such period as may be determined by the court. The applicantseeks in the alternative, a declaration pursuant to section 819 of the Companies Act 2014restricting the respondent from being appointed or acting as a director or other officer ofany company for a period of five years, unless that company meets the requirements ofsection 819(3) of the Act.2. The application is grounded on an affidavit sworn by the applicant on 9 July 2018.Replying affidavits were sworn by the respondent on 4 and 25 March, 2019, to which theapplicant has himself replied, in supplemental affidavits sworn on 19 March 2019 and 4April 2019.3. In the applicant’s grounding affidavit, he identifies a number of matters of concern inrelation to the manner in which the respondent conducted himself regarding the affairs ofthe company. These relate to such matters as an absence of books and records,inappropriate treatment of employees when the company ceased trading, issues arisingfrom the taking of deposits from customers at a time when the company was said to beinsolvent, concerns relating to unaccounted for turnover, VAT anomalies arising fromsales invoices, lack of cooperation with the applicant following his appointment, anddifficulties which the applicant says he encountered in tracing assets of the company.4. An unusual feature of this case is that the company traded for a period of only three orfour months, the cessation having occurred in dramatic circumstances which I shalldescribe below. The company had a very short total lifespan. It was incorporated on 10November 2016, and ordered by the court to be wound up on 24 April 2017.5. Another unusual feature is the series of events which occurred in the days immediatelyfollowing the applicant’s appointment, also described below.Pre-liquidation chronology6. On 10 November, 2016, the company was incorporated. On 14 November 2016, thecompany entered into a series of agreements with a company called ES Energy SavingPage 2 ⇓Systems Limited (“ES”) whereby it acquired the assets undertaking and business of ES(the “November 2016 Transaction”).7. The directors and shareholders of ES were a Mr. Michael Keane and Mr. James Gorham. Itis said that as part of the November 2016 Transaction, the respondent and the wivesrespectively of Mr. Keane and Mr. Gorham became the shareholders of the company.8. The business of the company was the installation of energy efficient heating equipment inresidential homes. By the November 2016 Transaction the company acquired theinventory, stock and equipment of ES, together with customer lists, the trading name“Let’s Talk Solar”, vehicles computers and associated equipment, printers, telephones,intellectual property, customer database and work in progress. The agreement alsoprovided for the transfer of staff, and provided that certain identified trade debts of EStotalling €130,374 would be assumed by the company. The consideration payable underthe asset purchase agreement was €128,000 payable by 24 monthly instalments of€5,333.33 each.9. On 14 November 2016, the company also entered into a short term business lettingagreement with ES for the use of the trading premises known as Energy House, LoughSheever Corporate Park, Mullingar, for a term from 14 November 2016 to 14 May 2017 ata rent of €2,000 per month.10. On 18 November 2016 there was executed an Option Agreement conferring on thecompany the option to acquire the premises at Mullingar for a consideration of €220,000less the “adopted debts” of €130,374.62.11. At some date after the start of February 2017, ES was itself placed in liquidation.12. Following the entry into these transactions the company commenced its trade from thepremises at Mullingar. The respondent was the sole director.13. Mr. Keane took up a position as installations manager although it appears that heperformed that role through a company owned and controlled by him or his wife, namelyMK Heating Networks Limited.14. Relations between the respondent and Mr. Keane deteriorated in January 2017 and,according to the respondent, an unusual event occurred on 30 January, 2017, which onthe respondent’s account had a fatal effect on the business of the company. Therespondent says that on that day, Mr. Keane and Mr. Gorham attended at the premises inMullingar accompanied by their accountant, Mr. Malachy Stevens. He says that theyinformed him that the directors and shareholders of ES had been advised that it wasappropriate to set aside the November 2016 Transaction. He says that they claimed thatthe transaction was a “set up” and reference was made to provisions of the Act, includingsection 604 (unfair preference).Page 3 ⇓15. The respondent says that on that date he was required to vacate the property. Mr. Keaneand Mr. Gorham arranged to have the locks changed and he was excluded from attendingthereafter.16. Mr. Keane informed the staff that he was taking charge and made arrangements to havethe locks and alarm codes changed.17. On 31 January, 2017, the company’s solicitors, Messrs Larkin Tynan Nohilly, wrote to ESand to Mr. Keane and Mr. Gorham. By this letter they informed them that the transactionsof November 2016 were valid and that the company intended to apply to the High Courtfor injunctions restraining the trespass and for other reliefs.18. Further letters were exchanged between the parties and ultimately on 7 February 2017the company applied to the High Court for an injunction.19. The proceedings were issued by the company against ES, Mr. Keane and Mr. Gorham. Thecompany sought an injunction restraining trespass, and injunctions to restrain thedefendants from interfering with the business of the company, including but not limitedto, interfering with relations with employees, customers or suppliers, soliciting customersor employees, interfering with the daily operation of the business and interfering with theremittal of sales receipts from its agents or servants. The company also sought damagesfor breach of the November 2016 agreements, trespass, tortious interference withcontractual relations, and certain accounts.20. A replying affidavit was sworn in the injunction proceedings by Mr. Michael Keane on 8February, 2017 supporting the assertion that the November 2016 Transaction should beset aside. He pointed out that, contrary to the statements to this effect in the transactiondocuments ES had not obtained legal advice in respect of the transaction. He said that hehad been advised by ES’s solicitors that the provisions of the agreement may not behonoured by a liquidator of ES in circumstances where it provided for taking only certainexisting trade debts and not all of the trade debts and that this may constitute a groundto declare the transaction a preference.21. Mr. Keane exhibited a minute of a meeting of the EGM of ES on 3 February 2017 at whicha resolution was passed to the effect that “all legal agreements executed by or on behalfof the company on the 18th day of November 2016 be and are hereby rescinded”.22. Mr. Keane said that steps were being taken to place ES in liquidation and he believed alsothat a liquidator would be required to apply to the High Court to pool the assets of ESwith the assets of the company and that “the liquidation of [ES] will trigger the liquidationof [the company]”.23. Finally, Mr. Keane stated that his main concern had been for employees who hadtransferred and that his wife had “personally paid the wages of all employees last weekand that I will personally be paying the wages of the employees this week…”Page 4 ⇓24. Mr. Keane said that the company had little or no assets in the jurisdiction and that itssolvency is to be questioned in circumstances where it had mixed its trading activitieswith those of ES which he said was “shortly to go into liquidation”.25. From the limited papers exhibited regarding the injunction proceedings, there is a lack ofclarity as to what ultimately transpired in relation to the injunction. The respondent saysin his replying affidavit in these proceedings that the injunction was granted by the HighCourt and upheld by the Court of Appeal. However, the injunction was ultimatelydischarged on 27 April 2017 and the company never thereafter regained possession of theproperty at Mullingar. The respondent complains that following his appointment theapplicant did not take the necessary steps to maintain the injunction and pursue theproceedings, despite the respondent having pointed out to him the advantages of theinjunction, the central purpose of which he claims was to protect and preserve assets ofthe company.26. In these proceedings, the respondent refers throughout to the events of 30 January,2017, as the “hijack” of the company. He says that the actions of ES and of Mr. Keaneand his associates had the effect of not only trespassing and interfering with the conductof the business of the company, but also of expropriating the assets and the records ofthe company and his access to employees. This description of those events by him is atthe centre of his opposition to this application.27. The plenary proceedings which were commenced by the company on 7 February 2017would, if pursued to a trial, have depended for their determination on the fundamentals ofthe validity of the November 2016 Transaction which was contested by ES and by MessrsKeane and Gorham. Those proceedings were never pursued to trial, and although thematters complained of in those proceedings are at the centre of the respondent’sopposition to these proceedings, this Court is not being invited to and could not in thisapplication adjudicate on the validity of the November 2016 Transaction. I shall returnlater to the impact this matter has on the determination of the application.Liquidation of the company28. On 28 February, 2017, a statutory demand was served on the company by a creditor. On23 March, 2017, a petition was presented for the winding up of the company. On 24 April,2017, an order was made for the winding up of the company and the appointment of theapplicant as liquidator.29. There is a degree of uncertainty and controversy as to when exactly the company ceasedtrading. It seems clear that the staff were at least laid off if not actually made redundantin or around 2 February 2017. The applicant claims that one of the failures on the part ofthe respondent was to regularise the redundancy of staff by issuing formal notices oftermination, which had the effect he claims that they were unable at that time to claimstatutory entitlements.30. The applicant says that following his appointment he was unable to identity and secureassets and records of the company. He says he visited the company’s trading premises atPage 5 ⇓Mullingar to find that the premises had been “stripped, and that there were no assets orbooks or records there”. He says that he made a number of attempts to contact therespondent in the days following his appointment and none of his calls were answered.31. The applicant says that on information received by him from an ex-employee, he wasgiven to believe that the respondent had removed the company’s assets outside of thejurisdiction to Northern Ireland and this led to a series of events on 27 April, 2017.Events of 27 April 201732. The applicant says that following his unsuccessful efforts to locate the respondent, hereceived information that the company had been trading from a location within thepremises of Kingspan in Newry, Northern Ireland. He says that he attended there on 27April 2017 and was told that although the respondent had been negotiating for a period oftime to rent office space adjacent to a factory there, these arrangements had not come tofruition and instead the applicant was informed that the respondent had rented a room atthe Mourne Court Hotel in Newry.33. The applicant says that when he arrived at the Mourne Court Hotel he inquired atreception if any rooms had been booked in the name of the company or of therespondent. The receptionist informed him that a meeting room had been booked in therespondent’s name and directed the applicant to that room. The applicant says thatentering that room he saw a number of people, some of whom he says that he knew tobe ex-employees of the company, working at laptops. He announced that he was lookingfor the respondent who then identified himself to him. The respondent said that he hadbeen looking to speak to the applicant and suggested that they leave the room to discussmatters.34. In these discussions the respondent said that assets of the company had been taken by“his former business partners in ES Energy Saving Systems Limited”. He denied that hehad been involved in the removal of any assets from the company’s premises.35. The applicant says that he informed the respondent that unless he was willing to assistwith the voluntary return of assets to the company, he would bring the matter to theattention of the Police Service of Northern Ireland whose nearest office was only 300metres from the hotel.36. The applicant then describes a series of further encounters during which he overheard therespondent speaking with a Mr. Joe Carroll, a former employee of the company, at whichthe applicant says they were discussing what versions of events they would present to theapplicant as to why they either were not in possession of assets of the company or why itwas appropriate that they were retaining them.37. Ultimately, after a number of further conversations the respondent brought the applicantto a lock up unit in Newry where it was revealed that there were retained at that locationtwo company vans, along with certain office furniture and stock of the company. ThePage 6 ⇓applicant then arranged for these items to be taken away for realisation by him asliquidator.38. Apart from the tangible assets such as vans, office equipment and company stock, theapplicant says that he was not afforded any access to books and records of the companyor any computerised records.39. The respondent says that the events of 30 January, 2017, or, the “hijack”, had the effectof depriving him and the company of access to critical trading assets which were seizedby ES and Mr. Keane.40. The respondent’s account of the events of 27 April, 2017, is entirely different to that ofthe applicant. He says that insofar as any of the assets of the company were still in hispossession when he met the applicant on 27 April, they had been brought to theselocations by him only as a method of protecting against any further expropriation ofassets by Mr. Keane and his associates. He says that the persons working in the room atthe Mourne Court Hotel were not, with the exception of one person, Joseph Carroll,employees of the company. He says that the others in the room were residents of Newry,had never been to Mullingar, and had never worked for the company.41. The respondent claims that after the liquidator was appointed he had been available if theapplicant had sought to make contact with him. He says that the reason the applicant haddifficulty accessing company assets, books and records, including computerised records,was that all assets of material value had been removed by Mr. Keane as part of theevents of 30 January 2017.42. The respondent says that it was his strategy after the “hijacking” to move the business ofthe company to Newry as part of a link up of Kingspan, with whom he had a goodrelationship. He says that he believed that it was within his remit to move assets incircumstances where he believed that he was acting “honestly and reasonably” in what hesays that were “the best interests of the stakeholders and customers who had paiddeposits”.43. The respondent says that his initial move in early February had been to set up a new callcentre, employing Joseph Carroll, and using a room at the Carrigdale Hotel in Co. Louthfrom which he had started successfully, he says, selling product. He then says that as hedid not have the readily available cash with which to pay Mr. Carroll, he agreed to giveMr. Carroll the two vans which were the property of the company. He says that this wasnecessary in order to “get the company working again” and that in any event the vanswere old, sign written, dented, rusty and scruffy. He said that the company at that stagehad no further use for them, as they would be using Kingspan – approved installers.44. The respondent says that there was nothing sinister therefore about the activities at theMourne Court Hotel and that when Mr. Carroll gave directions to the location of the lockup premises at Newry and they arrived at that location and found the vans there therespondent claims to have been surprised to find also the office furniture and other items.Page 7 ⇓45. I now turn to the individual headings of complaint relied on by the applicant in theseproceedings.The business name “Let’s Talk Solar”46. As early as 19 April, 2017, an advertisement for jobs appeared on a digital “jobs board” inNorthern Ireland, in the name of “Let’s Talk Solar”.47. The respondent says that in March he had commissioned the Newry job centre toadvertise for call centre staff in Newry for “RHS”. He says that although there wereapplicants, none were interviewed and after the company ceased trading theseapplications were taken no further.48. The respondent says that he renewed the instruction to the Newry job centre on 19 April,2017. He says this was intended for a different company owned by him in the U.K. butsays that the job centre simply did not change the name on the relevant website.49. The applicant’s evidence is that the business name Let’s Talk Solar was still registered inthe name of the company and yet was being used in an advertisement for employees, asof the time of the applicant’s appointment, and in the weeks prior to the applicant’sappointment, being times when the respondent claims that he no longer had access tothe assets and personnel required for trading the business of the company.50. The respondent offered an explanation that this trading name was now being used by acompany of a similar name incorporated in the UK. No verification was provided for thisexplanation, and the balance of the evidence is to the effect that at a time when thecompany had ceased trading, the respondent was deploying this asset either for his ownbenefit or for the benefit of another company being promoted by him.Ascertainment and retrieval of assets following liquidator’s appointment51. The respondent’s explanation for the events in the days immediately following theappointment of the applicant is almost entirely dependent on his own account of what hedescribes as the “hijack” of 30 January, 2017, and he refers to the grounds on which theinjunction was sought. He attaches all responsibility for the difficulty of access to assets toothers, notably Mr. Keane and his associates. This court cannot determine the merits ofthe issues which were the subject of the plenary proceedings. However, even taking hisaccount of the “hijack”, the respondent cannot escape the obligation, as the soleremaining director at the time of the appointment of the applicant, for the safe custody ofassets and records and the return of those assets to the liquidator immediately followinghis appointment. In his replying affidavits, there is at a minimum an acknowledgementthat certain of the assets which were located in the lock up premises near Newry were infact assets of the company. In relation to the trucks, albeit that they had a limited value,he acknowledged that his “purpose” was to make them available to Mr. Carroll in lieu ofwages. Of particular note in relation to this item is that this explanation was offered onlyas an alternative after he had initially indicated that he had no further information as tothe whereabouts of assets at that time.Books and records of the companyPage 8 ⇓52. The applicant says that books and records of the company were not made available tohim on his appointment. He emphasised that as a director it is the respondent’sresponsibility to maintain and protect the company’s books and records prior to theappointment of a liquidator and that he has failed to carry out this task.53. The respondent identifies other parties as responsible for this issue.54. Firstly, he says that a person Wiola Mazurek, who he describes as a “part qualifiedaccountant” who had been employed as an accountant in ES was responsible for all thebooks and records. Inconsistently with this, he says that when the company acquired theassets of ES, Ms. Mazurek: -“Transferred as an employee to RHS and retained the title of accountant, but I tookaway the responsibility for keeping all the books and records and the payroll exceptfor issuing invoices in accordance with the RHS procedure 002 for invoicing andbanking”.55. The respondent says that Ms. Mazurek kept the sales ledger of the company on acomputer on her desk and accessed it from a laptop “that she took home occasionally”.56. Secondly, the respondent also says that all the other books and records including thepayroll, VAT and PAYE accountability and calculations were kept and carried out byMichael Dolan & Company, Chartered Accountants, an external firm based in Ferbane, Co.Offaly, and a sister business of that practice, Handy Dolan Consultants. The respondentsays that his instructions to Ms. Mazurek and to Messrs Dolan were to have weeklymeetings to pass over all relevant sales information and copy invoices. The respondentthen says that after the events of 30 January 2017, he was informed by Messrs Dolanthat “Due to excuses by Wiola they had had no weekly meetings with her during January2017”. He says that he was totally unaware that the weekly meetings were not happeningbecause he was concentrating on sales installations and procurement and he refers to thisdiscovery as a “serious lapse of governance by both Wiola and the accountants”.57. The respondent then says that apart from certain sales ledger invoices which have beenavailable to the applicant, “the remaining books and records were with the charteredaccountants appointed by RHS”.58. Throughout the affidavits of the respondent, the dominant theme in relation to books andrecords, both hard copy and electronic, is that they were the responsibility of others,whether Ms. Mazurek, or Messrs Dolan. In taking this approach the respondent ignoresthe fundamentals of the duty to ensure that adequate accounting records of the companyare maintained.59. Section 281 of the Act confers on the company the obligation to maintain adequateaccounting records. Sections 286 and 609 impose sanctions – criminal and civilrespectively – on directors where they fail to take reasonable steps to secure compliancewith section 281. In the context of both of these sections, the Act affords a defence inPage 9 ⇓circumstances where a director establishes that he has taken all reasonable steps tosecure compliance with section 281 or had reasonable grounds for believing, and didbelieve, that a competent and reliable person acting under the supervision or control of adirector of the company who has been formally allocated such responsibility was chargedwith the duty of ensuring that those sections were complied with and was in a position todischarge that duty. Nowhere in the replying affidavits does the respondent profferevidence that such a regime was in place. If anything, the persistent references to therole of Ms. Mazurek, Mr. Keane and the external auditors reveal, at its most benign, alevel of delegation without the attendant supervision or control of a director whichamounts to an abandonment of responsibility for compliance with this duty.Employees60. The applicant notes that redundancy claims were made by employees as of 2 February,2017, but that company’s payroll records were poor and staff were not supplied withP45’s. He says therefore that redundancy entitlements and other entitlements ontermination such as arrears of holiday pay, payment in lieu of notice or arrears of wagesremained unpaid.61. The respondent says that as a consequence of the events of 30 January, 2017, he had noalternative but to make staff redundant or at least lay them off. He said that incircumstances where the assets and trade of the company were “hijacked” funds wouldnot be available to pay staff and the decision to lay them off was taken in order to curtailfurther debts being incurred which he believes to have been an honest and reasonabledecision.62. That explanation may have had some force were it not for the inconsistent assertion hemakes that while formal redundancy notices and paperwork were not attended to, Mr.Keane had by that time moved to take over the business of the company and thereforeemployees would have transferred under “TUPE rules” (Protection of Employees (Transferof Undertakings) Regulations).63. This is another aspect of the case where a definitive finding would depend on whichversion of the events of 30 January, 2017, is accepted. It seems to the court howeverthat whether the employees transferred to another business were “hijacked” andtransferred out of the company or whether the respondent simply believed that it wouldbe improper to continue their employment by reason of the company’s inability to tradeafter the “hijacking”, the processing of statutory notices and certificates to enableemployees to reclaim redundancies and arrears of statutory entitlements were never putin place. The excuse proffered by the respondent that he was forcibly removed fromaccess to books and records, including payroll information, does not, it seems to me,afford a credible justification for failure to ensure that such statutory information was dulyprocessed.The decision to apply for interlocutory injunctive reliefPage 10 ⇓64. The applicant says that the decision of the respondent to initiate on behalf of thecompany an application for an injunction was made at a time when there was a seriousdoubt as to the ability of the company to meet the undertaking as to damages.65. In the affidavit grounding the application for the injunction, which was sworn on 7February, 2017, the respondent states: -“I say that I am prepared to give an undertaking as to damages on behalf of theplaintiff if required for the purposes of the interlocutory injunctions sought.”66. The applicant says that in giving this undertaking at a time when the company knew orought to have known “that it was entirely unlikely to be in a position to meet any suchundertaking, the company, at the direction of the respondent, did not comes before thecourt with clean hands.”67. The applicant’s concern as to the propriety of giving such an undertaking is focussed, noton the substantive matters complained of in those proceedings, but on the trading andfinancial status of the company when the undertaking was given. The substantive matterswhich were the subject of the proceedings have never been the subject of a finaldetermination by a court of law and prima face the respondent appears to have beentaking measures to restrain what he characterised as unlawful measures being taken todestroy the business of the company. I shall return to this issue, but I am not prepared tofind that the commencement of those injunction proceedings, including the giving of theundertaking, was so inappropriate a measure as to, of itself, justify the making of theorders sought in this application.The taking of deposits68. The applicant refers to instances of the company receiving deposits from customers orpotential customers on a series of dates when it ought to have been clear to therespondent that the company was at the very least in financial difficulty, and unable tocomplete the orders.69. He refers in particular to a series of deposit payments made between 27 January 2017 (adeposit of €2,500 made by a Mr. Niall O’Connor) through to dates in March 2017.70. In fact, the evidence exhibited by the applicant refers to deposits paid by customers fromas early as 29 November 2016 and the applicant has exhibited correspondence fromthese customers protesting that they had been unable to contact the company to secureeither return or the deposit or that the relevant installation would be made.71. The respondent put forward a variety of explanations in relation to this issue. In relationto the earlier deposits, he says that the relevant installations would have been made wereit not for the intervention of Mr. Keane on 30 January 2017. In respect of deposits madeafter that date, he says that insofar as the installations were not made the deposits weredirected to be paid to the company’s bank account and therefore ought to have beenavailable to the liquidator. He says that there was no intention or action on his part totake those deposits without being able to make the installations, and that the depositsPage 11 ⇓may have been capable of being returned were it not for the freezing of the company’saccount on the appointment of the liquidator.72. The liquidator has exhibited the correspondence from the relevant customers and thecompany’s bank statement showing the payment of certain of these deposits from time totime, and thereafter payments made out of the relevant account. Therefore, it is clearthat insofar as installations were not delivered matching deposits made, no measureswere taken to ensure that such funds would be available for return to the relevantcustomers.73. Whatever the merits of the events of 30 January, 2017, it is clear that at a time when thebusiness of the company had been, to put it at its very least, disrupted by those eventsand when there was at the very least serious uncertainty as to the ability of the companyto deliver the installations deposits were still being received.74. The respondent asserts that the company was still solvent in March and that paymentswere being lodged to the bank account which was ultimately frozen.75. In support of the claim that the company was still solvent when receiving deposits, therespondent places significant reliance on the following: -1) The option in relation to the premises at Mullingar.2) Draft accounts prepared by Messrs Dolan.76. The respondent says that the principal asset still available to the company even at thetime when the liquidator was appointed was the option to purchase the property atMullingar which he says was worth in net terms over €100,000. The applicant says that itwas wholly unrealistic to believe that he as liquidator would be in a position to fund thepayments necessary under this option in the speculation that the property could berealised for an excess over its encumbrances and money mentioned by the respondent.77. The reference to draft accounts prepared by Messrs Dolan is a reference to a set of draftfinancial statements for the company, apparently prepared by Messrs Dolan & Company,Ferbane Co. Offaly.78. The document exhibited is described as draft “Management Accounts for the periodending 31 December 2017”. Reliance is placed on this document by the respondent inthat he states that it shows a projected gross profit for the year ended 31 December 2017in the sum of €1,888,588, yielding a net profit after administrative expenses of €807,973.79. This document is a draft. It bears no signature and no information is provided as to whenor by whom it was created. No direct evidence was proffered as to the provenance ofthese “Draft Management Accounts” or when they came into existence. They aretherefore of no assistance in the context of understanding the solvency or otherwise ofthe company in the period immediately prior to the appointment of the applicant.Page 12 ⇓Unaccounted for turnover80. The applicant exhibits an extract from a sales ledger covering the period from 16November, 2016, through to 2 February, 2017. He says that based on his investigationsof lodgements made to the company’s bank account during that period there is a shortfallof some €558,206.45 and that this discrepancy has not been explained.81. On this issue the respondent again refers to the firm of chartered accountants havingbeen “running this and ensuring compliance with VAT rules”. He says that much of thediscrepancy would be accounted for by reference to installations made or delivered by thecompany pursuant to orders which had previously been placed with ES and that there wasa transition period of “parallel trading”.82. The respondent says that he believes that the figure referred to by the applicant isexcessive and that the cash deficit that he can best calculate is in the order of €100,000.83. The respondent again attributes responsibility for this discrepancy to everyone elseinvolved in the company expect except himself. He says that Ms. Mazurek was responsiblefor arranging that payments from sales would be paid to discharge accounts of ES, and todischarge certain revenue debts owed by the company, and that the applicant had notrecognised these as costs which ES was obliged to discharge pursuant to the November2016 Transaction. He then asserts that the unaccounted for turnover was a lower amountof €100,000 and attributes this “misappropriation” to the conduct of Ms. Mazurek and Mr.Keane whom he says were “working together”.84. The respondent places reliance on the fact that he had instructed that Ms. Mazurek towork with the external accountants Messrs Dolan to implement an invoicing procedureand a form of “weekly audit” by Messrs Dolan. The premise of this reliance is theproposition that by doing so he did not need to concern himself with the supervision ofsales and due application of receipts. He acknowledges that significant cash receipts wereunaccounted for but attributes responsibility to Messrs Dolan and Ms. Mazurek. Again, thisis to ignore his overall responsibility as the sole director of the company.Raising of sales invoices and VAT anomalies85. The applicant says that after the November 2016 Transaction the company continued toraise invoices using the VAT number of ES. He says that this was inappropriate and abreach of VAT law. He says that included in the sales turnover listings provided to him inrespect of the company were an extensive number of invoices referenced not in the nameof customers but in the name of “ES Energy” and that these in fact corresponded to salesof the company using the ES VAT number.86. The respondent makes no meaningful attempt to explain why the ledger sales invoiceswould include sales made by ES, other than to refer again to the November 2016Transaction and to state that a parallel trade was being undertaken, pursuant to thecompany’s obligations to honour orders which had been placed with ES. Even taking thisexplanation at its best having regard to the terms of those agreements, this would notexplain why the sales ledgers of the company would include sales properly attributable toPage 13 ⇓ES or why such a large number of items within the sales ledger are referenced “ES” insuch a basic or simplistic form.Cooperation with the liquidator87. Under this heading the applicant refers to the events of 27 April, 2017, when he met withthe respondent at Newry. He exhibits also certain email correspondence exchangedbetween him and the respondent on the same day.88. It appears that the respondent emailed the applicant after their meeting on that dayidentifying what he described as assets which would assist the liquidator in hisrealisations. He referred the liquidator to the option to purchase the building at Mullingarwhich would have required the liquidator to source a buyer for the property, exercise theoption and make a payment of, he says, €90,000 to ES Energy, which would haveresulted in a surplus for the liquidator.89. He refers also to payments which were lodged in the account of ES at Bank of Ireland, inrespect of cheques payable to “Let’s Talk Solar”, suggesting that the culpability in thisregard was with the bank.90. The respondent referred the applicant to the existence of the injunction proceedings,informing him that he ought to pursue that matter so that those responsible for deprivingthe company of its trading assets could be “brought to account”.91. Reference was also made to certain other bank accounts into which funds of the companyhad been lodged by Mr. Keane and Ms. Mazurek and to potential claims for damages andcompensation against Mr. Keane, including a claim that Mr. Keane was starting up abusiness again in breach of a two – year exclusion provision in the November 2016contracts or in breach of a non – compete clause which he had entered with the company.92. A predominant feature of this correspondence, as with many of the other claims made bythe respondent, is the suggestion that every other person associated with the business ofthe company was responsible for the insolvency of the company and for the difficulty ofrealising valuable assets, again ignoring his duties as the sole director of the company.93. The applicant replied to the respondent with a number of queries and says that hereceived no ongoing cooperation from the respondent.94. This correspondence led ultimately to a further communication from the respondent on 2June, 2017. The respondent stated that he had been unwell, and he purported to providemore information regarding assets and their whereabouts. Again, however, therespondent said that he had been unable to exercise authority or responsibility in relationto assets of the company after the events of 30 January, 2017, and that following thoseevents he had “made the very reasonable and correct decision to move them to a safelocation which has proved to be in the interests of the creditors”. He continued: “you havesubsequently been told where the remaining assets are. If you are expecting me to beresponsible for the recovery of company data. I cannot accept that. Since obtainingaccess to the office after the injunction was put in place, I have made no attempt toPage 14 ⇓check any data, records etc remaining as it was clear from the lack of assets remaining onthe evening of re-entry that all the data, records and key asset had been removed.”Again, the recurring and predominant theme is to fix Mr. Keane and his associates withresponsibility for all of these issues.This application95. In the notice of motion, the liquidator seeks an order of disqualification under section 842or in the alternative a restriction order under section 819. In his grounding affidavit hesays that in all of the circumstances referred to by him in the affidavit“It is appropriate that I seek both Mr. Palmer’s disqualification and ask that thecourt holds him personally liable for the debts of the company.”96. That statement is made in a very general fashion without identifying which aspects of therespondent’s conduct would justify declarations of personal liability for the debts of thecompany. Nor does the liquidator identify anywhere which provision of the Companies Act2014 he would invoke to fix the respondent with personal liability for the debts of thecompany.97. Although seeking a disqualification order the liquidator states in his conclusion that hebelieves that the respondent has not demonstrated that he acted either honestly orresponsibly in the management of the company, which is the lower test referable only torestriction applications. This conclusion is repeated in his second and third affidavits.98. Unhelpfully, the applicant does not, either in the notice of motion or in the groundingaffidavit, identify which of the subsections of section 842 are relied on for adisqualification order. During the hearing the applicant’s solicitor indicated that thegrounds being invoked were sub-sections 842 (b) and (d). Section 842(b) relates tobreach of duty and section 842(d) concerns conduct rendering a person “unfit to beconcerned in the management of a company”.Conclusion regarding section 842 – disqualification99. Much of the narrative relied on by the respondent to resist the making of any orders inthis application concerns the actions taken by ES and by Messrs Keane and Gorham inmoving to set aside the transactions of November 2016.100. The applicant states that in applying for the injunction the company did not come beforethe court with clean hands, particularly in giving an undertaking for damages when therespondent knew or ought to have known that it was unlikely to be in a position to meetany such undertaking. He continues as follows:“Having crystallised the company’s redundancy obligations as well as the othersubstantial liabilities that had been booked in the company’s name, there was neverany substance to the undertaking for damages given.”He continues: -Page 15 ⇓“the court was not advised of the fact that the company’s staff had been maderedundant and as such would not be in a position to continue to trade. This factappears to have been withheld from the court for reasons unknown to me”.101. Although the applicant expresses his view that the injunction proceedings wereinappropriate, this concern appears to derive from the giving of the undertaking in theprevailing circumstances. Importantly, he does not say that the plenary actioncommenced was wholly without merit or that the grounds on which the injunction wasapplied for were fictitious or not stateable.102. The narrative of the dispute between the company and the respondent on the one handand Messrs Keane and Gorham on the other hand is unusual. The affidavits exchanged atthe interim injunction stage are likely to reflect only a part of the true narrative of all thematters in dispute between the respective principals. Whilst the unilateral “rescission”actions of Messrs Keane and Gorham were clearly aggressive, it seems to me that for therespondent to lay all of the blame for the misfortunes of the company and for his inabilityas a director of the company to be in a position to deliver assets and books and records ofthe company to the applicant is implausible.103. Where the truth lies as between the positions adopted by the protagonists in that disputecannot be determined by this court. Therefore, however implausible may be therespondent’s reliance on the position taken by the company in those proceedings, in theabsence of a finding that the injunction application was based on a fictitious account, thiscourt should recognise that the actions of Messrs Keane and Gorham at least contributedto the deficit and the insolvent liquidation of the company. For this reason I conclude thatthis is not an appropriate case for a disqualification order.Section 819 – restriction104. Section 845 (3) of the Act provides that on the hearing of an application for adisqualification order the court may as an alternative, “if it considers that disqualificationis not justified, make a declaration under section 819”.105. This brings the court to a consideration as to whether the respondent has established thathe acted honestly and responsibly in relation to the affairs of the company and that thereis no other reason why it would be just and equitable that he should be subject to therestrictions imposed by the section. This requires an analysis of those issues by referenceto the test set out in the seminal judgment of Shanley J. in Re La Moselle Clothing Ltd[1998] 2 ILRM 345, approved in numerous judgments of the Supreme Court and thiscourt. The factors identified by Shanley J. to be taken into account were as follows:-“(a) the extent to which the Director has or has not complied with any obligationimposed on him by the Companies Acts(b) the extent to which his conduct could be regarded as so incompetent as to amountto irresponsibility(c) the extent of the director’s responsibility for insolvency of the companyPage 16 ⇓(d) the extent of the director’s responsibility for the net deficiency in the assets of thecompany disclosed at date of the winding up or thereafter and(e) the extent to which the director in his conduct of the affairs of the company hasdisplayed a lack of commercial probity or want of proper standards.”106. In Re Tralee Beef and Lamb Limited [2005] 1 ILRM Finlay Geoghegan J. added the furthercriteria of considering whether the director had complied with his common lawobligations.107. I have already considered all of the areas of concern identified by the applicant, andstated my views on them. In summary:-(1) The explanations offered for the absence of books and records of account of thecompany are all based on attaching responsibility to the employee Ms. Mazurek, theexternal accountants Messrs Dolan & Co. and to Mr. Keane. The persistentnarrative on the part of the respondent is that these and other third parties areresponsible to the exclusion of himself for his inability to produce comprehensivebooks and records to the applicant. In this regard, he has failed to establish that asthe sole director with ultimate responsibility for such matters he acted responsibly.(2) The respondent relies on what he describes as a period of “parallel” trade as ajustification for the practice of raising invoices in the name of ES and using its VATnumber. I am not persuaded that this practice was justified by the agreementsentered into in November 2016.(3) I am not satisfied that the respondent has demonstrated he co-operated as far ascould reasonably be expected in relation to the conduct of the winding up. Inparticular, the respondent caused the applicant to undertake a “search” for therespondent and for assets by his visit to Newry on 27 April, 2017, leadingultimately to the tracing of assets of only very limited value at that location.(4) The discrepancy between the value of sales recorded in the sales ledger and thepayments received into the company’s bank account, over the limited duration ofthe company’s trading is not satisfactorily accounted for. Even on the respondent’sown account he acknowledged that sums in the order of €100,000 wereunaccounted for but attaches responsibility for this discrepancy to persons otherthan himself most notably Ms. Mazurek and the external accountants.(5) The respondent sought to explain the continued practice of taking deposits fromcustomers throughout January, February and into March by asserting that thecompany was solvent at the time. The evidence proffered to support thisexplanation was that the company was “trading well” and that the accountants hadestimated significant profits for the full year 2017, a wholly speculative proposition.(6) The applicant’s evidence that the trading name “Let’s Talk Solar”, which was aregistered business name of the company, was being used by the respondent forPage 17 ⇓the benefit of the company itself, was not contradicted by any evidence of therespondent having acquired rights to the use of the name independent of thecompany.108. Taking into consideration all of the above matters, and the factors identified by Shanley J.in Re La Moselle Clothing Limited (op. cit.) I have concluded that the respondent has notdemonstrated that he acted honestly and responsibly in relation to the affairs of thecompany, or that when requested to do so by the applicant, he has cooperated as far ascould reasonably be expected in relation to the conduct of the winding up. Accordingly, Ishall make a declaration pursuant to section 819(1) that he shall not, for a period of 5years, he appointed or act in any way, directly or indirectly, as a director or secretary of acompany, or be concerned in or take part in the formation or promotion of a companyunless the company meets the requirements set out in section 819(3).
Result: Judgment in Favour of the Applicant.
Wood Products (Longford) Ltd (in liquidation) -v- Companies Act
[2017] IEHC 314 (18 May 2017)7
Judgment of Mr. Justice Robert Haughton delivered on this 18th day of May, 2017.
1. In these proceedings the applicant as the liquidator of Wood Products (Longford) Ltd (“the Company”) seeks orders pursuant to the Companies Act 2014 disqualifying or alternatively restricting the respondents from being directors.
2. The first named respondent attended court but was unrepresented and indicated to the court in writing that he was not opposing the application, that he would be 70 at his next birthday, that he had not worked in the past three years and had no plans to work in the future, and that he was in receipt of the OAP. He confirmed verbally to the court that he was not opposing the application.
3. The second named respondent who is an accountant attended court and was represented by solicitor and counsel, and fully opposed the applications both in respect of disqualification and restriction.
4. In determining these applications I have considered the affidavits of the applicant and two replying affidavits sworn by the second named respondent Mr Fox. I have also had the benefit of written and oral submissions on behalf of the applicant and the second named respondent.
5. By way of general background, the Company commenced trading in 1975 and continued to trade until wound up by order of Moriarty J. made on 1 May, 2014, on foot of a Petition brought by the Revenue Commissioners dated 13 January, 2014. The first named respondent became a director of the company on 23 June, 1975, and is the principal shareholder, together with his wife. He was primarily responsible for the day-to-day running of the Company. The second named respondent became a director of the Company on 27 February, 2004. Both respondents continued to be directors of the Company at the date of, or within 12 months prior to, the commencement of the winding up.
The provisions relevant to the disqualification application
6. The basis upon which the applicant seeks Disqualification Orders is provided for in section 842(d) of the Companies Act 2014 –
“842. On the application of a person specified in section 844 or of its own motion, the court may make a disqualification order in respect of a person for such period as it sees fit if satisfied –
(d) the conduct of the person as promoter, officer, statutory auditor, receiver, liquidator or examiner of a company makes him or her unfit to be concerned in the management of a company”.
In addition the applicant draws the Court’s attention to s.842, subparagraphs (f) and (h) –
“(f) that the person has been persistently in default in relation to the relevant requirements,
(h) that the person was a director of a company when a notice was sent to the company under section 727 and the company, following the taking of the other steps under Chapter 1 of Part 12 consequent on the sending of the notice, was struck off the register under section 733”.
It is only of the court’s own motion that directors can be struck off under (f) and (h).
The approach of the court
7. In its approach to its task in these cases, the court takes into account the following principles. First, the burden of proof in respect of disqualification rests with the applicant. The applicant must first establish that the conduct of the directors comes within one of the relevant subparagraphs in order to trigger the court’s jurisdiction. This is a matter of “objective forensic enquiry” – see Fennelly J. in Re Wood Products Ltd: Director of Corporate Enforcement v McGowan [2008] IESC 28, followed and approved in Director of Corporate Enforcement v Seymour [2013] 1 IR 82. Once the jurisdiction is established a Disqualification Order may be made unless in the exercise of the court’s discretion it decides not to make such an order. The court should look at the respondents past performance as directors of the company because “…past conduct is certainly the best, if not the only, guide to the necessity for disqualification.” As to the meaning of “unfit to be concerned in the management of the company”, in Seymour Macken J. in delivering the judgement of the Supreme Court quoted with approval the judgement of Browne-Wilkinson V.C. in In Re Lo-Line Ltd [1988] Ch. 477, at pp 485 to 486: –
“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 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.”
It was common case that in the exercise of its discretion the court is entitled to take into account the effect of a disqualification on a director and that the effect may be greater on a professional person such as an accountant – see the judgement of Denham J. in Director of Corporate Enforcement v Byrne [2010] 1 IR 222 at page 241. Further, as Denham J. noted at page 240: –
“(iii) the conduct necessary to justify a disqualification order must be manifestly more blameworthy than merely failing to exercise an appropriate degree of responsibility…”.
Further background
8. By way of further background the undisputed evidence was that the Company was twice struck off on two prior occasions by the Register of Companies for failure to file annual returns on 25 June, 1999, (subsequently dissolved on 2 July, 1999) and again on 10 October, 2011 (and subsequently dissolved on 15 October, 2011). The first named respondent was previously a named respondent to an application made by the Office of the Director of Corporate Enforcement who by notice of motion dated 26 November, 2003, sought inter alia an order of disqualification arising from the failure of the Company to file annual returns. As appears in the judgement of Laffoy J., in those proceedings the Company was restored to the Register by order of the High Court (O’Neill J.) on 14 May, 2001. It was further ordered that the respondent directors, including the first named respondent in this application (but not the second named respondent) deliver all outstanding returns to the CRO and the Revenue Commissioners. Despite that Order having been made, the respondent directors, including the first named respondent in this application, had not complied with the obligation to file outstanding returns with the CRO as they were directed to do by O’Neill J. and, as recorded in the judgement of Laffoy J., the said returns were ultimately made on 22 April, 2004, following the commencement of the 2003 proceedings. At that time the outstanding returns dated back to 1990.
9. It was in response to the difficulties in 2003/2004 that the second named respondent became a director of the Company on 27 February, 2004. The first named respondent was the second named respondent’s wife’s brother. The second named respondent averred that he became involved for family reasons and because he was a practising accountant. He had never been a director of any other company. He says that his involvement with the Company arose only when called upon by the first named respondent and was dictated by events where the company needed “experienced financial and/or legal difficulties, and my activities were remedial in nature” (paragraph 6 of his first affidavit sworn on 16 January, 2017).
The grounds upon which disqualification is sought
10. The applicant presents a number of grounds upon which it is asserted that the respondents are unfit to be directors.
11. First, he asserts that the Company continued to trade while insolvent and he suggests that the insolvency arose in 2003. At paragraph 15 of his principal affidavit sworn on 1 April, 2016, the liquidator sets out a table of accumulated liabilities in respect of unpaid taxes from 2003 to 2014 when the accumulated total was €1,161,975.17 and this prompted the Revenue Commissioners to present the petition and to wind up the Company following demand for a total of €2,447,616.76. The table indicates pre-2003 liabilities of €99,352.89 and significant arrears of PAYE/PRSI and VAT accumulating, particularly in the years 2003 to 2010. Moreover, the directors of the Company failed to ensure that audited accounts were prepared since the period ending 31 December, 2004. This is not contested.
12. Mr Fox contests that the company was insolvent as far back as 2003, and indeed he contested that the company was insolvent at the date of presentation of the Petition. He relies on this in the contesting of the revenue debt and asserts that the company had a defence and counterclaim which would have exceeded the revenue debt which was based on estimated amounts. The basis for the counterclaim was that the company was owed money by government departments other than the Revenue Commissioners, and in particular the Department of Finance, in respect of construction work and goods and services provided.
13. However this defence and counterclaim do not appear to have been pursued at the appropriate time. Moreover conceptually it is hard to see how the Revenue Commissioners, an independent body, could have any liability in respect of counterclaims against a government department such as the Department of Finance or the Department of Justice, or other government agencies whom it is said owed the Company money (Aer Rianta, Social Welfare Office, Portlaoise Prison Officers housing), or any duty to provide a set off against taxes due. No specifics are given by Mr Fox in his affidavits as to the steps taken by the Company to engage in legal proceedings or recover on foot of the alleged claims and counterclaims. Nor are these alleged debts set out in the Statement of Affairs prepared by Mr Fox. Mr Fox does exhibit a letter dated 8 April, 2014, from his solicitors Donal Keigher and Co referring to his request to his solicitors to amend 2006 proceedings to include counterclaims, but no specifics are given. Mr Fox also exhibits a letter from his solicitors of the same date to counsel which refers to a special summons in which the Revenue Commissioners sought to recover taxes due of approximately €680,000 which had reached the close of pleadings by early 2009 and resulted in some negotiations in 2010. It appears that this did not include any counterclaim and Mr Fox wanted the pleadings amended to claim sums of money said to be due to the Company. This letter does no more than indicate a desire by Mr Fox on behalf of the company to raise a counterclaim but it expresses no view on whether there is any factual basis for the counterclaim; nor does this correspondence address the prospects of success.
14. I am satisfied that by 2014 the Company was hopelessly insolvent, and that its insolvency probably dates back to at least 2009. I am satisfied that there is strong evidence that the Company was permitted by the respondent directors to continue trading at a time when it was clearly insolvent at least from 2009 onwards when the Revenue Commissioners made substantial claims in relation to arrears of taxes, which claims were and remain effectively uncontested, and no counterclaim mounted or pursued. Moreover there is no evidence that any suggested counterclaim had any, let alone any reasonable, prospect of success. Also no material has been presented to support any counterclaim, or to assist the Court in establishing whether any such claim might be or have become statute barred. Mr Fox also asserts on affidavit that the Company would have been in a position to dispose of its business premises in the mid-2000s for a sum in excess of €2 million, but he presents no information on affidavit in relation to this, nor any valuation evidence.
15. I find that the continued trading of the Company at least post-2009, notwithstanding its substantial and ongoing indebtedness in respect of taxes, displayed a serious lack of commercial probity.
16. Secondly, the liquidator relied on a failure to make annual returns to the CRO between 2006 and 2013. The last annual return was made in respect of the period ending 28 October, 2005. This is particularly significant because the Company was previously struck off for failing to file annual returns which were outstanding for the period 1990 – 2004. While the second named respondent must be given credit for ensuring that all outstanding returns for that period were filed in the CRO on 22 April, 2004, and that the return was filed for the period up to 28 October 2005, it is astonishing that annual returns were not made thereafter notwithstanding that Mr Fox continued to be a director of the Company. In his affidavit he states that he advised the first named respondent to continue to file annual returns, but his duty as a director, particularly in light of the history of not making annual returns, went beyond this. It was incumbent on him as a director to ensure that the company was compliant. In particular as a practising accountant Mr Fox ought to have been fully aware of the obligations of directors to ensure company filings were up to date. In the circumstances this was an egregious omission. I accept that in November 2013 when contacted by the first named respondent Mr Fox assisted in the preparation of annual returns for the years since 2005, and that it was intended to file these “if the company had not been wound up” (paragraph 30(c) of his first affidavit), but this does not explain or justify his failure over several years to fulfil his obligations as a director.
17. Thirdly the liquidator relies upon the fact that the respondents permitted the Company to be struck off the register of companies for a second time in 2011 following notification of strike off dated 14 October, 2011, for failure to make annual returns.
18. Fourthly, the liquidator asserts that the Company continued to trade while dissolved not only after the dissolution of the company in 1999 (as noted by Laffoy J. in her judgement in the 2003 proceedings), but also after the Company was struck off in 2011. Notwithstanding that the Company ceased to exist in law, it is not contested that the respondents continued to operate the Company and trade as if the dissolution never occurred. This is particularly serious in respect of the 2011 strike off.
19. Fifthly, following that dissolution in 2011, an application was made by CPL (Profiles) Ltd, a creditor of the Company, to the Circuit Court to restore the Company to the register. It is noteworthy that no application was made by the Company or the respondent directors for such restoration. By order made on 12 November, 2013, the Circuit Court ordered the restoration of the Company. Despite that order the respondents did not file the necessary returns although I do accept Mr Fox’s evidence that he prepared these returns for the period in 2006 to 2014 and that he filed them with the office of the Revenue Commissioners.
20. Sixthly, the applicant relies on the non-payment of taxes to the Revenue Commissioners. The level of indebtedness to the Revenue Commissioners in respect of taxes at the date of liquidation exceeded €1.1 million. The Company’s indebtedness was very substantial by any standards, but particularly in the light of the turnover of the company for the years ending 2011, 2012 and 2013:
• €387,725 – year ending 31 December 2011
• €205,834 – year ending 31 December 2012
• €128,809 – year ending 31 December 2013
The second named respondent in his first affidavit at paragraph 35(h) states “The counterclaim, if successful, would exceed the admitted tax liabilities”, but for reasons already given that explanation/excuse is not supported by evidence.
21. The seventh matter relied upon by the liquidator relates to an allegation of withdrawal of funds from the Company. At paragraph 38 of his first affidavit, Mr McBride states that on 28 April, 2014, a sum of €10,000 was paid by the Company to the second named respondent from the Company’s bank account at Ulster Bank. This transfer was applied to the account on the same day as a lodgement of €10,491.90 was received with the narrative “Holden Development Ltd”. This was three days prior to the winding up order and the appointment of the applicant as liquidator. At paragraph 39 he avers –
“It is also of significance that this transaction was made at a time when the Respondents were aware of the fact that the Company was unable to pay its debts as they fell due (or, at least, were on actual notice of the allegation being made by the Revenue Commissioners in the petition in that connection).”
In paragraph 40 the liquidator also notes that €665 was withdrawn from the account on the day of his appointment as liquidator – but not by him.
22. In response to this Mr Fox states at paragraph 36 of his affidavit: –
“36. It is accepted that the sum of €10,000.00 was paid by the Company to an account in the name of your Deponent on or about 28 April 2014. The transfer was completed in order to fund the cost of legal assistance in defending the winding up petition being brought against the company and to fund the cost of making the returns required by the Collector General. This disbursement was substantially funded by a contribution to the company made by Mrs Patricia McGowan in the sum of €8000 for that purpose. Information in respect of this payment was furnished to the Liquidator. I acknowledge that €665 was withdrawn from the company account on or about 1 May 2014. I have no knowledge as to what this transaction relates to.”
In his second affidavit the liquidator states that, contrary to what Mr Fox asserts, he had never been provided with any explanation for the €10,000 withdrawal. He observes that no supporting material is exhibited and that Mr Fox does not explain why the payment was apparently made in discharge of legal fees of the company in order to meet a petition brought by the Revenue Commissioners and was paid to him personally and not to the lawyers in question. Mr Fox also does not explain why the payment to him occurred on the same day as payment of €10,491.90 is recorded as having been received in the company’s bank account with the narrative “Holden Development Ltd”.
In his second affidavit Mr Fox explains in that in November 2013 following the order of the Circuit Court that the Company be restored to the register he provided accountancy services through his firm. He says that when the application was made to wind up the company he felt there was a bona fide defence and, at paragraph 7 he states: –
“I felt it was appropriate that the company should defend itself and avail of legal representation and such other advice as may be necessary. I confirm the sum of €10,000 was withdrawn to fund the solicitors, barristers and as a contribution towards the fees that had already been incurred in complying with the previous order of the Court from November 2013. I would wish to point out that my accountancy firm is still owed considerable fees by the Company. This amount outstanding is approximately €16,540.00 which is a very substantial bill for a one man accountancy practice to be owed.”
23. This explanation is very unsatisfactory. First, Mr Fox does not exhibit any documentation in support of his evidence – no documentation relating to Mrs McGowan’s alleged contribution of €8000, and not even an invoice from his firm that would have demonstrated a breakdown of the fees which he claims were due. Mr Fox does not address at all the coincidence between the payment into the Company and the payment out on the same day of €10,000. At the very least I am satisfied that this payment by the Company to Mr Fox’s firm demonstrates a lack of commercial probity at a time when both directors must have known that the Company was, or probably was, insolvent.
24. Eighthly, the liquidator asserts that a substantial amount of plant and machinery assets of the company were disposed of in March 2014, some weeks before he was appointed liquidator. When he raised this issue he was informed by the first named respondent that these assets were transferred to Mrs Patricia McGowan in discharge of a loan that she made to the Company. A list of these assets was exhibited and runs to one page. It includes various saws and other equipment such as might be expected to be of use in a woodworking business, but includes other items such as compressors, waste extractor systems and a forklift. At paragraph 42 of his first affidavit the liquidator states that despite requests for further information and supporting documentation for the alleged loans by Mrs McGowan to the company, he has not received any satisfactory response or documentation. At paragraph 43 he states: –
“43. In a most alarming development, I say that it now appears as though these assets are being used by former employees of the company at a [nearby] rented premises, who are engaged in the similar business to that formerly carried on by the company.
44. I say and am advised that the transfer of assets of the company to a connected person within a matter of weeks of the appointment of your Deponent as Liquidator (and in circumstances where the first return date on the Petition presented by the Revenue Commissioners was 10 February, 2014) is a matter of significant concern. This is particularly so in circumstances where there were significant debts due to non-connected creditors (including the Revenue Commissioners) at this time.”
25. As previously stated the first named respondent did not file any replying affidavit of substance and therefore has not denied these contentions. In his first affidavit Mr Fox says he had no involvement in the running of the company, at paragraph 37 he states –
“I am informed by the first named respondent, that approximately €15,000 was required by the Company to ease difficulties with cash flow and it was necessitated primarily due to the downturn in trade directly attributable to the economic recessionary period that existed in the country at that time. Full particulars of this transaction were included in the documentation which I supplied to the liquidator”.
Mr Fox goes on to say he had no involvement or knowledge of this disposal, and that he was informed by the first named respondent that the transfer in fact took place in 2011. However in a letter dated 13 March, 2014, from Mr Fox to the liquidator’s solicitors, between the date of presentation of the petition and the making of the winding up order on 1 May, 2014, Mr Fox states –
“… It is to be noted that activities are arranged as follows, certain assets have been relocated to facilitate the manufacturing process, located in the rented premises that are listed hereunder. All other assets remain on the company property.”
The accompanying “schedule of assets under control of the company relocated to rented premises” lists the same assets that are now being used by former employees of the company at a nearby rented premises.
26. While the manner in which Mr Fox has addressed this particular issue is less than satisfactory I do not consider that misconduct on his part is proven to my satisfaction.
27. Ninthly, the liquidator relies on a material error in the Statement of Affairs filed by the second named respondent on 21 July, 2014. This disclosed trade debtors amounting to €165,047. This figure is misleading because it is comprised almost entirely of sums due from entities that the liquidator ascertained were either in liquidation or had already been dissolved. It included some of €59,840 as being due from an entity known as Structural Detailers Ltd, yet this entity was dissolved on 20 July, 2012. Mr Fox seeks to explain this by saying that he had “difficulty in getting access to records in a timely fashion to comply with” the order that he file a statement of affairs. However Mr McBride in his second affidavit says that when he attended the company premises the day after he was appointed liquidator he was informed by the first named respondent that accounting records for the years 2010 – 2014 were with Mr Fox at his offices, and when the liquidator met Mr Fox on 8 May, 2014 he was told that Mr Fox had all current financial records and that he would make these available to the liquidator by 13 May, 2014. Mr Fox does not further respond to this in his second affidavit. The Court infers that the second named respondent did have available to him all necessary and appropriate financial information at the time he prepared his statement of affairs, and that he cannot avoid responsibility for its inaccuracy. This is further evidence of his unfitness to be a director.
28. Finally, the applicant asserts that the respondents failed to cooperate with him. In particular in a letter dated 11 February, 2015, the liquidator raised 11 queries/requests for further information/documentation to which he did not receive any satisfactory response. Mr Fox refutes this and says that he made every reasonable effort to cooperate in providing information and engaging with the liquidator in correspondence and verbally. I am not sufficiently persuaded that such lack of cooperation as there may have been on the part of Mr Fox amounts to misconduct because he did prepare and file a Statement of Affairs and engage with the liquidator.
Non-executive/passive director defence
29. Mr Fox’s primary contention is that, although he was a Director from 2004 onwards, he was not involved in the day-to-day running of the company – this was done by the first named respondent – and he, Mr. Fox, was a “non—executive” or “passive” Director. At paragraph 6 of his first affidavit he says that he had –
“…minimal involvement in [the] business. I never possessed keys to the assets of the company, I was never involved in any trade/contract negotiations and I held no authority over the Company’s bank accounts. I say that my involvement with the company arose only when called upon by the first named respondent. My involvement was dictated by events i.e., when the company experienced financial and/or legal difficulties, and my activities were remedial in nature.”
At paragraph 7 he says that he has never been a director of any other company, and that he never received any dividends or directors fees from this company.
30. When the liquidator took issue with this in his second affidavit, primarily on the basis that Mr Fox became a Director of the Company precisely so that he would have a role in the financial record-keeping, Mr Fox in his second affidavit took the opportunity to clarify his role, stating –
“3. In relation to paragraphs 7 to 12 of the Liquidators Supplemental Affidavit, I say and clarify that I did provide accountancy services via my Accountancy firm of a routine nature to the company. This involved processing of transactions relating to sales, purchases, payroll, banking, production of PAYE, PRSI, VAT and RCT Returns together with annual accounts for the company…The services provided were limited to the above and I was not directly involved with the running of the company on a day-to-day basis. I never handled the company’s banking, had no access to the company bank account and was not a signatory on the company’s cheque book. My involvement was as set out in my first affidavit.”
31. Mr Fox has stated that he has a small accounting practice. Given that he was a Director, and that he or his firm also prepared monthly management accounts, he ought to have been familiar with the company’s financial and banking transactions. He was well positioned to ensure that the Company accounts were audited and that all returns were made to the Revenue Commissioners and the CRO. The fact that he informed the liquidator at their meeting on 8 May, 2014, that he had all current financial records and that he would make them available to the liquidator on 13 May, 2014, confirms the level of his involvement in the Company. I am satisfied that as a matter of fact Mr Fox’s involvement in the operations and financial running of the company was significantly more than minimal, occasional or “remedial”. Moreover Mr Fox was introduced as a director to the Company specifically for the purpose of assisting the Company in its financial record keeping and ensuring that it complied with its Companies Act obligations. Mr Fox cannot now purport to divest himself of his obligations as a director by minimising his involvement in the day-to-day operations of the Company either as a matter of fact or as a matter of law.
32. In legal submissions, counsel for Mr Fox emphasised the point that the effect of the Disqualification Order may be greater on a professional person – which the Court accepts – and that it may affect a person’s constitutional right to earn a livelihood and to a good name. There was however no evidence put before the Court to suggest in any concrete way that a Disqualification Order would affect let alone deprive the second named respondent of his right to earn a livelihood. Counsel referred the Court to Re Tralee Beef and Lamb Ltd (in liquidation): Kavanagh v Delaney [2008] IESC 1, where the first named respondent was a chartered accountant in a well-known firm. He had been appointed to the board purely in connection with the business expansion scheme investments of the company. Hardiman J. referred to the jurisdiction to restrict/disqualify as “Draconian” and referred to the importance of reputation and professional standing that the Court should take into account. At page 359 he stated: –
“… I am slightly uneasy that, in this case, there may have been an assimilation in particular of the position of a non-executive director to that of an executive one…”
At page 360 he stated: –
“I do not consider that this case [Re Barings Ltd (No. 5)] or that of In Re Vehicle Imports Ltd (in liquidation) mandates the assimilation of the position of a non-executive director to that of an executive in terms of their common law duties. The position of a highly paid executive director of a vast bank may be of limited use in considering the common law duties of a non-executive director, appointed to keep business expansion scheme investors informed, of a small company.”
It will be noted that this passage referred specifically to a director’s common law duties.
I find more helpful the recent decision Re Walfab Engineering Ltd [2016] IECA 2 in which the Court of Appeal addressed the issue of directors who are not involved in the day-to-day running of the company, whether as non-executive directors or “passive” directors. The trial judge had considered matters which he regarded as pertinent to the exercise of his discretion, the first of these was the “scale of enterprise and qualification of directors” and he pointed out that the courts “in applying the law are of course sensitive to the personal circumstances and social background of persons who present before them…” And he had regard to “unprecedentedly turbulent times, when the respondents and the companies of which they were directors were confronted with economic challenges of such a scale and swiftness that customary practices such as the filing of returns may not have had the priority to some, the respondents among them, that legal requirements ought generally to have for all…”
Disagreeing with this analysis of the trial judge, Kelly P. at paragraph 60 of the judgement of the Court of Appeal stated: –
“60. For my part, I cannot agree that the factors identified by the trial judge can be regarded as relevant to the exercise of his discretion. The whole thrust of the legislative provision 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.”
Kelly P., in response to the trial judge’s comments that the directors should have sought to put the companies into liquidation sooner and sought an orderly wind up of the company’s affairs, in a comment that has some resonance in the present case, observed –
“61. He is undoubtedly correct that they ought to have put the companies into liquidation, but it is not a question of doing so “sooner” because, in fact, they never wound up the companies at all.”
In the present case the striking off of the Company in 1999 and 2011 emanated from the CRO. The restoration in 2011 occurred not because of the efforts of the respondents, but rather an application by a third party creditor. Ultimately the petition was presented by the Revenue Commissioners.
33. In Walfab Kelly P. directly addresses “passive directorships” from paragraph 67 of his judgement and reviewed the case law. At paragraph 71 he concluded: –
“… These decisions were given in the context of s.150 restrictions, but I am of the opinion that no different test would be appropriate in the context of a s.160 application. All directors whether passive or otherwise are required to undertake all reasonable steps to file annual returns.”
34. Even if I accepted that Mr Fox was a passive director, which I do not because of the level of his involvement in this company as outlined above, as an accountant and having regard to the reasons for his involvement in this company at the outset, he cannot sidestep the evidence of misconduct related to the company trading while insolvent, the failure to make annual returns, the continued trading while the company was dissolved, and the evidence related to non-payment of taxes.
35. I am therefore satisfied that the conduct of both respondents as directors has been such as to make them unfit to be concerned in the management of a company.
36. Further and in the alternative, of the Court’s own motion I find that both respondents should be disqualified under s.842(f) on the basis that they were both persistently in default in relation to relevant requirements of the Companies Acts.
37. In the circumstances it is not necessary for the Court to decide whether the second named respondent should be the subject of restriction pursuant to s.819. However my earlier findings lead me to the conclusion that the second named respondent did not act responsibly in relation to the conduct of the affairs of the company, and I would have been satisfied that it was just and equitable that the second named respondent should be subject to restrictions.
38. Counsel for Mr. Fox suggested that, if considering a disqualification or restriction order, the court should consider instead accepting his undertaking not to become a company director in the future. The offer of a formal undertaking to this effect was made by Mr. Fox in a letter that his solicitors sent, somewhat belatedly, on 16th January, 2017, to the Director of Corporate Enforcement (DCE). The letter points out that Mr. Fox is now 65 years of age, and suggests that as the primary purpose of the legislation is to safeguard the public and creditors, this would be achieved by such an undertaking. Counsel also referred the court to the decision of Murphy J. in Architectural & Industrial Coatings Limited: Cahill v. O’Brien and Cosgrove [2015] IEHC 817, a restriction case brought under the old s.150, where “some sympathy” was shown for the position of one of the directors who appeared to be “excluded from the affairs of the Company by the actions of the first named respondent”.
39. The DCE has a power (under s.850) at his discretion to issue an invitation to a director to voluntarily to submit to a period of disqualification by disqualification undertaking, but this was not done in the present case and the DCE is specifically precluded from offering or accepting such undertaking under s.851(6) which provides:
“(6) The Director shall not exercise his or her power under section 850(2) in relation to a person where –
a) in the Director’s opinion, a period of disqualification, in relation to the person, that is longer than 5 years is warranted by the underlying facts and circumstances, or
b) the Director is aware that an application under section 842 has already been made in respect of the person arising from or in connection with the underlying facts and circumstances.”
A similar position in relation to restriction applications/undertakings is contained in s.853.
In a reply letter dated 2 March, 2017, the Office of the DCE informed Mr. Fox’s solicitors that as the section 842 application had been made the DCE could not accept an undertaking. The letter added:
“For the sake of completeness, I should also note that when considering whether or not the liquidator should be relieved of such an obligation, the option of inviting your client to submit to a Disqualification Undertaking was considered. However, it was considered that the Director was precluded from offering an undertaking in this instance by virtue of section 851(6)(a), i.e. in circumstances where it was considered that a period of disqualification of longer than 5 years was warranted by the underlying facts and circumstances of the case.”
40. Section 851(6)(b) clearly precluded the DCE from accepting an undertaking. The section does not in express terms preclude the court from accepting an undertaking in lieu of disqualification. However reading the section as a whole, and reading it with s.850, the intention of the legislature appears to be that in appropriate circumstances the DCE can deal with the matter of director misconduct or unfitness by undertaking. In the absence of an express provision empowering the court, it would seem to undermine the function of the DCE if the court were to accept undertakings, or certainly if it were to become common practice. Moreover while sections 850 and 851 provide a statutory framework for disqualification undertakings, and their meaning and effect, there is no such provision in relation to an undertaking the court might accept. So for instance the disqualification undertaking to the DCE must be registered by the DCE with the CRO, and certain specific provisions prescribe its effect (and the same applies in respect of restriction); these provisions would not apply to an undertaking accepted by the court. The decision of Murphy J in Cosgrove is noted, but clearly does not set a precedent in respect of disqualification applications, or indeed restriction applications under the Companies Act, 2014. I also share the view of the DCE that a period of disqualification in excess of 5 years is warranted in the present case, which is a further reason for not accepting an undertaking.
41. I propose to hear the parties further in relation to the appropriate period of disqualification. It may however assist if I were to express a preliminary view on this issue. I regard the misconduct in question as serious, but not egregious. The appropriate period of disqualification is in the range of five years to ten years. The first named respondent is more blameworthy and should attract a disqualification nearer the upper end of this range.
Director of Corporate Enforcement -v- Brennan
[2008] IEHC 132 (22 April 2008)
Judgment by: Murphy J.
Status of Judgment: Approved
Neutral Citation Number: [2008] IEHC 132
Judgment of Mr. Justice Roderick Murphy dated the 22nd day of April, 2008.
1. Background
This application to the courts by the Director of Corporate Enforcement (“the Director”) follows the decision of Kelly J. in Re NIB Ltd: Director of Corporate Enforcement v. D’Arcy [2006] 2 IR 163 and this Court in Re NIB Ltd: Director of Corporate Enforcement v. Seymour [2007] IEHC 102 and in Re NIB Ltd: Director of Corporate Enforcement v. Curran [2007] IEHC 181. The applications followed the Report of Inspectors appointed by the High Court on 30th March, 1998, to investigate the affairs of National Irish Bank Limited (NIB) and National Irish Bank Financial Services Ltd. (NIBFS), (collectively referred to as “the Bank”). That report was published on 23rd July, 2004.
The Inspectors, Mr. Justice Blayney and Mr. Tom Grace FCA, had made findings in relation to the knowledge and responsibility of certain senior executives of the Bank.
Mr. Brennan was one of the general managers, having been appointed General Manager – Retail Banking in the organisational structure of the Bank, which was put in place in May, 1988, shortly after the appointment of Mr. Lacey as Chief Executive. Prior to that appointment, Mr. Brennan was General Manager (Operations). In both roles, he had charge of the branch network, reporting to the Chief Executive. The respondent held the title of General Manager – Retail Banking until 30th June, 1991. On 1st October, 1990 another person was appointed Head of Retail, reporting directly to the Chief Executive in respect of the branch network. Consequently, from 1st October, 1990, he was no longer directly responsible for the branches, and ceased to be on the circulation list for internal audit reports on branches. These reports identified some irregularities which were the subject of findings by the Inspectors.
Mr. Brennan subsequently held a number of other positions within the Bank being as follows:
From 1st July, 1991, he became General Manager – Corporate Services, retaining responsibility for management services. Internal audit reported to him in relation to the administrative and operational matters in this role.
On 3rd May, 1993, his title changed to General Manager – Administration, where he assumed responsibility for the treasury and international department, in addition to his existing duties.
In March, 1996 the respondent’s title changed to General Manager – Risk Management and Administration and in May, 1997 his role was changed to Head of Risk and Administration.
The respondent was a director of NIBFS during the period which is the subject of the Inspectors’ inquiry.
2. Findings of the Inspectors regarding bogus non-resident accounts
2.1 Findings in respect of the Bank
2.1.1 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.
2.1.2 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.
2.1.3 Up to May, 1995 senior bank management failed to inform the branch staff in clear terms of the relevant provisions of the Finance Act 1986. Part IV of the 1986 Act, entitled Interest Payments by Certain Deposit Takers, provides for the deduction by the deposit taker – the Bank – of tax from interest due to deposit holders resident in the State. Non-resident deposits had to be treated as deposits in respect of which DIRT had to be deducted from the interest unless the banks were satisfied that the person beneficially entitled to the deposit was non-resident. The Inspectors found that senior Bank management failed to have a review conducted at that time to ensure that all existing non-resident accounts were genuine.
2.1.4 At branch level, the Bank failed to deduct DIRT from bogus non-resident accounts and from non-resident accounts where the Bank did not hold a properly completed the declaration in a form prescribed or authorised by the Revenue Commissioners.
2.1.5 Although senior management were 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.
2.2 Responsibility of the Respondent
As General Manager – Retail Banking between May, 1988 and June, 1991, one of Mr. Brennan’s responsibilities was to ensure that the branches had full and accurate instructions with regard to deducting retention tax from interest on deposits, and to ensure that appropriate procedures were in place to implement the instructions. This tax was introduced in the Finance Act 1986. Genuine non-resident accounts were exempt from Deposit Interest Retention Tax (DIRT).
Between July, 1991 and March, 1998, Mr. Brennan continued to be responsible for procedures in the branches and for ensuring that there was an appropriate system in place for compliance with the DIRT regime.
The Inspectors found that he failed to inform the branches prior to May, 1995 of the requirement of the Finance Act 1986 in relation to the deduction of DIRT and that he failed to discharge his responsibility of ensuring that proper procedures were in place in the branches to secure compliance with the statutory provisions for the operation of DIRT-exempt non-resident accounts.
The Inspectors found that Mr. Brennan had been made aware, through internal audit reports, of the deficiencies or irregularities which existed in the operation of DIRT-exempt non-resident accounts at branches. The majority of such reports referred to the failure of branches to hold properly completed declarations for all accounts classified as DIRT-exempt non-resident accounts.
Some of the branch audit reports received by the Inspectors when Mr. Brennan was on the circulation list referred to non-resident accounts linked to other resident accounts at the branch, to lending to resident customers being secured by liens over deposits with non-resident status or to other matters which, in the opinion of the Inspectors, pointed to the likelihood that certain non-resident accounts were in fact bogus. The audit reports showed that these deficiencies and irregularities persisted. This led to a comprehensive DIRT theme audit in late 1994.
Mr. Brennan attended a meeting of senior management held on 9th February, 1995 to discuss the results of the DIRT theme audit and the issues arising therefrom. In the minutes of the meeting, he was noted as having stated that 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.
On that date, 9th February, 1995, he sent a memorandum to the Executive Director which noted his concerns over a number of years in the area of compliance with the legal requirements for the operation of DIRT-exempt non-resident accounts.
It is the Inspectors’ belief that Mr. Brennan was not only aware of the failure of branches to hold properly completed non-resident accounts declarations, but ought also to have been aware that bogus non-resident accounts existed throughout the branch network.
It was his responsibility while acting as General Manager – Retail 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 DIRT. He failed to discharge that responsibility.
At the meeting of 9th February, 1995, he failed to raise the question of potential retrospective liability to the Revenue Commissioners for DIRT resulting from the findings of the DIRT theme audit. In his evidence to the Inspectors, Mr. Brennan claimed that this would have been the responsibility of the financial department. Even if the primary responsibility rested elsewhere, he had a responsibility, by reason of being part of senior management, to raise the issues at the meeting. He failed in that responsibility.
3. Finding of the Inspectors in relation to fictitious and incorrectly named accounts.
3.1 The Inspectors found that the Bank opened and maintained fictitious and incorrectly named accounts which existed throughout the branch network during the period of the investigation up to the end of 1996. 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. Bank personnel were aware, or ought to have been aware, of the reasons for the opening of such accounts.
3.2 Responsibility of the Respondent:
The Inspectors made a positive finding in relation to Mr. Brennan. The report indicated that the Inspectors had received no evidence that he was aware of the existence of fictitious and incorrectly named accounts across the Bank network, prior to the issue by Mr. Keane, General Manager – Banking of a memorandum dated 7th December, 1995 and they believed that Mr. Brennan took appropriate action to eliminate those accounts.
4. Sale of Clerical and Medical Insurance (CMI) and other policies:
4.1 The Inspectors found that 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 the Bank for investment in CMI policies which were promoted as a secure investment for funds which had not been declared to the Revenue Commissioners. The Bank engaged in a practice which served to facilitate the evasion of revenue obligations by third parties. Prospective investors were given an assurance by Bank personnel that their investment would be confidential from the Revenue Commissioners. If made the subject of trust, the investment would pass to 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 branch personnel of the Bank was to identify likely investors. The role of the personnel in the Financial Advice and Services Division (FASD) was to introduce customers to CMI and induce them to take out policies with CMI. The Bank’s purpose in executing such policies was the earning of commission, the retention of deposits and the gaining of new deposits.
4.2 Responsibility of the Respondent
While General Manager – Administration, Mr. Brennan was the addressee of a memorandum dated 17th August, 1994, from Geoff Bell, Head of Management Services, and therefore knew that CMI policies were being promoted to persons with “sensitive funds” with “confidentiality a prerequisite in investment”. He also knew the extent of the funds deposited by CMI with the Bank resulting from the sale of CMI personal portfolio policies.
Mr. Brennan shared a responsibility to take steps to ensure that the promotion of CMI policies in this manner was stopped.
5. Improper charging of interest
5.1 The Inspectors found that during the period of investigation, interest charged by the Bank to some customers on their quarterly accounts included sums which were in fact not interest. Such inclusion was improper and should have been immediately refunded.
5.2 Responsibility of the respondent
In 1990, Mr. Brennan was General Manager – Retail Banking. He was made aware of the practice of loading interest through receipt of the audit reports in the Carrick-on-Shannon and Carndonagh branches. His response to the audit report on Carrick-on-Shannon and the related memorandum dated 21st May, 1990, from Mr. Lacey, Chief Executive, was appropriate insofar as he requested that he be advised of the extent of the practice and instructed that the practice cease. However, he omitted to give any instruction that refunds be made to customers. He failed to ensure that he was advised of the extent of the practice, and by reason of this failure, he was unable to take any decision on whether further action was required.
The Inspectors found that Mr. Brennan shared responsibility for the Bank’s failure to make
appropriate refunds to customers at the time, notwithstanding his evidence to the Inspectors that the primary responsibility to refund customers lay with the branch managers and thereafter with the relevant regional manager.
6. Practice of improper charging of fees
6.1 The relevant finding of the Inspectors was that between 1988 and April, 1996 there was no system in operation at the branches for the contemporaneous recording of administrative and management time. The manner in which branch managers were to charge such fees was improper and resulted in some customers being overcharged across the branch network. While the new system for recording and charging account administration time, introduced in 1996, was to take effect from May/August, (the charging period of 1996) the system 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.
6.2 Responsibility of the Respondent
During the period 1988 to 30th June, 1991, when Mr. Brennan was General Manager – Retail Banking, he knew, or ought to have known, that the Bank Procedures Manual did not contain any guidance on the nature of the work or services to customers which should give rise to an administration or management of time charge, nor did it give any guidance on the form of record to be maintained by branch staff responsible for the delivery of the service. Mr. Brennan bore the principal responsibility for the Bank’s failure during that time to put in place an appropriate procedure for recording management and administration time which was chargeable to customers.
Between July, 1991 and March, 1996, while his title and functions changed from time to time, Mr. Brennan continued to be responsible for procedures in the branches. Accordingly, he continued to share responsibility for the Bank’s failure in this regard.
7. Director’s submission
Summary of Respondent’s Responsibility
In summary, insofar as Mr. Brennan is concerned, the Director submitted that the Inspectors’ report found that he was aware of various improper practices which prevailed within the Bank and was responsible, with others, for the continuation of many of these practices, for the failure to address the Bank’s retrospective liabilities arising from a number of these improper practices and for the Bank’s associated legal and professional failures.
In all the circumstances, the Director of Corporate Enforcement says that it is clear that by his actions and omissions, the respondent, while acting as an officer of the Bank over a period of close to ten years –
Breached his duty as such an officer in failing to ensure that the company’s legal requirements were complied with and in failing to carry out his common law duties with due care, skill and diligence. In this regard the Director refers to s. 160(2)(b).
Engaged in conduct which makes him unfit to be concerned in the management of a company and in this regard reference was made to s. 160(2)(d) and (e).
8. Pleadings
By notice of motion dated 20th July, 2005, the Director applied to the court for an order pursuant to s. 160(2)(b) and/or s. 160(2)(d) and/or s. 160(2)(e) of the Companies Act 1990, declaring the respondent 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 taking part in the promotion, formation or management of any company or any society registered under the Industrial and Providence Societies Act 1893 – 1978.
The grounds upon which the relief was sought were to be found in the Inspectors’ report published on 23rd July, 2004, which concluded that NIB and NIBSF (collectively referred to as “the Bank”), were involved in a number of improper practices, summarised 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;
So-called CMI 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;
There was improper charging of fees to customers.”
The Inspectors’ report concluded that responsibility for the improper practices which existed rested with the senior management of the Bank during the period covered by the investigations. The Inspectors made findings relevant to the respondent in respect of five of the six above mentioned practices. The area where no finding was made was that relating to Special Savings Accounts.
9. Grounding Affidavit of Dick O’Rafferty:
Mr. O’Rafferty, an officer of the Director, deposed to the matters summarised in the notice of motion above.
The Director’s solicitor sent the respondent a letter enclosing a notice dated 15th March, 2005 of the Director’s intention to make the application herein. Mr. O’Rafferty points out that the notice of motion in the proceedings differed to some extent from the draft which was forwarded to the respondent with the s. 160(7) notice.
Mr. O’Rafferty concluded that the respondent was a general manager or equivalent grade within the Bank for a period of some ten years, during which time he held various senior positions in areas relevant to the critical findings of the Inspectors. He was also a director of NIBFSC for a period of over ten years. The respondent was, therefore, an officer of the Bank who had clear legal and professional responsibilities to uphold proper standards of corporate and banking behaviour in the Bank. It was clear from the Inspectors’ report that the Bank was seriously deficient in meeting these standards in certain areas. The Director believed that the Inspectors made appropriate findings of fact and responsibility with respect to the respondent.
While the Inspectors approved of the remedial action of the respondent in eliminating fictitious and incorrectly named accounts, it was clear from the Inspectors’ report that in the areas of bogus non-resident accounts, CMI, interest and fees in particular, the respondent failed, with others to:
put in place in the Bank proper procedures to secure compliance with legal and professional obligations,
pursue the correction of weaknesses or potential weaknesses in Bank practices of which he was aware,
address the Bank’s retrospective liabilities to the Revenue Commissioners and its customers which resulted in the improper enrichment of the Bank at the expense of those stakeholders and/or
create, promote and uphold within the Bank a culture of material compliance with relevant law and duty.
On the basis of the findings of the Inspectors’ report, the Director considered that the respondent demonstrated unfitness, a lack of commercial probity, negligence and/or incompetence in the discharge of his duties as an officer of the Bank. Accordingly, the Director was of the view that the respondent is unsuitable to participate in the management of a company and recommended to the court that an order be made against the respondent in the terms of the notice of motion.
10. Respondent’s replying affidavit
10.1 By affidavit sworn 15th October, 2005, in response to the affidavit of Mr. O’Rafferty, Mr. Brennan averred that he was never a director of National Irish Bank Limited and was not within the class of persons covered by paragraph (b) and/or (d) of s. 160(2) as he was not an officer of National Irish Bank. He says he was a director of NIBFS but that the application did not contain any reference to any conduct on his part in relation to NIBSF.
Mr. Brennan observed that it was apparent from the notice of motion and the affidavit grounding the motion that the applicant’s application was based essentially on the findings of the Inspectors appointed to investigate the affairs of NIB and NIBFS. He took issue with many of those findings insofar as they related to him. He stated that even if the court were to accept all of the findings, insofar as they related to him, they did not indicate conduct on his part which would make him unfit to be concerned in the management of the company or make it appropriate that he be disqualified pursuant to s. 160.
He said he was at a significant disadvantage in dealing with the issues raised in the grounding affidavit by reason of the expiry of the time and a lack of access to some of the documentation which would be relevant to the defence of his conduct within the relevant period. He had retired from NIB in December, 1999 and did not have access to documentation other than a small amount of copy documentation which was furnished to him in connection with the inquiries of the Inspectors. By letter of 23rd September, 2005 his solicitors requested various documents from NIB which was refused by letter of 26th September, both of which he exhibited. He believed that some of the documentation relevant to the application was among documentation stolen from the remote storage facility used by NIB and subsequently furnished to RTÉ journalists and shown on the News and other programmes broadcast by RTÉ in 1998.
10.2 He referred to a broad range of responsibilities which he held in NIB and described the regional managers’ structure, whereby Kevin Curran and Dermot Bonner were appointed regional managers with “specific responsibility for the management, development and control of the business in the two regions”. The five Dublin branches already had senior managers in place who reported to him. That left the regional managers and the five senior managers to get on with the task of managing the regions and branches respectively. His duties as General Manager – Retail Banking included responsibility for the establishment of the Dublin based computer operation known as Management Services, which was in the process of separation from Northern Bank in Belfast. He was involved in the Bank’s credit committee which absorbed a considerable amount of his time and represented the Bank and the Bankers’ Federation, the Institute of Bankers, the Ombudsman Board and a number of other bodies.
On the appointment of Dermot Bonner as Head of Retail in October, 1990, reporting directly to the Chief Executive, he ceased to have responsibility for the branch network and was not on the circulation list of the branch audit reports from 30th September, 1990.
On 1st July, 1991, when Basil Noone replaced him as General Manager – Retail Banking, he was appointed General Manager – Corporate Services. he was given additional tasks with the following areas reporting to him: Head of Legal, Company Secretary, Head of Asset Finance, Head of Credit Administration, Head of Internal Audit (of administration and corporational matters only) as well as Head of Management Services. He continued to have the external representational roles as well as being a member of the in-house committees such as executive, credit, asset and liabilities, and pricing. In May, 1993 he was also given the responsibility for treasury and international matters. In March, 1996 his title was changed to General Manager – Risk Management and Administration but this did not entail any change in duties.
10.3 Mr. Brennan said that the improper practices identified in the report of the Inspectors occurred at branch level. He notes that the Inspectors decided that it was not appropriate to make any findings of individual responsibility against branch managers. They decided that the responsibility lay with senior management to ensure that the practices did not exist. He did not accept this as either a valid or a reasonable approach and suggested that the Inspectors did not appear to have given sufficient weight to the calibre of person who had been chosen and appointed branch manager which role was a considerable responsibility and trust arising from considerable banking experience, typically twenty years, and proven ability. He placed a high degree of trust in the regional managers and the senior and branch managers to carry out their responsibilities in an appropriate manner even where, as matters turned out, this appears not to have been well-founded.
10.4 Mr. Brennan then dealt with the Inspectors’ criticism in relation to bogus non-resident accounts, operation of DIRT-exempt non-resident accounts, CMI policies and improper charging of interest and fees.
Mr. Brennan firstly deal with the Inspectors’ criticism that he failed to inform the branches prior to May, 1995 of the requirements of the Finance Act 1986 in relation to the deduction of DIRT.
There were a number of circulars issued to branches prior to the establishment of National Irish Bank in 1987 and to his appointment as General Manager – Retail Banking in May, 1988. These circulars were referred to at pages 25 and 26 of the Inspectors’ report. He referred to circular SI/86 of 24th July, 1986 and quoted therefrom. He also referred to the Bank’s Procedures Manual regarding the identity, respectability and suitability of the proposed customer when opening an account. He had a clear recollection of meetings attended by branch managers and regional managers making clear the position in relation to non-resident accounts. In the period 1989 to 1993 he wrote on a number of occasions to the branches and to the regional managers, emphasising the legal requirements in relation to DIRT and referred, in particular, to a letter of 4th October, 1989, which stated, inter alia:
“Branches will be aware of the qualification of payments of interest growth, i.e. non-resident exempt societies etc. and clearly we must deduct DIRT on all other accounts.
I am enclosing with this letter a print out of all DIRT-free accounts for your branch and should be obliged if you would run through the list and confirm to me by signing the end of the report that you are satisfied that all these accounts are correctly classified.”
He also referred to a letter of 15th January, 1990 regarding the “correct flag set to account for DIRT” where interest bearing accounts were opened.
He referred to a memorandum to regional managers of 7th August, 1991, making reference to the Finance Act 1986 which stated:
“Over the past year the investigation branch of the Revenue Commissioners has been extremely active in pursuant of what they term ‘bogus’ non-resident accounts. These are accounts where the person who is beneficially entitled to the interest has completed the declaration form (Stock 44) as a non-resident but in fact is resident in the Republic of Ireland. Less there be any ambiguity on the obligations of our branch managers in this respect I am enclosing the following for guidance.
Appendix 1:
Note of meeting between Irish Bankers’ Federation/Department of Finance/Revenue Commissioners held on 26th February, 1986.
Appendix 2:
Copy of letter of 21.3.1986 from the Department of Finance concerning reference to ‘a normal degree of care’.
Appendix 3:
Extract from the Finance Bill, 1986 that indicates reference to non-resident deposits.
The question that immediately comes to mind is the interpretation of the term ‘normal degree of care’. From my conversations with the Revenue Commissioners it is clear that their interpretation will stretch to inquiry when the account is opened but this has not yet been tested. What is clear is that the Revenue Inspector may examine any declaration held by a relevant deposit taker (ref. Chapter 37/2(b)). It is vitally important that all DIRT-exempt accounts are supported by a properly completed declaration form. …
Should we find declarations incorrectly completed and then be required by the Revenue Commissioners to produce these declarations you do not need me to tell you the implications for both the customer and the Bank.”
Mr. Brennan referred to the note in Appendix 1 of the meeting between the Irish Bankers’ Federation, the Department of Finance and the Revenue Commissioners which stated, inter alia:
“Asked if the provisions of the recent budget in relation to Retention Tax would place a greater burden than hitherto on branch managers to satisfy themselves that the necessary requirements would be met by non-resident depositors, the Revenue officials replied that they did not think so. They felt that branch managers would be expected to exercise ‘reasonable discretion’ in their dealings with such depositors. obviously, if it could be shown that a branch manager accepted declarations which he knew to be false, this would be a different matter.”
In the fourth place, Mr. Brennan referred to a memorandum of 11th November, 1991, to regional managers in relation to DIRT-exempt accounts. He received a confirmation from Mr. Curran, Regional Manager, by memo of 12th November, 1991, that he had thoroughly investigated the position with each manager in his region and that all managers confirmed that any DIRT-exempt accounts were correctly documented.
He also referred to a memorandum of 7th December, 1992, to regional managers and a letter of 26th November, 1993, regarding non-resident accounts and the Bank policy.
There were eight circulars which he said were relevant from 1992 to 1993. Subsequently, circular S.11, 1995 combined these into one to replace all previous circulars on DIRT.
In the circumstances, he failed to understand how the Inspectors could have concluded that he failed to inform the branches of the requirements of the Finance Act 1986 in relation to deduction of DIRT. It was clear that notwithstanding the numerous reminders, some bank managers chose to ignore the Bank’s written procedures. This became apparent in the DIRT theme audit which was discussed at the meeting at which he was present on 9th February, 1995.
11. Further Affidavit from Director
Mr. O’Rafferty’s second affidavit, at para. 14, stated that the fact that the issue of DIRT was a regular topic underlined the inadequacy of the procedures in place as alluded to by the Inspectors and, indeed, by the DIRT theme audit. The letters referred to by Mr. Brennan had little impact on addressing a clearly identified problem. On analysis, they did not address the failings in the circulars which, again, were clearly acknowledged to be inadequate, both in the DIRT theme audit and in the European audit in January, 1999. The problem was identified by the external auditors and referred to in the letter of 4th October, 1989, which caused Mr. Brennan to write to the branches.
12. Further Affidavit of Respondent
In Mr. Brennan’s second affidavit he had referred to Mr. O’Rafferty’s reference to the management meetings at Head Office and clarified the position by saying that he was not present at management meetings and regional management meetings but was present at biannual meetings attended by senior management at which he was told that regional managers were raising DIRT as an issue.
Mr. Brennan said he could be mistaken with regard to his reference to being present at biannual meetings where he was told that regional managers were raising DIRT as an issue. In his evidence, he referred to a particular meeting where the matter was raised by Mr. Lacey.
In his first affidavit, Mr Brennan had stated that he regularly raised the issue of DIRT. He said in his evidence to the court that he was aware of it when regional managers raised it with him during his regular meetings with them up until 1990. He said it would be wrong of him to say that the management meetings in Head Office raised the issue as a regular item. He could not say how frequently the issue of DIRT was raised at senior management meetings.
He believed that Mr. Lacey’s concern that the deposits base at the Bank would be eroded because he did not want deposits that might be at risk through tax evasion, rather than indicating a desire that deposits were to be held onto and not lost. He was aware that many branch managers and officials explained that they permitted bogus non-resident accounts to be opened by reference to a desire to ensure that business was not lost, that customers would not go elsewhere with their money.
13. Evidence to the court
13.1 In his evidence on cross-examination, Mr. Brennan outlined his career with Northern Bank from 1st November, 1960 to 1986 when Northern Bank (Ireland) Limited separated from the Northern Bank at which time Mr. Brennan was Assistant General Manager of Operations and set up the headquarters in Dublin as part of the Midland Bank Group. In 1987 it was part of the National Australia Bank Group. Mr. Brennan was General Manager – Retail Banking and a member of the Executive Committee until 1994 when Mr. Lacey left as Chief Executive to be succeeded by Mr. Seymour. The Executive Committee met about once a month. Mr. Seymour had more broadly-based meetings in what was a traumatic time. As he was less familiar with Irish banking he “had to rely on us”. The Executive Committee gave policy directions but did not go into the detail of operations. He did not remember the problems of the Bank being dealt with at that level.
The Board of Directors was quite independent with non-executive directors apart from the Chief Executive. The Executive Committee addressed issues and was responsible for the strategic and policy direction of the Bank. It did not deal with actual practical issues that were presenting themselves for resolution at executive level. Mr. Brennan did not remember the DIRT problems, ensuring that the DIRT regime was applied at branch level, being discussed. He accepted that it could have been. He continued:
“I am not saying that they were not, they could have been, but I cannot remember that level of detail being discussed and unfortunately we do not appear to have minutes of the meetings.”
After the DIRT theme audit report was circulated in December of 1994, Mr. Seymour was appointed Executive Director. The panel of people who were invited to the meeting on 9th February, 1995, comprised the members of the Executive Committee. Mr. Brennan did not believe that the Executive Committee was as active as it had been during Mr. Lacey’s time.
His responsibilities at all material times related to retail, credit/lending and the profitability of the branches. The responsibility with regard to corporate matters lay with National Bank Finance Corporation and then National Irish Investment Bank.
His office was close to Mr. Lacey’s, with whom he had daily contact.
The business of the Bank was growing to such an extent that he could not manage retail on his own. Retail managers were appointed in 1988 and reported to him until 1990.
Once a year all managers met with Mr. Lacey, who addressed them. The issue of DIRT came up at one of those meetings. Prior to 1994, the issue of DIRT was raised at a meeting in headquarters, at which all managers were present. The Bank’s performance was the main issue. Mr. Brennan said that Mr. Lacey was unequivocal regarding DIRT: he did not want the deposit base to be eroded by non-compliance.
Mr. Brennan said that there was one meeting that he could remember in particular where Mr. Lacey referred to concerns in respect of DIRT as Mr. Lacey chaired that meeting. He said he could be mistaken in mixing up the regional meetings with the senior management meetings. He was not certain, he might have been mistaken. He agreed that he had said he was present at biannual meetings attended by senior management at which he was told that regional managers were raising DIRT as an issue and that management meetings held around the country regularly raised the issue of DIRT. He said he did not know after 1990 but certainly the regional managers during their regular meetings with him would have raised the issue.
Mr. Brennan had averred in his affidavit that he believed that management meetings held at Head Office and regional management meetings held around the country regularly raised the issue of DIRT but he could not identify a particular meeting other than the one he had referred to. In his evidence he said he thought that it would be wrong of him to say that the management meetings at Head Office raised the DIRT issue as a regular item. Mr. Brennan said that he would be aware of what was going on up to October, 1990 and assumed that the issue of DIRT continued after that date but he could not be certain of that at this moment.
He agreed that he had written to managers subsequent to 1990. He had read the explanation given by many branch managers and officials to the Inspectors that they permitted bogus non-resident accounts to be opened to ensure that business was not lost, that customers would not go elsewhere with their money. He did not interpret that as the explanation of the remarks being made by Mr. Lacey.
Mr. Brennan averred that he believed that management meetings held at Head Office and regional management meetings held around the country regularly raised the issue of DIRT but that there was no written record of those meetings available. He did recollect that such meetings were held and that, at management meetings, the position in relation to non-resident accounts was made clear to managers and regional managers.
Mr. Brennan had agreed that the tax ought to have been remitted to the Revenue Commissioners where the accounts were misclassified. He agreed that there was a tax liability but could not remember the matter being discussed. He was the Bank delegate to the quarterly meetings of the Bankers’ Federation where DIRT compliance was discussed in 1991. It was public knowledge within the Bankers’ Federation that there were non-resident accounts in Bank of Ireland branches in August, 1991 and that one of the major banks was talking with the Revenue Commissioners. He was told that another bank was competing with one of the branches of his Bank regarding the facility of non-resident accounts. He was aware of the branch which had a client from the U.S. who was allowed to open a non-resident account though he was resident in the jurisdiction. This, he thought, was in 1991. Other cases were not established. The Bank, because of its Northern Ireland roots, had many genuine non-resident accounts. He agreed that the issue could have been solved by treating the account as subject to DIRT – it could be sorted with a stroke of a keyboard. The background of the black economy and the tax amnesty of 1993 was relevant.
He said that the 1995 DIRT theme audit report shook him.
The memorandum of 7th August, 1991 referred to the Revenue Commissioners’ interpretation “stretched to inquiry” when an account was opened. This led Mr. Brennan to understand that if there was a complete declaration that there was no problem.
He said he understood the properly completed form meant that the customer was truly resident. He said he had not got advice regarding taxation other than the references from the Irish Federation of Bankers. He believed that the reference to sensitive meant that they would lose deposits if they did not do what other institutions were doing. The deposit base would be under threat. There was a reality of losing customers. However, he had seen no evidence of the Bank trying to facilitate customers holding bogus non-resident accounts. He believed that if there were properly completed declarations, there would be no problem. He made no request to enquire of the bank managers.
He said he believed that the reference in the memo of 7th December, 1992 to a tax inspector contacting the Company Secretary of the Bank with regard to the percentage of non-resident accounts resulted in the Revenue official interviewing a bank manager and being satisfied with the answers given.
13.2 A book of documents for cross-examination was prepared and referred to as “the yellow book” consisting of five sets containing eleven, six, two, one and two documents, being a total of twenty-two documents selected.
The first set relates to memos from 1989 after Mr. Brennan had become General Manager – Retail Banking up to the DIRT theme audit meeting of 9th February, 1995. From October, 1990, when Mr. Bonner was appointed Head of Retail, Mr. Brennan was no longer directly responsible for the branches and ceased to be on the circulation list for internal branch audits.
The second set of six documents related to August, 1995 to October, 1996, after the DIRT theme audit and the meeting of February, 1995.
The third set are documents sent by Mr. Brennan to Geoff Bell and his reply to Mr. Brennan on 3rd and 17th August, 1994, relating to CMI.
The fourth set are documents relating to two branches regarding audits and interest loading.
Finally, the fifth set comprises of two special circulars S11/95 and S22/95 after the DIRT theme audit meeting.
The court summarises the evidence from cross- and re-examination and makes certain conclusions as follows.
13.2.1 The first, dated 4th October, 1989, is a standard form letter headed “re: Deposit Interest Retention Tax”.
The first paragraph of the letter of 4th October, 1989, reads:
“In the course of this year’s audit we have become aware of some accounts incorrectly flagged as free from Deposit Interest Retention Tax. This, of course, means that the interest has been paid gross for the past couple of years.”
The letter enclosed a print-out of all DIRT-free accounts for the relevant branch with a request that the manager confirm that the accounts listed were correctly classified and that the branch held either the non-resident declaration form or the tax exemption notice. The letter was addressed to the manager personally with a request that confirmation be returned by 13th October, eleven days hence.
Mr. Brennan agreed that it was to be sent by him as General Manager – Retail Banking. He said that the Finance Act, 1986, introducing DIRT, came into effect from 6th April, 1986. As the Bank was then administered from Belfast he was not required to concern himself with the new DIRT regime. The gradual transfer of responsibilities from Northern Bank occurred during the latter half of 1986 and practically the whole of 1987. The collection of tax was the responsibility of the Finance Department. National Australia Bank, the parent Bank, had a tax adviser for the group who was based in London. The external auditors also had a tax partner available to the Finance Department. Everybody in the Bank had responsibility for ensuring that the Bank observed the laws of the land. Special circulars were drafted by him or by the function head most associated with the change and it was then agreed with either Mr. Lacey or Mr. Brennan himself. He said that the standard letter of 4th October, 1989, had been prompted by the external auditors.
He agreed that the interest was being paid gross for the past couple of years and that the Revenue Commissioners had lost out in respect of the operation of those accounts.
Mr. Brennan agreed that there ought to have been tax deducted in respect of the operation of such account, that tax ought to have been remitted to the Revenue Commissioners and that there was a retrospective tax liability. He agreed that there were problems in relation to DIRT in October, 1989 which were raised by the external auditors and he undertook the task of bringing these problems to the attention of the branch managers.
He agreed that the Revenue Commissioners had lost out in respect of the operation of these accounts if they were incorrectly flagged. He understood the requirements of the Finance Act 1986, hence his letter saying: “We must deduct DIRT on all other accounts”.
It was put to Mr. Brennan that, where there were incorrectly classified accounts identified by the audit, it followed automatically that the Revenue Commissioners had lost out in respect of the DIRT on those accounts. He replied:
“I would obviously be aware if the tax was not deducted where it should have been deducted that the Revenue required the tax or should have received that tax.
…
Yes, there would be a retrospective tax liability.”
He said he honestly could not remember retrospective tax liability being specifically discussed at senior management meetings but he would clearly know that there was a retrospective liability for DIRT if any account was incorrectly flagged for any reason. He would have thought that every manager in the Bank in particular, probably every official in the Bank, would know that if there was an error in respect of the collection of DIRT and that error was not found out for a particular period of time that there was retrospective liability. He was not sure that a statement from him or a statement from anyone else was required to tell the managers that there was a retrospective liability.
He said that it never crossed his mind to give an instruction to bank managers to refund overcharged interest because common sense suggested it should be so and that the same applied to remitting to Revenue Commissioners of monies retrospectively due. Managers would have known this. As the events occurred over 20 years ago he had no recollection of the matter being discussed.
In re-examination he told the court that the letters of 4th October, 1989 and 15th January, 1990 and a memorandum of 7th August, 1991, relating to the areas of concern, left branch managers in no doubt of what he considered were their requirements in respect of the DIRT regulations.
The appendix to the last document, a note of a meeting between the Bankers’ Federation and the Department of Finance and the Revenue Commissioners on 26th February, 1996, was attached. He had referred to false declarations and his worry that there were penalties attaching to people who knowingly assisted in tax evasion. He believed that insofar as declarations of residence were concerned that a normal degree of care had been taken and that one did not accept declaration forms which the branch managers knew to have errors in them. A memorandum of 7th December, 1992 made it clear that there could be no ambiguity about the Bank’s policy to observe the law.
The court concludes that the letter, prompted by the (external) auditors clearly identifies, though does not quantify, accounts incorrectly flagged as free from DIRT. The second paragraph refers to the branches being aware of the qualification for payment of interest gross, i.e. non-resident, exempted societies etc., and that “We must deduct dirt on all other accounts”.
In his evidence Mr. Brennan acknowledges that the Revenue Commissioners lost out in respect of accounts which were improperly flagged. He agreed that everyone in the Bank had responsibility for ensuring compliance. However, he seemed to suggest that the collection of tax was the responsibility of the Finance Department, of the tax department in London or of the tax partner of the auditors. Yet it is clear that the latter prompted the letter. No evidence was given of advice being sought from the Finance Department or from London.
On the other hand, he said it had never crossed his mind to give instructions to branch managers to remit to the Revenue Commissioners taxes retrospectively due, notwithstanding his assertion in re-examination that there could be no ambiguity regarding the Bank’s policy.
Mr. Brennan limited his responsibility to a standard letter requesting confirmation that accounts were correctly classified.
13.2.2 The second document, also a standard template, dated 15th January, 1990 re Auditors’ Recommendations, 1989 raised three points, one of which was DIRT. The letter stated that care should be exercised when interest bearing accounts were opened to ensure that the correct flag was set to account for DIRT.
“It has become apparent from the recent returns from branches that non-resident declaration forms could not be located for a number of the savings accounts so designated and also that some resident accounts had been incorrectly set up originally as being DIRT-exempt. Please ensure the declaration forms are held for all non-resident accounts and note and advise me at the end of January of any outstanding items or difficulty encountered where accounts were wrongly flagged, correcting entries where necessary.”
Mr. Brennan said he was not aware that no retrospective payments were being made in respect of these accounts as he did not know what went on in individual branches. He would have been very surprised if there were not correcting entries passed in respect of errors.
The Court concludes from the evidence in cross- and in re-examination that Mr. Brennan was aware of problems in relation to DIRT in October, 1989. This issue had been raised by the Bank’s auditors. He undertook to bring the problem to the attention of the branch managers. While he agreed in cross-examination that there was retrospective tax liability and that the Revenue Commissioners had lost out as a result of incorrect flagging of the accounts he did not insist on raising the matter nor did he obtain advice nor attempt to calculate retrospective tax. While this may have been the responsibility of the Finance Department, he agreed that he too had responsibility for instructions and circulars.
13.2.3 The third document was dated 9th August, 1991, from Mr. Brennan as General Manager to the Regional Managers and to Mr. Noone, General Manager and to Mr. Bonner, Head of Retail. It post-dated the time when Mr. Brennan had ceased to have direct responsibility for the branches but he continued to write to the Regional Managers. This appears to have been prompted by meetings Mr. Brennan had with the Irish Bankers’ Federation, where he was the Bank nominee until 1999. He said he attended most of the meetings and that issues of DIRT and DIRT compliance and enforcement were discussed. A big issue in the branch of another bank became public knowledge in August, 1991 in relation to bogus non-resident accounts. That was the first time he had heard the term “bogus” being used meaning individuals were signing declarations to say they were non-resident.
Mr. Brennan said that around August, 1991 – it may have been sometime later, he was not altogether certain – there were a number of issues with major banks mentioned at the Bankers’ Federation. Some banks were having discussions with the Revenue Commissioners. The cards were not put on the table, but there were certainly issues being raised. A particular manager raised an issue of a competitor bank providing facilities to one of NIB’s customers in respect of what would now be termed bogus non-resident accounts.
He was aware one of the banks settling with the Revenue Commissioners in circumstances where declarations were falsely made. He was concerned that they might filter through to NIB and that was the reason why he was writing to the regional managers and including a copy of the notes of meetings of the Irish Bankers’ Federation, the Department of Finance and the Revenue Commissioners, a copy of the letter of 21st March, 1986, from the Department of Finance and an excerpt from the Finance Bill 1986. The letter also referred to a recent trawl of NIB’s DIRT-exempt deposit accounts. Mr. Brennan was surprised to find a number given on the print out as either “C/O Branch” or with an address within the Republic of Ireland. He referred to the whole area of non-resident accounts as a sensitive issue and rather than write again to the individual managers was sending a copy of the computer report to the regional managers so that the regional managers might contact “one or two branches in your region and enquire if there is any cause for concern”.
Mr. Brennan referred to one issue where one of NIB’s officials was reported to the Revenue Commissioners by a customer for opening a non-resident account for a person who was a resident who had returned from America and bought a pub and where the manager was aware or should have been aware of the circumstances. He disciplined the manager and fined him £250. He was not sure of the date but he thought it was 1990 or 1991.
He said it was correct that there were bank officers to his knowledge who were willing to facilitate a customer willing to make false declarations. He had no reason to believe that anyone, apart from that particular official, was concerned, within the Bank. A further report where the investigation branch carried out an inquiry turned out not to be correct. For this reason he described the issue as a thorny subject. Because the Bank began in Northern Ireland a lot of its staff were, in fact, Northern Ireland residents with family connections, the Bank had more than its share of legitimate non-resident deposits customers who had a great reluctance to get correspondence sent to them in Northern Ireland and there were difficulties in getting declarations for which, he said, “they did not have to sign up until then and they may have had to account for a number of years”. There were still problems with documentation when one looked at the external Auditor’s report in 1989. He believed the primary problem was documentary. He had argued that, as a matter of law, these accounts should have been treated as subject to DIRT. However, the difficulties were still being presented to him five years after the introduction of the Finance Act 1986. He agreed that it would have been possible to have introduced a computer system to change the flag and to have audited the accounts that did not have a proper declaration. He believed that the apparent reluctance to do this was because the people on the ground who were dealing with customers on a day-to-day basis, seemed to have a concern that they did not want to lose the deposit, they felt that they would get it sorted out and get the customer to complete the correct documentation.
He agreed that the Finance Act 1986 created an incentive to people to dishonestly represent themselves as non-resident for the purpose of avoiding DIRT at that particular time, when tax rates were high and where the black economy and tax evasion seemed to be a common problem throughout the economy.
The memo referred to the interpretation of the Revenue “stretching to inquiry” having not been tested. Mr. Brennan accepted that it was a basic term of banking that when a bank account was opened correctly one would not accept the position of any manager, or any official in the Bank, opening an account which the knew to be wrong. The Revenue Inspector may examine any declaration held by a deposit taker. The mechanical requirement to have a declaration is to have a formal solemn declaration. He agreed that customers were prepared to solemnly declare in false terms. If the Bank got the correct declaration completed, he did not see any problem. It did not necessarily follow, he said, that a care of branch address in the Republic of Ireland meant that there was a bogus non-resident account. If the declaration were not correctly completed, then it was invalid and the Bank should not have the account deemed as DIRT-free. The Bank would have a liability, a retrospective liability, for DIRT. He did not accept that there was no concern being evidenced in the memo about the issue of bogus non-resident accounts and no concern about any liability to the Revenue Commissioners arising from such accounts. He stated that the memo ‘talked’ in terms of bogus non-resident accounts. He said that, to his knowledge, the Bank had not obtained advice from a legal or accountancy source as to the validity or otherwise of its interpretation of its duty to the Revenue Commissioners. He added that this would probably have been for the tax people to deal with. He did not obtain advice. The only discussions he would have had with regard to that would have been in the Bankers’ Federation. He said that the phrase “properly completed” could mean making sure that all of the document was completed with appropriate information. It appeared from the memorandum that it was a matter for resolution by the regional managers.
Some of the other organisations that he knew about were using the facility to avoid tax. New managers were distinctly saying that the Bank was going to lose deposits if we did not do what the other banks were doing or other organisations were doing. It was becoming an issue for them because their deposit base was under threat at branch level. He continually made the point that that was not the business they were in. He remembers saying that to one particular manager. There was not a more widespread contact between him and the managers. He agreed there was a threat if they did not offer DIRT-free accounts. That was the reality. He said he had no evidence that they facilitated the opening of accounts as non-resident accounts knowing the customers were not entitled to the non-resident accounts. He felt that if they had properly completed declaration forms, they had nothing to fear.
A standard form NIB declaration was uniform for all organisations. There had been discussion between the Revenue Commissioners and the Irish Bankers’ Federation at the time. A declaration provided for a description of the account as the “person’s beneficially entitled to the interest”.
At a meeting of the Bankers’ Federation in February 1986, before the enactment of the Finance Act, there was a reference to a greater burden on bank managers to satisfy themselves that the necessary requirements were met by non-resident depositors. There was a reference in the meeting to the Revenue officials requiring branch managers to exercise “reasonable discretion” in their dealing with such depositors.
The excerpt continued:
“Obviously if it could be shown that a branch manager accepted declarations which he knew to be false, this would be a different matter. Notwithstanding the assurances given by banks in recent years to the effect that bank branch mangers have been directed to comply fully with statutory requirements, there were claims from tax evaders to the effect that bank managers had actively encouraged them insofar as false declarations were concerned. In relation to the penalty and provisions of the relevant statutes, branch managers would not be liable to penalties such as those imposed, for example, in the case of tax due under PAYE, were the employer is liable for tax due but not deducted.”
Mr. Brennan agreed that, in 1986, there were suggestions from the Revenue Commissioners that tax evasion was being facilitated by bank managers. His memo said that the Revenue Commissioners interpreted a ‘normal degree of care’ to mean ‘inquiry’. He agreed that in the memo he did not suggest that bank officials or bank managers ought to enquire into the validity of the declarations. He did not instruct managers to make enquiry.
Mr. Brennan said that, in addition to the reference in his memo of 7th August, 1991, he had further dealings with the investigation branch of the Revenue Commissioners, in addition to the meetings under the auspices of the Irish Bankers’ Federation. The Comptroller and Auditor General’s report referred to a number of matters being investigated in the period 1988 to 1992 in relation to certain branches of the Bank and a further incident in June, 1994. Mr. Brennan said that no action was taken against the bank official concerned. Mr. Brennan said he had no way of verifying that the account holder had returned here. He could not recall the extent of the non-resident accounts. The Bank’s Secretary had dealt directly with the Revenue Commissioners.
Mr. Brennan agreed that there was a reference to him in the Comptroller and Auditor General’s report as follows:
“There were difficult cases which required a lot of tenacity on the part of the officers of the Investigation Branch. I do not believe that there are grounds for suggesting that more could have been done by Revenue. In response to what they felt was implied criticism that the Bank was in some ways obstructive or uncooperative with the inquiries.
The National Irish Bank assured Revenue that they would give the fullest co-operation within the boundaries of its legal duties and the powers under which the Revenue were acting. The General Manager of the Bank said that there were no grey areas when the question of providing full customer account information was concerned. The information would be provided when the Bank had an authority signed by the account holder or an order of the court.”
The two incidents involved the same official.
Mr. Brennan said he would have been surprised if he did not discuss the issues which prompted him to write the memo of 7th August, 1991, with Mr. Lacey, who would have been fully aware of the concerns he had.
The Court concludes that, in the period of over a year and a half from the previous document, Mr. Brennan had the benefit of the Irish Bankers’ Federation discussions with the Revenue Commissioners and with particular incidents within the Bank. It was by then clear that the normal degree of care in opining non-resident accounts required inquiry and not passive acceptance of what customers said. This was not done.
He did not instruct managers to make enquiries.
No advice had been sought.
He relied on documentary compliance despite the import of the discussions between the Revenue Commissioners and the Irish Bankers’ Federation at whose meeting he represented the Bank.
Nothing in re-examination dissuades the court from such conclusion.
13.2.4 A document of the 11th November, 1991 was sent by Mr. Brennan to the regional managers. This was after he had ceased to have direct responsibility for the branches regarding the matter of non-resident accounts. He expressed the hope that any irregularities would be cleared up prior to the 30th September, 1991. He had not had the opportunity to speak with the Bank’s external auditors on the content of their comments for that date which was the end of the Bank’s financial year.
“I have not as yet had the opportunity to speak with our external auditors on the content of their comments this year, but before I do so, I would wish to be in a position to confirm that we have a clean slate as far as DIRT exempt accounts are concerned. To prepare for this, I would wish to know if you are in a position to confirm that all DIRT exempt accounts are correctly documented”.
The following day, 12th November, 1991, Mr. Curran, a regional manager replied saying that he thoroughly investigated the position of each manager in his region and that all managers confirm that all DIRT exempt accounts are now correctly document.
Mr. Brennan did not know if he received a reply from the two other regional managers as he did not get discovery of Bank documents before 1994. He said that over a period of time he would have received confirmations and would be very surprised if he had not gone back to them if they did not reply. The Court concludes that Mr. Brennan was aware of the need to satisfy the auditors regarding the documentation behind non-resident accounts. He was also aware that previous assurances did not eliminate the problem of documentation. He was aware that at this time the problem was not solely documentary in nature.
13.2.5 Over a year later, on 7th December, 1992, Mr. Brennan sent a document to the regional managers and copied it to Mr. Bonner regarding non-resident accounts.
“You will remember that over the last few years I have written a number of times on the above subject. My concern stems from the experience I have had with an inspector of taxes (who) has seen the pursuit of bogus non-resident accounts as a personal crusade. There will be no need for me to tell you again of problems experienced in other banks where evidence of irregular practice was found and acted upon by the inspector. The Finance Department have recently run a report for me which shows the percentage of non-resident credit balances as a percentage of total credit balances. As these are available from branch I am sending you the list for information. In the statement of practices recently received from the Revenue Commissioners following changes in the Finance Act 1992, extract attached, there can be no ambiguity of our responsibilities in the area of paying interest without deduction of income tax. The purpose of this note is to again remind you the Banks’ policy on strictly observing the regulations in respect of non-resident accounts and to ask you to remain alert when visiting branches to ensure that the Bank’s policy is understood by all staff.”
Mr. Brennan confirmed that one particular official in the investigation branch of the Revenue Commissioners had been in touch with the Secretary of the Bank on more than one occasion. He was concerned with bogus non-resident accounts. A Revenue official had been involved in the incident where a Bank official was found guilty of opening a non-resident account. There was a further case where there was an accusation made that the manager was facilitating a customer. The Revenue inspector was satisfied with the explanation made by the manager. His memo of the 7th December was just an information swap where the name of a particular inspector of taxes was a common denominator and who was focusing on bogus and non-resident accounts in deposit taking banks. He did not think anyone was critical of him.
The attachment to the memo of the 7th December, 1992 showed the percentage of non-resident credit balances as a percentage of total credit balances with a descending table of branches referenced.
Mr. Brennan agreed that border branches such as Gweedore with 57% was the highest and then Dungloe and Castlebar almost in excess of 50%. Killarney, however, had an excess of 43%. Sligo, Galway, Waterford, Limerick and Swords had more that one in six Irish pounds deposited in non-resident accounts. Baggot Street was under 5%. Mr. Brennan said there were a couple of explanations or possible explanations. Killarney was a relatively new branch and his manager was actually from Belfast and would have attracted funds from business acquaintances and relatives from the North. It was opened in the late 1980s, Mr. Brennan thought. He said that there was a problem with Castlebar and in Ennis. He was not sure about whether the manager in Galway was from the North as well which was a target market for garnering deposits. There was disciplinary action taken against both the manager and the assistant manager in Castlebar and against the manger who was formerly in Ennis and subsequently in Galway. He was not involved in the Castlebar proceedings but heard about it subsequently. He thought it might have been an issue with fictitious accounts. In Ennis and Galway the particular issue was with interest rates. There was a problem with it here as to DIRT procedures as well. It was correct to say that he was responsible for terminating the employment of the person who was manager of Galway and Ennis.
Other managers in Waterford and Limerick and Swords had previously worked in branches in Northern Ireland. He was not saying that it was a simple explanation. The deposit base was not huge. The money that came from the North might be on the larger side which could account for the imbalance. He did not accept that the accounts were bogus.
He said that it did not cross his mind when he saw the figures that there was one obvious potential explanation that the accounts were bogus non-resident accounts. He had made it quite plain to the managers that the Bank was not in the business of bogus non-resident accounts but he agreed that there was pressure from managers. If there was a problem with the branches the regional managers were the people who could address it. He did not deny that there was potentially evidence of irregular practices. It was their job to get down to see if there was a problem.
The Court concludes that whatever the position had been by December, 1992 Mr. Brennan was aware of the focus of the Inspector of Taxes in relation to bogus non-resident accounts. He sent a report of the Finance Department to the regional managers showing the high proportion of non-resident credit balances in certain branches should have caused stronger reaction than asking managers to be alert to Bank policy and to strictly observe the regulations.
Despite this knowledge, Mr. Brennan did not accept that there were bogus non-resident accounts.
While, somewhat inconsistently, he did not deny that there was potential evidence of irregular practices he believed, as stated above, that this was a matter for the regional managers.
13.2.6 Mr. Brennan was asked to consider a sixth document sent by Mr. Hunt to him on the 18th November, 1993. That document read:
“I have recently received three separate phone calls from senior officials from the Department of Finance and Revenue on the 1993 tax amnesty. They are clearly unhappy about the alleged actions of a number of bank officials. I’m now convinced that the Revenue will commence detailed audits of the major banks in 1994, with particular attention on non-resident accounts. The UK 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 analyses attached. It is difficult to explain why such a high proportion of new funds are from non-residents.”
Mr. Brennan said that it did not occur to him to inquire as to why the Bank had still less than 20% of its total deposit base as non-resident. He agreed that there was a 36% increase. He agreed that Mr. Hunt was drawing attention to an issue of concern about the conduct or actions of Bank officials in relation to DIRT. He was aware that during the years 1991 and 1992 there were ongoing problems with DIRT throughout the country and throughout the financial institutions. He did not believe there was a problem in the Bank but was aware of problems in other financial institutions.
In his evidence Mr. Brennan told the court that he was not saying the problems were not replicated in the Bank but to his knowledge they were not. He was seeking assurances from the managers and from the regional managers that their house was in order and that properly completed documents were in place. He disagreed that the document had nothing to do with the substance as, in his view, incorrect information should not be put on any document.
Mr. Brennan was asked where it was said in any of those documents that managers do not open an account for a non-resident unless satisfied that the person opening the account is in fact non-resident as that was not what they were about in banking. When a bank account is opened inquiries are made from the customer as to where they lived and that detail is correctly put on the form. He knew it was a problem. He believed that if they had their documents correct and properly completed, then they did not have a problem. He could not accept that the document (memo) was not an instruction to enquire but an instruction as to how to focus on the documents.
It was correct to say that a bank official was alleged by Revenue Commissioners to have opened an account in favour of a friend of his that was false or a bogus non-resident account. From memory, he said, the customer involved was availing of a tax amnesty and disclosed that he was assisted in opening a non-resident account (by a bank official) who was from the same rural town as he was.
The issue of retrospective DIRT arising from that account was not raised with the Bank. He personally warned the official who explained that the customer had returned from the United States of America and purchased a pub in a local town. It was the first time he had come across a complaint from the Revenue. The declaration was not properly completed as it gave an address in New York and the Bank knew that the customer now lived in a provincial town in Ireland.
He agreed that had the Revenue Commissioners considered the document on its face, it would appear to them to be a properly completed declaration. He raised the issue with the branch. The bank official remained in place.
The court concludes that by November, 1993 matters were even clearer. Three separate calls from the Revenue Commissioners and the Department of Finance were received by him regarding alleged actions of a number of bank officials. Mr. Brennan still found it difficult to explain why such a high proportion of new funds were from non-residents. To continue to maintain that he did not believe that there was a problem with the Bank, in the light of specific incident where he had dealt with and warned an official, seems implausible. Properly completed documentation was perceived by him to be a solution to the persistent problems raised.
13.2.7 The next document was a memo from Mr. Brennan of 26th November, 1993, to various heads and regional managers referring to the Department of Finance and the Revenue Commissioners concerns about the validity of the figures coming through from banks in respect of non-resident accounts. Mr. Brennan, having had occasion to seek assurances from branches that all non-resident accounts were correctly documented, referred to the level of non-resident deposits rising by close to 30%. He decided that an attached letter be written to all the branches regarding the substantial increase which was welcome and essential for the bank. However, recent analysis of the sources new money indicated that a significant proportion came from non-resident accounts. The draft letter to the branches referred to the deposit interest retention tax exempt flag and continued:
“Branch officials should be aware of the need to act prudently in accepting such declaration. Incomplete forms are not acceptable and a non-resident address should be clearly stated. It is not permitted for a non-resident to provide a vague address, (e.g. London, England) and use of the branch as an accommodation address is strictly forbidden. Declarations should not be accepted from customers where the detail is obviously incorrect as this leaves the Bank, and in particular the official accepting the declaration, liable to penalties imposed by the Revenue Commissioners and possible prosecution.”
A computer printout of all accounts classified as DIRT exempt would be sent. Branch managers were required to complete certificates as evidence at all non-resident and other debt exempt accounts and have the supporting documentation completed not later than the 20th December, 1993.
The certificate was short, headed ‘Non-Resident Accounts’ and stated as follows:
“I confirm that proper documentation is held in respect of all non-resident accounts listed on the printout dated 2nd December, 1993.
For National Irish Bank ___________________ branch
Date Manager/Assistant Manager”
Branch officials had a duty to enquire to get the details correct from that particular customer according to the Bank’s account opening procedures. He agreed that (nationally) there was widespread practice of bogus non-resident accounts but he was not sure that it could be described as widespread in the Bank even in the light of what he read of the Comptroller and Auditor General’s Report. That report referred to Bank managers opening accounts without inquiring or satisfying themselves that non-resident customers were in fact non-resident. That was causing concern to the Department of Finance and the Revenue Commissioners. He did not see why he needed to keep repeating what was a basic fundamental procedure in the Bank to follow account opening procedures. The instructions for opening accounts had never changed and are still contained by the Bank in the Branch Procedure Manual.
The Court concludes that to persist in the understanding of the correctness of documentation and to rely on the Bank’s Procedural Manual at this stage despite the memos written by him to the bank managers and regional managers pointed to a blind spot in Mr. Brennan’s vision of his responsibility. He ignored the concerns of the Revenue, the Department of Finance, the Irish Bankers’ Federation and the evidence of non-compliance within the Bank itself.
13.2.8 The DIRT theme audit report of 24th January, 1995 provided compelling evidence of the extent of non-compliance. Mr. Brennan said that he certainly did not receive the report at that date. He did not remember having read the full report subsequently but remembered that the position was unsatisfactory. He could not remember the fact that the theme audit was being undertaken but he probably would have heard about it. He had no involvement. He agreed that he was giving instructions to be passed on to all Bank officials and to that the audit says that there was a lack of care and concise guidelines in DIRT compliance issues. He did not accept that it was a criticism not exclusively of him but certainly which applied to him. He believed it to be a criticism of the original DIRT circular in 1986 and of the SSA circulars in relation to which he never gave any instructions.
In relation to the major findings, he said that it was right and that these were the sort of documentary errors which he had been earlier referring to in documents which he sent. He agreed that Mr. Hunt had raised the same issue in his memo to Mr. Brennan on the 18th November, 1993, which was a phenomenon that he was not aware of beforehand. He agreed that the standard operating procedures dealing with the opening of accounts generally within the Bank needed to be improved where there was evidence of unsatisfactory compliance. He did not believe that he said so specifically in any of the documents dating from 1989. He did not think he adverted to clarification of Bank’s responsibility for verification of account holders residency, e.g. passport, licence etc. He thought the requirement for documentary evidence had been strengthened by the provisions of the Criminal Justice Act, 1994.
Mr. Brennan did not think it was an obvious step to have independent evidence of residence because many of the Bank’s non-resident accounts came from branches in Northern Ireland. In fact, in some cases managers (in this jurisdiction) may have not ever have even met the customer. The customer may not have come to the branch. The declaration might be completed but (the account holder) may not necessarily have appeared in front of the particular official opening the account at that particular time. The managers relied on their colleagues in other branches to complete the documentation. He repeated that the account opening procedures were quite clear. If the manager did not know the customer was coming in to open any account – it need not be a deposit account – the manager was to get documentary evidence to support and references if necessary. He agreed that there was no specific reference in the documents he had authored to obtain or look for documentary evidence of residence before opening an non-resident account. The greater problem was a technical one in the Bank’s computer system. On a rollover of a fixed term deposit it was necessary to close the account and open a new account with the result that a new account number was required. (That would create a difficulty in referencing the declaration.)
Appendix 4 of the DIRT theme audit report referred to a significant level of missing declarations in the Malahide, Dungloe and O’Connell Street samples of between a fifth and a quarter of the deposits. Mr. Brennan said he could not deny that it was very disappointing to hear at this particular time, after all he had said and had understood to be the case from the regional managers. He was not sure that systematic failure would be the word but it was certainly careless. It was disappointing to find elementary errors such as missing declarations. He agreed it was just incredible and showed a picture of incompetence or carelessness on the part of branch officials. He did not agree that it reflected anything more. It was his view at the time that they were seriously at risk because of the documentary problem as the Bank had an obligation to remit the DIRT on any account where they did not have the proper documentation to support the non-resident status.
Mr. Brennan said that if they were not able to correct the error, by the date not being on it or getting the date put on it, then they would have a liability. He would not have been aware of any action been taken with regard to repayment of DIRT to the Revenue in respect of missing declarations. There was no reference to retrospective liability in the minutes of the meeting that followed the DIRT theme audit report.
The court concludes that the evidence of Mr. Brennan discloses a reluctance of accepting any involvement in or being aware of the DIRT theme audit report. His belief was that it was a criticism of the previous circulars relating to DIRT and Special Savings Accounts. He maintained, however, that he never gave any instructions in relation to these. He denied being aware of the issues being raised by Mr. Hunt on 18th November, 1993.
The court accepts the technical difficulty with regard to the rollover of fixed-term deposit accounts. However, no evidence was given as to having been perceived as a problem much less of any solution being sought. The court concludes that this indicates a lack of finance control and legal compliance with the administration of DIRT.
There seems to be some inconsistency between Mr. Brennan’s knowledge of Mr. Hunt’s memo and his understanding of the audit report and, more particularly, of the opening of the minutes of the meeting of 9th February, 1995, which is the next document put in cross-examination.
13.2.9 Mr. Brennan (JFB) was recorded in the minutes as being the first person to address the meeting of the 9th February, 1995. The minutes began as follows:
“JFB stated that 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 his evidence to the court Mr. Brennan said that he doubted that that was so. He did not remember the actual content of the meeting or even remember the statement that he made at the meeting until the document was presented to him. He remembered the meeting but did not remember what he had said and to this day cannot remember.
He said he certainly contributed to the discussion on DIRT down through the years but he did not think that he would be considered to have “taken ownership”. He knew that Mr. Lacey had quite a role in DIRT compliance.
He was asked whether there was a connection between documentation and tax evasion as the problem being recognised in the minutes by him was a problem of tax evasion. He agreed and said that tax evasion was a particular problem throughout those years.
It would be tax evasion in his opinion if the Bank officials were aiding and abetting individuals in respect of incorrect declarations and not deducting appropriate tax. He agreed that that constitutes tax evasion. There was nothing in the DIRT theme audit report that suggested that the Bank was facilitating the opening of bogus non-resident accounts. He replied that there was always a danger that if it were a case in the Bank, as appeared from what he heard was occurring in other organisations, then tax evasion would have been a problem for them. He said that if they had a situation where they were assisting in bogus non-resident accounts then it was a tax evasion matter. He had no evidence to suggest that the Bank was involved in opening bogus non-resident accounts. He honestly did not know, he said in his evidence, what prompted him to suggest that the problem was really one of tax evasion. It could well be part of the discussions that were taking place. He found suggestion to be extraordinary that he opened the meeting by using the words “tax evasion”.
He said that the circulars which he signed were not issued by him but by the Finance Department.
The meeting attended by eight or nine of the most senior managers, including the Executive Director, Mr. Seymour, to discuss the implication of “recent unfavourable audit report of DIRT interest tax issues”. Mr. Brennan did not believe it to be a crisis but it was certainly disturbing to him. He just could not recall the level of discussion at the meeting. He did not believe that there was a more fundamental problem than a clerical or administrative problem and was one involving tax evasion as there was no mention of tax evasion in the DIRT theme audit report.
Before arriving at a conclusion in relation to the minutes of the meeting of 7th February, 1995 it is appropriate to consider the memorandum of that date written by Mr. Brennan to the Executive Director.
13.2.10 On the same day as the meeting of 7th February, 1995, Mr. Brennan wrote to Mr. Seymour, the new Executive Director from the United Kingdom, who had replaced Mr. Lacey on 22nd April, 1994.
Mr. Brennan wrote:
“Having wrestled with DIRT for a number of years, I do believe that we must introduce a change of attitude by our management staff to the legal requirements. It is an Irish failing that is considered little harm in closing one’s eyes to tax evasion and to confusing evasion with avoidance.
As far as tax is concerned, the DIRT regulations are not that difficult. We must however start from the premise that DIRT, presently at 27%, is deducted in all interest paid to customers unless and until we have clear and correct documentary evidence to support the lower rate of 15% applicable to special savings accounts or the nil rate applicable to non-resident and other qualifying accounts.”
It is significant that Mr. Brennan did write directly to Mr. Seymour on the 9th February, 1995, the very day of the meeting, to discuss the DIRT theme audit report. His action points are reflected in the timetable appended to the minutes.
Mr. Brennan did not remember whether Mr. Seymour reverted to the issues raised. He said that in other banks there was a problem of tax evasion he did not believe that the problem in the Bank was one of tax evasion. The regional managers were supplying him with information from the managers saying that everything was in order. He agreed that he had looked for assurances and he had got them. There were problems but they were of a documentary nature. He asked what more was he to do. What he was suggesting in the memo to Mr. Seymour was that a compliance officer take a role to inspect all documentation. He agreed that he had never asked bank managers to confirm that they had inquired, checked and were satisfied that the non-resident accounts in their branches were legitimate non-resident accounts opened by persons who are non-resident of the State and were entitled to operate and maintain such accounts. He said he has asked them to confirm that they had proper and correct documentation for every non-resident account.
He said that the compliance office was appointed sometime during 1994 in anticipation of the discussions on the Criminal Justice Act. There had been nobody occupying such office beforehand. The person appointed had been a branch manager, had been with the Bank for 25 years and was just below the regional manager level.
Mr. Brennan did not disagree with the Inspectors’ report that there was no accounting by the Bank to the Revenue Commissioners in respect of DIRT as he had no evidence to the contrary. There was no documentary evidence to support the fact that it was considered and who considered it. He could not recall directing, recommending or advising anyone that was an issue to be considered, he agreed that it was a lamentable failure on the part of the Bank not to account to the Revenue. He did not accept that he, as one of the three or four more senior managers, had significant responsibility for that failure. He did not have any role to play in the collection of the DIRT tax. He agreed that if there was a liability it was the management of the Bank that was responsible for considering the issue of retrospective liability for DIRT. If the documentation was properly in place at the branches that was not an issue with calculation of DIRT as the computer system was sufficiently robust to deduct tax where appropriate, providing that everything was imputed correctly. He agreed that that was not so, that it was the responsibility of the management of the Bank to give direction as to how to treat those accounts or whether or not to account to the Revenue. He claimed he did give that direction.
He was asked whether instructions were given to compute retrospective liability and answered by saying that was not specific instructions. If there were a problem with documentation at the Bank, the bank manager knew at the beginning that he had responsibility to make the adjustment in respect of DIRT. The managers on the ground knew as well as he did that there was a retrospective liability in respect of DIRT if there was an error found subsequently.
Mr. Brennan agreed that he was one of the most senior managers at the Bank. He did not personally enquire or consider any inquiry from any branch manager as to what problems were found with the non-resident accounts nor instruct that steps be taken to calculate the tax liability and remit that tax liability to the Revenue Commissioners.
In the first place, the customer would have a liability if the declaration signed was incorrect. If the account were closed subsequently and the Bank could not recover it from the customer, then the Bank had the liability to account DIRT. He said he doubt he would have heard of a five or ten year DIRT retrospectivity liability being withdrawn from the customers account unless a dispute arose where the customer claimed that he was aided and abetted by the manager.
If it did not come within the branch manager’s discretion it would be a matter for the regional manager or the general manager of banking.
The Bank had competent and qualified accountants in the Finance Department dealing with tax returns whose duty it was to quantify the tax liability. He did not see it as his role to tell them how to do their job. It was a matter of the retail bank side and particularly the managers on the ground.
The court having regard to the evidence in cross-examination and re-examination finds it significant that Mr. Brennan dismissed the suggestion that the problem was more fundamental than a clerical or administrative problem and asserts that there was no mention of tax evasion in the DIRT theme audit report. He believes that there was a lot more discussion in the meeting of the 9th February, 1995 than appeared in the minutes and found it extraordinary the suggestion that he opened the meeting by using the words tax evasion even though that clearly appears in the minutes. The court accepts the minutes as a summary of the proceedings of that critical meeting. There was no evidence of any attempt to correct the minutes.
In his evidence he distinguished between aiding and abetting people to evade tax, which is tax evasion purely and simply, from a passive facilitation. While the DIRT theme audit report did not mention tax evasion it was clear from the opening line of the minutes of the 9th February, 1995, that Mr. Brennan felt there was a need to change attitudes at branch level so that possible tax evasion could be eliminated to the greatest degree possible. He did not say that tax evasion could be eliminated absolutely. The second sentence is consistent with his case that it remained a documentary problem:
“This means that we deduct DIRT at the standard rate (27%) unless the necessary clear documentation is held.”
This sentence indicates a mere documentary solution rather than to an obligation to inquire and to verify. While there may have been some ambiguity regarding the indications from the Revenue in the immediate aftermath of the Finance Act 1986 this clearly was dispelled from the attitude of the tax inspector referred to by Mr. Brennan and discussed at the Irish Bankers’ Federation (referred to in the memo of 9th August, 1991 and Mr. Hunt’s memorandum of 18th November, 1993). The development of the Bank’s own memoranda and circulars reflected the increasing awareness of non-compliance with DIRT obligations. It is significant that the tax inspectors criticised circular s. 11 of 1995 which was actioned as the solution to the inadequacies of the past by the critical meeting of the 9th February, 1995. Yet it is clear that documentary irregularities persisted after the issuing of that circular. One has to conclude that some documents remained formally incomplete and substantially non-compliant. The ultimate result was, of course, an accumulation of retrospective tax. There is no breakdown of the settlement as to whether it was tax, interest and/or penalties. Non-resident deposits increased without their being any substantial improvement in compliance.
The Court concludes that Mr. Brennan had a pivotal role in the presentation of the DIRT theme audit report notwithstanding his doubts that he was the first to speak at the meeting and his evidence that he had not been involved in its drafting. He sought to underline the fact that the report did not mention tax evasion, but agreed that tax evasion was a problem throughout the previous years. In the opening sentence of the minutes he himself is recorded as saying 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 reality the attitude of senior management needed to be changed to eliminate the lack of compliance just as had been done by Mr. Brennan in the elimination of fictitious accounts following the Criminal Justice Act 1994.
In re-examination he said that it was not just documentation which was a key focus of his, but that the documentation had to be correct. If the declarations were correct then the Bank would not have a problem with DIRT.
The reference to “sensitive” by the Department of Finance was a reference to the flight of capital out of the country if they were too stringent in their examination and their application of the Finance Act 1986. He thought that it was the Revenue Commissioners who would use the term. It was clear that the DIRT problem was far more extensive that he had believed, even from the information he was gleaning from his contacts with other banks at the time. Other banks also had a problem. He thought the Comptroller and Auditor General’s report alluded to the fact that one of the State banks had a particular difficulty and an unusual amount of non-resident accounts. It seemed to be public knowledge, and known to the Revenue Commissioners and the Department of Finance at the time.
What they were doing was saying to the banks: you do your best to get your house in order. That is exactly what he believed he was doing.
Mr. Brennan said he did not believe he was responsible for all the procedures in the Bank. He never claimed to know everything that was going on. He said that the administration area for which he had responsibility had no role in relation to monitoring and enforcement.
14. Post DIRT Theme Audit
14.1 Mr. Brennan wrote to Mr. Keane dated 2nd August, 1995, in relation to the Ballinasloe audit in the following terms in relation to fictitious accounts:
“Bearing in mind the dangers of a Revenue audit and the confirmations given by the Bank to the Tax Inspector following the branch trawl in December, 1993, the reassurances from Regional Managers that all managers fully understood the Bank’s attitude to fictitious accounts, the distribution of the Bank’s code of conduct policy and staff guidelines in February, 1993, the experience of recent disciplinary cases in the past and the Criminal Justice Act, 1994, I am at a loss to understand how any manager could be in doubt of the Bank’s attitude.
There can be absolutely no excuse, from what I have heard from the Head of Audit, and while I have not seen the report, wearing my operational risk hat I am concerned with what has now been discovered. Clearly, there is something radically wrong with our procedures. This has allowed this practice to go on for years without being brought to the attention of the regional and executive management. The question that immediately springs to mind is how widespread is this practice and how do we believe managers who can supply an incorrect certification. While I know you will be addressing the issue with those concerned, we as a management must not underestimate the disastrous effects something like this could have on the Bank and its management. Do the managers involved realise the risk that they run to themselves personally, as well as to the rest of the Bank? I am simply at a loss for words to describe adequately my shock at what has been disclosed and when you have time to consider the report maybe we can discuss.”
There was no finding by the Inspectors in relation to Mr. Brennan’s responsibility for fictitious accounts. He had not received the audit in relation to Ballinasloe as he was not on the circulation list for audits. He was correct to say that Mr. Harte had come to him in relation to difficulties that were disclosed in the Galway and Ennis branch and, prior to 1995, he had recommended to determine the employment of the manager involved. It was correct to say that he had ceased to be General Manager of Banking some time in 1990 and had relinquished control of the branch network. However, Mr. Harte had referred the matter to him because of its gravity. He believed that the reference to “wearing your operational risk hat” referred to the risk the Bank undertook if it was involved in opening fictitious accounts. They all had specific responsibility for operational risk at the Bank. He accepted that any element or risk in the Bank was his responsibility as a senior manager. He accepted that management had a collective responsibility for stamping out the practice. Here was clear evidence of wrongdoing when the Head of Audit told him that the manager had aided and abetted the opening of fictitious accounts knowingly. He did not believe the certification given.
14.2 The next document is a response from Mr. Brennan on 26th April, 1996, to a memo from Mr. Harte of 24th April relating to incorrectly titled accounts where Mr. Brennan said:
“I believe that a fresh and unequivocal instruction be given to all staff involving the opening and control of customer accounts and any further indiscretions in this area will simply not be tolerated. In fact, I believe that any evidence reported in the future of our staff knowingly involved in the opening or maintaining of fictitiously incorrectly named accounts could lead to automatic disciplinary action. We simply cannot put the Bank’s licence to operate at risk, and it behoves us in management to protect the shareholders’ investment by ensuring that we obey the law.”
It was put to Mr. Brennan that strong recommendations were nowhere to be found in relation to bogus non-resident accounts. Mr. Brennan said that he did not know what the memo of 24th April had said as he was not able to obtain that document. While the words were not used in relation to DIRT compliance, he had consistently adhered to the Bank’s procedures on the law.
14.3 The next document, a joint memorandum of 30th May, 1996, shortly after the April document was to all branch management from Mr. Keane and Mr. Brennan. Mr. Brennan said that is was originated by Mr. Keane who asked him to countersign the memorandum, in relation to fictitious accounts, which again was a strong memorandum stating that existing branch management have responsibility for all accounts in their branches regardless of when they were opened; that certificates had to be properly completed and must be regularised and/or closed, even where there was a possibility that business would be lost. Disciplinary action would be taken against all staff who had been knowingly involved with the opening and maintaining of accounts. Mr. Brennan said they would have to be closed. He did not remember if those accounts were also non-resident accounts. By regularising he meant putting the correct name on the account.
14.4 The next document was a joint memo of 22nd July, 1996, by Mr. Harte to Mr. Brennan and Mr. Keane following up on the previous memo mentioning branches with the most fictitious accounts.
14.5 A memo of 24th September, 1996 contained recommendations to close accounts, interview managers and ensure compliance with money laundering legislation when a new account was being opened. The same standards were to be applied to existing accounts as new accounts. All fictitious and incorrectly named accounts had to be cleared by 30th September, 1996 and internal control could not be signed off by the Chief Executive without the manager’s confirmation that these accounts had been regularised.
In his evidence Mr. Brennan said that there was a problem that customers might not wish to change or to close the account and there was a great reluctance on any manager to lose an account. Mr. Brennan said that the Inspectors’ report seemed to confirm that such action would be equally applicable to bogus non-resident accounts. Some managers who inherited branches where there were irregularities were able to sort them out very quickly. All they had to do was to change the customer’s account or else change the flag on the customer’s account which would automatically deduct the DIRT up to the previous charging period. If it went prior to that, then it would require a manual intervention. But it would not require any permission from him to do that.
14.6 The last document was dated 2nd October, 1996, regarding fictitious or incorrectly named accounts and referred to the feeling that some of the branches did not fully appreciate the risk for the Bank in the continuation of the irregular practice. Twenty-four branches had disclosed fictitious accounts in Mr. Harte’s memo of 22nd July, 1996. Twelve branches admitted retention of fictitious or incorrectly named accounts. Mr. Brennan said it was not a case of managers not knowing what their instructions were. But in October, 1996 there were still a few managers, not many, who were reluctant to grasp the mettle and tackle the individual customers. Mr. Brennan retired from the Bank in December, 1998. He was not able to say what the position was with the Bank at present with regard to the DIRT problem. In his opinion there was a different environment in the 1990s.
The court finds that Mr. Brennan continued to have an important overall responsibility regarding operational risk at the Bank. This was acknowledged by Mr. Harte, the Head of Audit, in relation to Ennis and Ballinasloe.
He had discharged that responsibility in relation to the elimination of fictitious accounts.
15. Circulars
15.1 Special circular s.11 of 1995 was issued on 8th March, 1995, under the name of Mr. Brennan but was headed Finance and Planning Department and was drafted by them. Mr. Brennan said that as there had been glaring errors in a previous circular so circulars were then issued by the Chief Executive or a General Manager. He did not know why it emanated under his name rather than under the name of Mr. Keane who had responsibility for corporate and retail banking from the 3rd May, 1993, to the 18th August, 1995.
The circular referred to lack of documentation and/or incomplete documentation exposing the bank to potential losses and needed to be eliminated. It gave instructions that DIRT must be deducted at the standard rate unless the valid declaration was held, signed and dated and in all other respects were fully completed by the customer. There was a provision that before an account was opened for a person who wished to avail of non-resident statutory status that documentation must be produced as evidence that they were resident outside the State and such declaration held on file. Mr. Brennan said that that did not appear at all in the Bank’s account opening procedures. In his affidavit Mr. Brennan referred to the manual which stated “when you are opening an account the manager must be satisfied about the identity, respectability and suitability of a proposed customer”. Mr. Brennan agreed that that statement refers to a Bank Procedures Manual in relation to current accounts but that similar provisions granted to deposit accounts which he referred to in re-examination.
The Inspectors had made two criticisms of s.11 of 1995. One is that it did not contain an instruction from the Bank that the manager had to be satisfied that someone was a non-resident before opening a non-resident account: staff were not instructed that DIRT had to be deducted unless the Bank was satisfied that the depositor was non-resident.
The second criticism was that the circular did not address the satisfaction of the Inspectors to the question of existing non-resident accounts and did not require bank officials or branch managers to audit existing accounts so as to satisfy themselves that they were proper accounts.
Mr. Brennan said in his evidence in relation to new non-resident accounts that if experienced Bank Managers did not understand the DIRT requirements, which they obviously did not, he did not know what more he could say to emphasise the requirements of the law. The findings of the Inspectors and of the Comptroller and Auditor General’s report was one of non-compliance at branch level and it was not any misinterpretation of the rules that is laid down. He believed it to be a violation of the rules laid down. In his opinion he did not believe that the branch managers needed to wait until the issue of circular s.11 of 1995 to understand the requirements for non-resident accounts. He found it disheartening to see that the same issues were being repeated. While it was the first time that there was evidence in writing, there was no question in his mind that bank managers knew exactly what the requirements of the Act were. He agreed that what transpired was that the managers were consciously departing from the requirements of the Finance Act, 1986. He agreed there were instances that proved, subsequent to the 1998 audit, that there were managers who violated basic instructions and knew they were violating such instructions. He did not accept for one minute that they did not clearly understand the position of the bank in relation to compliance.
It was not correct to suggest that managers were oblivious to the requirement for a genuine non-resident account. There was no need for him to elaborate any more on what was in the circular. The duty of care extended to inquiry of the residence of the account holder.
16. Clerical Medical Insurance (CMI)
16.1 The memo from Mr. Brennan to Mr. Bell, Head of Management Services, dated the 3rd of August, 1994, some four months before the DIRT theme audit referred to Clerical Medical International (CMI) and was copied to Nigel D’Arcy, the Head of Financial Advice and Services. The memo referred to Mr. Brennan being surprised that the issue of the CMI deposits was not sorted out. Mr. Brennan, having conducted some research on CMI, was satisfied with the strength of the institution but expressed dissatisfaction with the manner in which the funds were introduced to CMI and in particular with the role played by the branch manager. The bank manager referred to had clearly identified the deposit with a particular customer even though the account title (in the branch) was CMI with the unique number. Mr. Brennan suggested to the Chief Executive that deposits be maintained centrally rather than in branches. He had written to Nigel D’Arcy outlining his views. He was concerned with the complicated procedures that were open to error and abuse and with the implications that branches might be assisting in opening non-resident accounts. He wished to see the matter implemented that month.
As well as being General Manager – Administration, Mr. Brennan was the Director of National Irish Bank Financial Services which was in receipt of the income generated by FASD rather than directly into the bank for some technical or tax reason. Mr. D’Arcy was recruited in the 1980s and had reported directly to Mr. Lacey, the Chief Executive.
In his evidence to the Court, Mr. Brennan said that the first reference to CMI came when he was on the Assets and Liability Committee chaired by Mr. Lacey. The size of the deposit with CMI of £20 million formed part of the reporting to the Central Bank as a large deposit. Mr. Brennan said that if the figure were double or more there were possible implications to the liquidity if such deposit were lost. Non-resident deposits around that time had increased from £80 million to £110 million.
He had heard of CMI as a substantial company but did not understand that CMI was a product that could only be sold to non-residents as he had heard they had been sold to Irish residents. Mr. Brennan agreed that all monies coming in from CMI were non-resident. FASD were handling the administration with CMI directly and were not providing each individual branch with a declaration form in respect of each and every account that CMI had in that particular branch. In his evidence, Mr. Brennan said:
“No, they were able to identify the accounts as CMI accounts in the branches that they linked the accounts to an introduction that would have been made on behalf of the customers. The customers name was not on the account, it was a CMI account. But because of the timing presumably a couple of weeks after they would have invested money on behalf of the customer with CMI, it came back and there was an account opened in the branch. Now, they would then, if you like, link that in their own mind to a particular customer, yes,”
The dissatisfaction that Mr. Brennan felt was that the bank managers were not equipped to be advising customers on insurance related products. The FASD team were experts in that particular area. He wanted the branch managers to call in the FASD and not to get the branch manager involved in providing advice that might not have been correct. The customers gave instructions to FASD to place monies. The managers were concerned about the interest rate that would be applied to that account with the customer.
18.3 In relation to the clerical medical accounts (CMI) he said in re-examination that there was some confusion at branch level in relation to the nature of the accounts and withdrawals.
Mr. Brennan did not remember the particular document dealing with sensitive and confidential information other than to say he did not pay any great significance to either phrase because he knew that people with large sums of money had particular issues with regard to confidentiality and, moreover, there were some non-residents who invested in CMI.
16.2 The next document put to Mr. Brennan was a memo from Mr. Bell to Mr. Brennan, (copied to Mr. Keane, Mr. Harte, Mr. Byrne and Mr. D’Arcy) dated the 17th August, 1994, in answer to Mr. Brennan’s memo of the 3rd August. Attached was a document headed “CMI Deposits with Flow Chart” showing the operation of the deposits at present and the proposed operation. References were made to “client confidentiality”, “sensitivity of the scheme”, “confidentiality of pre-requisite in the investment”, “the funds usually being of a sensitive nature” and Mr. Brennan was asked what he understood by those references. He said that the word sensitive had gained common currency in the 1980s and 1990s and related to the fear of anyone knowing about the funds. It could well be that the Bank had a potential Revenue problem.
He agreed that NIB or other banks would not disclose details of customers’ accounts to anyone other than the customer. The reference to “funds may be in existing branch deposits or other” was to funds that could be introduced to CMI. Mr. Brennan agreed that what they had in common was that they were usually of a sensitive nature. Customers resented any enquiry. One interpretation was that the monies were sensitive vis-à-vis the Revenue Commissioners. He did not know specifically what the memo was referring to. Some weeks earlier, on 3rd August, 1994, Mr. Brennan had expressed concern that branches might be assisting in opening non-resident accounts which he referred to as “abuse”. He said that in that particular case they were opening non-resident accounts for CMI. The monies coming back from CMI were not resident accounts but CMI’s money. Mr. Brennan’s memo continued:
“What was happening was I did not want in any way, shape or form that those funds were linked to customers, which the branch managers believe they were. They believed that they were the original investment going to CMI on behalf of a customer but coming back in CMI’s name. CMI was the account holder.”
In his evidence to the court Mr. Brennan believed it to be correct that all CMI accounts were non-resident accounts because CMI itself was non-resident. It was correct to say that there was an initial charge by the deposit holder of 3% and thereafter a recurring charge of 1.6% when deposits were transferred by individuals to CMI. Mr. Brennan said that he did not know the commercial reason for an investment being reduced to 97% with the deposit still in place in the branch, which was subject to an ongoing charge of 1.6% per annum. He believed that the customers were buying a single premium insurance policy which he had not seen. He presumed there was a life assurance element to it. He agreed that looking back at the first paragraph of Mr. Bell’s memo, which referred to funds being invested for Irish residents by an insurance company based in the Isle of Man, that it was primarily an investment.
He said there was an interest element attaching to the deposit presumably. When asked if the interest element would have been attaching to the deposit in any event, he replied:
“It would, but presumably I possibly understood, I cannot remember particularly at this particular juncture, that there was a tax avoidance scheme available. There was an awful lot of tax avoidance scheme available around at that time in respect of investments in A, B, Cs and car parks and the like. It was a period of very high interest rates, because of that people were looking for investments to avoid paying the high rates of tax.”
He was not aware of an announcement in the budget that provided for investments of that kind, which would attract favourable tax treatment. He was not au fait with what the FASD people were selling and he had no role in the organisation of FASD.
While he now knew that they were targeting “hot” money for investment in CMI products, he firmly believed that at that time and right up until 1998, they were selling a legitimate product. He had no reason to doubt it. He never questioned the particular investment in CMI as they had people who were responsible for running that particular department who knew far more about insurance than he did. He did not raise inquiry from Mr. D’Arcy or anyone else as to why a person would invest but knew that they were very successfully selling these products to customers. He now knew the reason but certainly did not know then. He says that in hindsight, he is wise now but at the time he was not, to the reference to funds being of a sensitive nature and confidentiality being a prerequisite in the investment. There was no mention that it was a tax evasion scheme. It did not occur to him that it was not justifiable on any rational commercial basis. He had enough to do with his own job rather than get involved in trying to run another division of the Bank that did not report to him.
He agreed that in his memo of 9th February, 1995, albeit in the context of DIRT, he had referred to a culture of tax evasion in Ireland. However, he did not associate the memo from Mr. Bell with tax evasion. It was tax avoidance but not tax evasion. If it had been the latter he certainly would have made enquiry. One of the problems with CMI was that there was never a circular issued and he never saw a brochure though he agreed that he could, of course, have asked for one. He was not aware of the promotional material. He was concerned about the impact on the Bank if the £20 million in CMI constituted a very large proportion of non-resident deposits which could be withdrawn overnight. He agreed that that was what led, apparently, to his concerns in the course of early 1994. His first introduction to CMI was in connection with the commissions FASD were earning. They were lauded for the success they were having as CMI maintained the deposits in the branches.
Appendix 10 to the Inspectors’ Report in relation to CMI referred to clients’ names not appearing on any account and to deposits being transferred out of the existing account and re-invested in the names of a holding company and that the investment was written in trust so that clients can decide who the beneficiaries would be in the event of death so that there were no probate requirements. Reference was made to “tax-free, all returns are paid gross”. Mr. Brennan said he never saw that document at the time.
16.3 The next document was an FASD document on 28th February, 1990, some four and a half years prior to the exchange of memos between himself and Mr. Bell. That document referred to standard questions being asked of customers and investors which included a question whether the money was declared. There was a reference to people who have money invested offshore already or whose money is “hot”. The last paragraph stated:
“Finally, we have the people who have money invested off-shore already or whose money is hot. In this scenario we should in almost all cases direct the monies into our new bond, the Emerald International Portfolio, which is a combination of the above funds.”
Mr. Brennan said he did not see that but he remembered a paper about Emerald International which was marketed to non-residents only. It appeared to be a predecessor to the CMI Investment Bond.
Mr. Brennan believed that Mr. Bell would have received the information, the subject matter of a memo, from a third party or from somebody involved in FASD which did not have any employees. They were all employees of the Bank under the umbrella group. Mr. D’Arcy worked in the same building on a different floor and attended the senior management meetings. He did not remember Mr. D’Arcy or anyone other than Mr. Lacey presenting figures. He agreed that FASD was presented as one of the success stories in the early days. Mr. D’Arcy had been recruited by Mr. Lacey to set up the Financial Advice and Services Division.
Mr. Brennan did not think that Emerald was very successful, if he remembered rightly, because it was focused entirely on non-resident customers who were non-resident in Ireland. He did not think it took off that well, but certainly CMI “was presented to us at various meetings as that (sic) the commissions earned from that were now proving very successful, yes”. While he could not ever remember anyone saying that it was a target market, it was a new income stream that the Bank had. It was successful and he did not think and could not remember anyone questioning anything about it. He agreed that he could have asked for further information in relation to the CMI products or in relation to the business of FASD. However, he and others had responsibilities for their own areas which were their priority and for which they were responsible. A huge change had taken place during the early years of 1986, 1987 and 1988 as the Bank changed and furthermore, there was a disaster in 1993 when Mr. Lacey was kidnapped and later left the organisation at short notice.
He first became aware the CMI products had been marketed by employees of the Bank and targeted as people with “hot” money in 1998 when a letter came to the acting Chief Operating Officer from RTÉ to say that they were going to have a Prime Time programme the following night, together with the Chief Operating Officer he asked Mr. D’Arcy to find out what was going on. They found out subsequently that the scheme was illegal and that the target market for it was people who had monies that were not declared to the Revenue and that they had provided the facility to evade tax rather than to avoid tax.
16.4 The Court notes that, at all material times, Mr. Brennan was a director of National Irish Bank Financial Services Limited which reported FASD profits. Mr. Brennan’s evidence was vague in relation to the commercial benefit of customers investing in CMI. He had not seen the insurance policy. He had not seen any promotional literature nor circular. He presumed there was a life element to it but that it was primarily an investment. He did not remember whether it was a tax avoidance scheme. The Court finds that Mr. Brennan was indeed concerned with CMI but only from the point of view of declarations by CMI, as the deposit holder, being centralised in FASD.
He was clearly aware of “the implication that branches might be assisting in opening non-resident accounts”. This was, indeed, the conclusion of the Inspectors. It is difficult to understand his concern if he considered CMI as an insurance product. His concern for opening non-resident accounts can only be based on a concern that they might be bogus. Similarly, his memo of 13th August, 1994, that he did not want the funds to be linked to customers has to be understood in the context of his claim that “client confidentiality is of utmost importance”, to “the sensitivity of the scheme” and to the reference in the flowchart that “funds may be an existing branch deposit or other but are usually of a sensitive nature”. Mr. Brennan accepted that one interpretation was that “monies were sensitive vis-à-vis the Revenue Commissioners”. He was aware of procedures being open to abuse. He failed to acquaint himself with the nature of the product which the Bank was selling and failed to act or to take advice.
17. Interest Loading
17.1 Mr. Brennan agreed that there was no instruction to refund interest in the memo of 21st May, 1990, where Mr. Lacey had expressed his concern to Mr. Brennan about interest loading in Carrick-on-Shannon, the audit report of which was copied to Mr. Brennan.
Mr. Brennan wrote to Mr. Curran, the relevant regional manager, on the same date referring to the audit report and to 33 cases of interest loading to compensate for a shortfall in fee income. It was noted that some refunds were made. No instruction was made to refund though it was clearly stated that the so called “soft option principle” was unacceptable.
Mr. Brennan’s memo to Mr. Bonner and Mr. Curran dated 5th June, 1990, in relation to Carrick-on-Shannon and Carndonagh asked for confirmation that the extent of the practice be ascertained and ceased immediately. However, no reference was made to interest being repaid.
In his evidence to the court Mr. Brennan said that interest rates were in the high teens. The practice of loadings was initiated for accounts which were constantly in excess of the agreed limits. In relation to one of the branches, the manager was claiming that he was owed fees by the customers in question and was adding the amount of the fee onto interest, which was quite wrong. Mr. Brennan continued that he did not have documentation in relation to the follow-up but he would have been surprised if he did not do so because his secretary was very good at monitoring anything which required a reply. He agreed that, according to the Inspectors’ report, the practice did not disappear in 1990 and, ultimately, there was a full recompense to customers.
The Inspectors had concluded that Mr. Brennan knew or ought to have known that the Bank procedures manual did not contain any guidance on the nature of the work or services to customers which could give rise to an administration or management time charge, nor did it give any guidance on the form or record to be maintained by branch staff responsible for the delivery of the service. The Inspectors concluded:
“Mr. Brennan and Mr. Keane bear the principal responsibility for the Bank’s failure during the periods they occupied the respective positions of General Manager, Retail Banking, or General Manager, Banking, to put in place an appropriate system. Between July, 1991 and March, 1996 while Mr. Brennan’s titles and function changed from time to time, he continued to be responsible for procedures in the branches and accordingly he continued to share responsibility for the Bank’s failure in this regard.”
Mr. Brennan took issue with the fact that the Inspectors had found him liable for not introducing a system in the Bank or a solution for a problem in the Bank of which he was not aware.
He did not accept that there was a deficiency in procedures. There was an entitlement to charge. As lending manager he used get the customer to sign a certain stock form 36. There was no evidence of this practice continuing.
He agreed that it was unsatisfactory to have a kind of estimated figure, or ‘guestimate’, in relation to the charges as mentioned in the evidence of former branch managers to the Inspectors. One of the managers had referred to such charges being a “sort of a nuisance”. Mr. Brennan said that there was no such charge for nuisance. The Bank charged only what they were allowed to charge and there was no such charge for nuisance value as far as he was concerned. He agreed that there was an emphasis on driving up the fees but it was in the context of getting adequately covered for the work they were doing. He was aware that the cost recovery for fees was grossly inadequate – in one particular branch it was below 10%. He agreed that in a few branches it was, as counsel suggested, ‘guestimated’. But he had no knowledge of it being arbitrary or discretionary.
The court concludes that, while Mr. Brennan’s practice as lending manager in getting the customer to sign for any charges was proper and presumably compliant with Bank procedures, the subsequent ad hoc practice which was allowed to develop was not satisfactory.
It would appear that procedural controls were inadequate. The emphasis of driving up fees could not have been justified on the basis of work being done for clients without there being verifiable agreement giving an entitlement to charge.
The court concludes that Mr. Brennan’s responsibility extended, with others, to ensure that procedures were in place and adhered to and that there was adequate control of compliance. The court accepts the findings of the Inspectors.
18. General Responsibility
18.1 Mr. Brennan was asked whether he considered then and did he now consider that he was jointly responsible for that state of affairs in the Bank. He answered:
“Yes, I consider that every one of us could have done more and I certainly could have done more too if I had known then what I know now.
…
Certainly there was illegality involved in it, no question about it.
…
I believe that a number of our managers were also responsible.”
Mr. Brennan said he became aware of the widespread existence of bogus non-resident accounts in 1998.
He did not disagree that there was a problem in terms of his participation in the management. He was unaware of those problems even though he had been in a senior management position in the Bank for the period 1988 to 1998. He said he could only rely on the information that was coming forward to him, the enquiries he was making. He did not think at any stage that he would ever encourage or condone illegality.
The following exchanges then occurred on the last day of the hearing:
“141. Q. Everything was there to indicate to you at a far earlier stage?
A. Everything was there, but what the indications were – I did not interpret the indications to the extent that we are doing today.
142. Q. Was not that, with respect, and I do not mean to offend you in any way, a massive failure on your part in terms of the discharge of your obligations?
A. Of course. It was a complete let-down for me personally. I let down my employer. I let down my Chief Executive, whom I reported to. There is no question about this. You can imagine how I felt in 1998 when I saw this coming forward?
143. Q. This was a catastrophic failure.
A. It was. I worked for this organisation for 40 years, at that stage 36 or 38 years. This hit me so hard, I never recovered from it. I have not even today. There is no question about it, because here I was dealing, as I thought, right along the line following the law of the land and following the procedure of the Bank and yet I failed miserably to maybe find the fault at an earlier stage. As you rightly say, there were indications there. There were, I acknowledge that. In that respect I did fail, but I failed my employer which is the most important thing. I failed my Chief Executive and I also failed the customers of the Bank. This was the worst event in my life, no question about it. I do not think there is any – sorry, I feel emotional about it today, but I do.”
It was put to Mr. Brennan that that was not said in any of his documents. He agreed that it was absent from those documents but that there was no question in his mind but that managers understood. The Regional Managers told him that the Bank was not involved in illegality of any description. He did not know why the managers and other branch officials persisted in opening and maintaining bogus non-resident accounts. All he could do was to refer to the Inspectors’ report and see some of what he called the “ridiculous answers” that the bank managers were giving to the Inspectors: that they were under pressure for targets, for deposit targets and that they were being pressurised by customers who said they would go elsewhere. He did not believe that the managers understood that the Bank was not sufficiently serious about the problem or was tolerating the practice by simply indicating that the problem was merely one of documents. They did not get the message that such accounts were not to be opened. All the branch managers at the meeting with the Chief Executive in 1992, 1993 or early 1994 were told that the Bank was not to be involved in illegality and did not want to compete with other banks in that respect. Mr. Brennan believed that if the instructions asking managers to fill up documents correctly were followed there would be no problem. Accepting a declaration that was false was breaking the rules of the Bank and the laws of the land. The account opening procedure was the most important document to start from would have to be administered correctly for a valid account to be opened. It was not a case of “see no evil and hear no evil” or of a “nod and a wink”. He said that there was no reference that the Bank was involved in illegality. He agreed that the instructions issued in 1995 were not taken seriously as new accounts were opened post-1995.
He explained:
“We say, was for the first time we said do not open accounts. We were still opening accounts post-1995 which were bogus non-resident accounts. You know, how do you? We did not realise until 1998 the real problem. The real problem was that it did not matter what instructions we gave the managers, in some cases – now in a few case (sic), not very many – but in a few cases it [did not] matter what instructions we gave them, they still went about and got involved in this particular business.”
It was put to Mr. Brennan that as far back as 7th August, 1991 when he wrote the long, detailed memo referring expressly to bogus non-resident accounts that he knew then, at least in respect of other financial institutions, that there was a problem. He agreed. It was further put to him that the Revenue Commissioners had taken the view that the Bank’s obligations extended to a duty of inquiry. Circulars and letters were not the only communication regarding DIRT to the Bank. Regional managers were meeting on a quarterly basis with managers and he was sure that the issue was discussed at a majority of those meetings but, unfortunately, he could not answer for them.
Some managers were disciplined, transferred and suspended. He thought there were DIRT issues as well as other matters in relation to fictitious accounts. These sorts of problems were more significant than simply documentary. He could not remember whether he was informed. Mr. Keane, who became Head of Banking in 1993, probably informed him of disciplinary action in respect of branch managers relating to DIRT. He would not have known the specific details.
Mr. Brennan told the court in re-examination that he was the longest serving senior manager. When difficulties arose such as bank raids and the kidnapping of Mr. Lacey, he assumed responsibility. He was a member of all the senior committees and was the representative of the Bank on the Institute of Bankers, the Ombudsman Board and other bodies.
He was in the Bank at about 7.15 in the morning and would rarely leave before 7 in the evening. In the late 1990s he tried to reduce the amount of work he did at home. The Bank had a very small management team and the number of areas which he had to cover was varied and quite extensive. Lending could take as much as 40% to 45% of his working day.
The case of the Director focused on certain responsibilities that he had in this period which he said constituted a very minor proportion of his overall work commitments: less than 5% of his work. There were many aspects of his work which did not appear on the organisation chart. He never took all of the holidays which he was allowed. In 1986, he spent his holidays working on branch profitability which resulted in a recommendation to close the six branches which were loss making.
18.2 Mr. Brennan said in re-examination that management services was the area responsible for technology and the computer area. The Company Secretary reported to him in respect of staffing and also reported to the Board, though this did not appear from the organisation chart. In fact, the reality should have been a straight line from the Board to the Company Secretary.
Mr. Brennan said that the Audit Committee was the first line in relation to substantive audit matters. He had no responsibility for retail banking and the branches after 1st October, 1990 and thereafter did not receive any internal audit reports.
18.3 Between 1988 and 1990, when the regional managers reported to him once every month or two months, he had a more hands on role in relation to DIRT, interest, fees and CMI and received internal audit reports in relation to the branches. In relation to the branches, his responsibility more often than not was in relation to lending issues which are the bread and butter of banking. The fee income was quite miniscule in comparison to the interest income.
He was very disappointed with the Bank’s replies to his requests for documentation from 1988 to 1996. He said that he received absolutely nothing for that period.
He was meticulous in taking notes of which he retained more than he probably needed. He would have received 20 to 30 memos a day. These were eventually sorted and sent to remote storage. He had sought this documentation from the Bank and inspected 23 boxes of his. He had not taken anything with him at all. He said he had not received the documentation which he had expected to find in remote storage. Some of the documents were not his copies nor were there responses to certain letters – all of which related to the period from August, 1991 to November, 1993.
18.4 Since he retired at the end of 1998, he has had no contact with the Bank in a business sense. He has not worked and it is not his intention to take up employment.
He never received any requests from the Director in relation to stating his intentions or what his activities were. He said he had learned of the matters when they came into the public domain through the RTÉ programmes and he felt that he had failed the Bank and its customers. Had he known then what he knows now he would certainly have acted differently. He stated in his evidence on re-examination:
“In that respect I have failed my employer, as I mentioned earlier, and failed my Chief Executive and everybody else. I let people down. But in saying that, you know, the only comfort I have is that I felt and I still feel today that I did the best I could in the circumstances that were available to me at the time and the knowledge that I had at the time. I have looked back on those memos so many times, I’d look back on them, and as Mr. Collins alluded to so many times, why did you no say this or why did you not say that? I can tell you, there are many times I have asked why I did not go further, why I did not put in another phrase, why I did not look at that, but in all honesty, from the information I had at the time I genuinely did the best, I felt I did the best at the time.
I have gone over it, I have gone over these documents, I have looked at the Inspectors’ report, I have accepted the criticism of the Inspectors’ report where I felt it was justified. But I must say I was taken by the fact that my colleagues let me down and lied to me, that upset me most.
But how I would have acted differently I just do not know. If I had more knowledge I certainly would have acted differently. … when I did acknowledge in a particular case, another case we mentioned, a disciplinary case, I did act. In fact, despite the fact that I knew this particular individual extremely well, I had to sit across the desk and sack him and knew that this was the end of his career. It was not the easiest thing in the world to do, when you have worked with somebody for the best part of 20 years and to sit across the desk and say that your career is finished.
So a number of issues like that. I felt if I knew then what I know now I would have acted differently and in that I let people down. I can have comfort in the knowledge that I have convinced myself that I did my best. But, obviously, my best was not good enough.
… we are the ones who have been pilloried, we are the ones who are subject to the Inspectors’ report and, in all honesty, I cannot for the life of me make any complaint of the Inspectors and their findings overall. I am talking about here we had individuals in the Bank knowingly stealing money from customers’ accounts. There could be absolutely no excuse. No matter what they have said the draft (sic) report, there could be no excuse for it, none whatsoever.
In respect of DIRT, the other major issue they have come across, I suppose I have gained some comfort in respect of the Comptroller and Auditor General’s report and say we were certainly not the worse by a long chalk and we certainly were an awful lot better than an awful lot of the others and we generally tried to make the best of what was a bad lot at the time. But, you know, what was there, what the Comptroller and Auditor General’s report brings out is that there was an endemic problem of tax evasion in the country during those particular years. No question about it. And we were fighting an uphill battle in National Irish Bank. We did our best. Our best was not good enough. But we did our best.
…
I know that’s a speech rather than an answer. I am sorry, but that is my interpretation of it. I accept what the Inspectors’ report, in respect of overcharging customers was damnable. And that’s the word I would use and I make no excuse and make no compensation for it. In respect of DIRT, I would consider it is a different issue, in that we had an environment that we were working in which we were up against. In respect of CMI, we had a situation where we were targeting and evading. We were, obviously, providing a tax evasion vehicle for people, which I was not aware of and which I have said continually I was not aware of. I have not condemned myself for that because I just did not know.
What I condemn my self for is maybe I should have written memos in a more clear and logical way, as [counsel for the Director] has alluded to. And I have agonised over that I can tell you.”
19. The statutory provisions and case law
19.1 The Companies Act 1990 provided a new generation of company law with emphasis on investigation, transactions involving directors, insider trading and disqualification and restriction of directors. Provision was also made for greater accountability.
Section 160 provides for the disqualification of certain persons from acting as directors or auditors or of managing companies.
The Director has pleaded the court to make an order under subs. (2)(b), (d) and (e) of that section.
The former, (b) and (d), refer, inter alia, to an officer who has been guilty of a breach of his duty (b),or whose conduct makes him unfit to be concerned in the management of a company.
The latter, (d), refers to a report of inspectors appointed under the Companies Act in consequence of which the court is satisfied that the conduct of any person makes him unfit to be concerned in the management of a company.
Section 22 provides that the inspectors’ report is admissible in any civil proceedings as evidence of the facts in the report and of the opinion of the inspectors as provided in the section. See Countyglen plc v. Carway [1998] 2 I.R. S40 at 551.
19.2 Mr. Brennan was a director of NIBFS. He was, accordingly, an officer of one of the companies under investigation, notwithstanding its limited role in relation to FASD and the marketing of CMI.
19.3 The task of the court is to determine whether there is, on the balance of probabilities, sufficient evidence of some conduct that constitutes, as a minimum, a breach of standards of commercial morality or gross incompetence which makes the director, officer or person unfit such as to justify disqualification in order to protect the public.
19.4 General authorities
The origin of this phrase “a breach of standards of commercial morality” and “gross incompetence that requires the director to be disqualified in order to protect the public”, has been considered the Irish and English decisions in this regard, which flow from the decision of Sir Nicholas Browne-Wilkinson V.-C. in In re Lo-Line Ltd. [1988] 1 Ch. 477 at p. 486 and in the Barings case (cited below).
In re Lo-Line Ltd. arose out of insolvency proceedings and was decided under s. 300 of the English Companies Act 1985. It was held that the primary purpose of that section was to protect the public against future conduct of companies by persons whose past records as directors of insolvent companies showed them to be a danger to creditors and others. In considering whether a person was unfit to be a director under that section, only his conduct “as a director” was relevant. Under the English provisions, the definition of director was inclusive and not exhaustive and was capable of including a de facto director. On the evidence of that case Mr. Browning Junior, who had been appointed when he attained his majority in 1968, had been shown to have behaved in a commercially culpable manner in trading through limited companies when he knew them to be insolvent and in using unpaid Crown debts to finance such trading.
It was in this context that the judgment examined the proper approach to decide whether someone is unfit to be a director, an approach which has been widely cited in the Irish cases:-
“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.
… (emphasis added)
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.”
Laffoy J. considered the authorities under s. 160(2)(d) at page 10 et seq. of Director of Corporate Enforcement v. McGowan (Unreported, High Court, 24th February, 2005) citing In re Lo-Line Ltd. and noting that the passage above cited was quoted with approval and adopted by Shanley J. in La Moselle Clothing Ltd. v. Soualhi [1998] 2 I.R.L.M. 345, by McGuinness J. in Re Squash (Ireland) Ltd. [2001] 3 IR 35 and in the judgment of McCracken J. in Re Newcastle Timber Ltd. (in liquidation) [2001] 4 IR 586 and by Murphy J., for the Supreme Court, in Cahill v. Grimes [2002] 1 IR 372.
In Director of Corporate Enforcement v. McGowan the respondents’ company, Wood Products (Longford) Limited, was struck off for failure to make annual returns. ACC Bank Limited applied to have the company restored to the Register. There were outstanding returns to the Revenue Commissioners and a failure to discharge the company’s tax liability. The court had no doubt that the respondents had acted irresponsibly and posed the question of whether they had displayed a lack of commercial probity or fallen below the standards of commercial morality. In the view of the court, the conduct of the respondents had come very close to the threshold but did not quite breach it. The first respondent had remedied the breaches of the Companies Act and the taxation code in relation to making returns albeit when faced with the application for a disqualification order. Both directors combined in restructuring the corporate governance of the company and intended to discharge the company’s indebtedness. In those circumstances the court did not consider it appropriate to make a disqualification order as it was not necessary to do so to protect the public.
Smyth J. in Cahill v. Grimes (Unreported, High Court, 20th July, 2001) also adopted the above quotation from In re Lo-Line Ltd. and other authorities. The court was satisfied that the respondent had acted in gross dereliction of his duty in serious breach of commercial morality as described by Hoffman J. in Re: Dawson Print Group Lt. & Anor. (cited below). His actions were deemed to be reckless and in disregard of ordinary business ethics and were not mere oversight or misjudgement – his acts were quite deliberate.
Re Dawson Print Group Ltd. & Anor. [1987] 3 B.C.C. 322 is authority for the proposition that proof of dishonesty in a company director is not a strict requirement before disqualification can be ordered:-
“There must, I think, be something about the case, some conduct which if not dishonest is at any rate in breach of standards of commercial morality, or some really gross incompetence which persuades the court that it would be a danger to the public if he were to be allowed to continue to be involved in the management of companies, before a disqualification order is made.”
Henry L.J. in In re Grayan Ltd. [1995] Ch. 241 at pp. 257, 258 referred to the standards and regulatory rules governing the privileges of limited liability in the following terms:-
“The parliamentary intention to improve managerial safeguards and 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.”
19.5 National Irish Bank cases
In Re NIB Ltd.: Director of Corporate Enforcement v. D’Arcy [2006] 2 IR 163, the court held that for a disqualification order to be made, Mr. D’Arcy’s conduct had to show a lack of commercial probity or gross negligence or total incompetence. An element of the conduct which made the respondent unfit to be concerned in the management of a company was that it occurred within a bank rather than an ordinary corporate entity.
Kelly J. noted that the definition of “officer” in this jurisdiction did not include a “manager” as in s. 455 of the U.K. Companies Act 1948. He stated that English authorities were, at best, persuasive, but that their persuasive value must be lessened when they were dealing with a different definition from that in the Irish legislation.
He cited and approved the above referred to passages of In re Lo-Line Ltd. and In re Grayan Ltd.
In relation to Mr. D’Arcy and the promotion of CMI policies, the Inspectors had concluded that Mr. D’Arcy could have stopped the practice but did not do so. They also found him to be primarily responsible for the continuation of the practice which went on over a long period of time involving large sums. Mr. D’Arcy was in the upper echelons of bank management, not at the very top level, but just one remove from it. The court continued:
“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 C.M.I. policies. That operation was carried out over a period of years in a deliberate fashion. The inspectors held that the respondent 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 applicant has proved that the conduct of the respondent as found by the inspectors was such as to make him unfit to be concerned in the management of a company.”
In the matter of Ansbacher (Caymen) Limited: Director of Corporate Enforcement v. Collery [2006] IEHC 67, reference was made to D’Arcy and also, indeed, to the conclusions of the Inspectors cited herein. The Court held that the conduct of Mr. Collery, in relation to the off shoring of funds, was such as to make him unfit to be concerned in the management of a company.
This Court in the Matter of Vehicle Imports Limited (In Liquidation) [2000] IEHC 90, adopted the enumeration of director’s duties listed in Barings plc & Ors. (No. 5) Secretary of State for Trade and Industry v. Baker & Ors. [1999] 1 B.C.L.C. 433 at pp. 435, 436, 486 – 489.
19.6 It is useful to refer to the following propositions from that decision of the English High Court:
“(a) Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.
…
(d) Where delegation has taken place the board (and the individual directors) remained responsible for the delegated function or functions and retained the residual duty of supervision and control. The precise extent of that residual duty will depend on the facts of each particular case, as will the question of whether it had been breached.
(e) A person who accepted the office of director of a particular company undertook the responsibility of ensuring that he understood the nature of the duty a director was called upon to perform. That duty would vary according to the size and business of that particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. The duty included that of acting collectively to manage the company.
…
(g) The following general propositions could be stated with respect to the directors’ duties:
(i) Directors had, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.
(ii) Whilst the directors were entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation did not absolve a director from the duty to supervise the discharge of the delegated functions.
(iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, depended on the facts of each particular case, including the director’s role in the management of the company.”
Jonathan Parker J. in Re Barings Plc at p. 487 believed it not to be in dispute that where delegation has taken place the Board (and the individual directors) will remain responsible for the delegated function or functions and will retain a residual duty of supervision and control.
It is clear that the duty will vary according to the size and business of the particular company and the experience or skills of the director held himself or herself out to have in support of appointment to the office. (See Daniels v. Anderson [1995] 16 ACSR 607 where the Supreme Court of New South Wales analysed directors’ duties of skill, care and diligence.)
In addition, the level of reward which a director is entitled to receive may be a relevant factor. According to Jonathan Parker J., at p. 488:
“The point is that the higher the level of reward, the greater the responsibilities which may reasonably be expected (prima facie, at least) to go with it.
‘… but the higher the office within an organisation that is held by an individual, the greater the responsibilities that fall upon him. It is right that that should be so, because status within an organisation carries with it commensurate rewards. These rewards are matched by the weight of responsibilities that the office carries with it, and those responsibilities require diligent attention from time to time to the question whether the system that has been put in place and over which the individual is presiding is operating efficiently, and whether individuals to whom duties, in accordance with the system, have been delegated are discharging those duties efficiently.”
Morritt L.J., giving the decision of the Court of Appeal for the court, upheld the decision of the High Court. The Court of Appeal was of the view that the issue was not whether the director was an incompetent operator in the financial products or derivatives market of the bank. It was wrong to equate disqualification proceedings with a professional negligence claim. The standard of competence to be shown by a person or director was a different question and was one of law. Whether the director failed to achieve that standard was a question for the court to decide.
The Court of Appeal held that the High Court was right to find that the director had management responsibilities for the unauthorised trading of the employee of the Singapore subsidiary. The director had a duty as a director of the bank to acquaint himself with the nature of that employee’s trading and to take reasonable steps to ensure that it was properly conducted. The director knew, or ought to have known that, contrary to advice from Barings internal audit department, the employee continued to run both the front and back offices in Singapore and his trading was not subject to risk limits or that risk limits were not enforced. The director never investigated the employee’s business to enable him to assess its reported profitability. The Court of Appeal held that the High Court was right to find the charges against the director proved and that they demonstrated incompetence of such high degree that it led to a finding of unfitness. The director’s conduct involved a serious abdication of responsibility by a senior director of the principal operating subsidiary of a major public company.
The Court of Appeal at p. 535 emphasised the propositions referred to by Jonathan Parker J. in relation to the question of “unfitness”. The court had to decide whether “viewed cumulatively and taking into account any extenuating circumstances [it] had fallen below the standards … of competence appropriate for persons fit to be directors of companies”. It could be no answer to the allegations that separately and individually none of (the allegations) was sufficiently serious to demonstrate the requisite unfitness.
Secondly, the court held that the “director’s responsibility for the causes of the company becoming insolvent” in that case, required a broad approach and was not to be assessed by reference to “nice legal concepts of causation”.
Thirdly, where the allegation made related to incompetence without dishonesty, this was to be demonstrated to a high degree. This followed from the nature of the penalty. Nevertheless, the degree of incompetence should not be exaggerated, given the ability of the court to grant leave, as envisaged by the disqualification order as defined in s. 1, notwithstanding the making of such an order.
Fourthly, the Court of appeal stated that:
“…it is not necessary for the Secretary of State to show that the person in question is unfit to be concerned in the management of any company in any role. This test, described by the judge as the lowest common denominator approach, is not what the Act enjoins. As the judge observed the court is concerned only with the respondent’s conduct in respect of which complaint is made set in the context of his actual management role in that company. If his conduct in that role shows incompetence to the requisite degree then a finding of unfitness and a consequential disqualification order should be made.
Fifthly a finding of breach of duty is neither necessary nor of itself sufficient for a finding of unfitness. As the judge observed a person may be unfit even though no breach of duty is proved against him or may remain fit notwithstanding the proof of various breaches of duty.”
This apparent contradiction is explained in the light of the proposition that no rule of universal application can be formulated as to the duty of the director. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of a company.
19.7 Re Westmid Packaging Services Ltd., Secretary of State for Trade and Industry v. Griffiths and Ors. [1998] 2 B.C.L.C. 646 at p. 653, Lord Woolf M.R. stated:
“It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities. While an individual director may delegate but, having delegated a particular function, he has a duty in relation to the discharge of that function, notwithstanding that the person to whom the function has been delegated may appear both trustworthy and capable of discharging the function.”
19.8 Application to present case
The evidence in this case is that Mr. Brennan was, not alone a director of National Bank Financial Services Limited but was also on the Management Committee of National Irish Bank Limited. For the ten year period which was the subject of the Inspectors’ investigation he was a General Manager of the Bank and, indeed, for much of that time the senior General Manager who reported frequently to Mr. Lacey.
The court was impressed by the evidence given by Mr. Brennan and, in particular, by his closing remarks. He felt let down by the branch managers and was sincere in his remarks about letting the Bank down. The court accepts fully the genuineness of his shock on hearing the two television exposés of the bogus non-resident accounts, fictitious accounts (for which he bore no responsibility) for the promotion of CMI and other products by the FASD and for the charging of fees and expenses.
The reference by Mr. Brennan to the climate of tax evasion, amnesties and the concerns of the Department of Finance and Revenue regarding the flight of capital during the period within which were difficult times in the Irish economy, excused the lack of control and the persistence of abuses at certain branches of the Bank. While Mr. Brennan was not in receipt of the audit reports of the branches after October, 1990 which, taken cumulatively, showed persistent irregularities, he was still involved in the drafting and signing off of memoranda and circulars in relation to compliance. I have no doubt of his frustration in this regard. However, the evidence of the perfunctory implementation of these directives demonstrated that there was no effective control or supervision.
The court has to contrast the action taken by Mr. Brennan in relation to fictitious accounts following the Criminal Justice Act 1994 which, admittedly, had an element of criminality and personal responsibility inherent in it. The Inspectors made no adverse findings against Mr. Brennan. The court acknowledges the efforts of Mr. Brennan in this regard.
However, the failure to implement effective sanctions in relation to bogus non-resident accounts and the few incidents of disciplinary action against managers’ breaches of the directives made contrast with the actual effectiveness of eliminating fictitious accounts. There is no evidence or analysis of the fictitious accounts that became bogus non-resident accounts.
Mr. Brennan said that the Bank could have introduced a computer system to change the flag on all of the accounts which lacked a proper declaration. That would have been possible. He said that the people on the ground who were dealing with the customers on a day to day basis seem to have had a concern that they did not want to lose a deposit and felt that the matter would get sorted out with correct documentation. He agreed that the Finance Act 1986 created an incentive for people to dishonestly represent themselves as non-resident. At that particular time, tax rates were high and the black economy and tax evasion seemed to be a common problem, not just in the banking industry but throughout the economy. Even aside from the Bank being put on inquiry, the normal degree of care required that accounts be opened correctly. Mr. Brennan agreed that he was emphasising that what must be complied with was the requirement that a declaration held in respect of each account. He agreed that there were people who were prepared to solemnly declare in false terms. He did not see a problem once the Bank got the correct declaration, completed with procedures in place, that all the information taken from the customer’s account was correct.
He did not see any contradiction between that requirement and the additional requirement which the Revenue Commissioners had identified which was described as the duty of inquiry. He said it did not necessarily follow that if there were a c/o branch address or a Republic of Ireland address on the declaration that it was a bogus non-resident account. This was so where the customer had asked not to send any correspondence to his home address. The implications for the Bank would be a liability and a retrospective liability for DIRT which the customer would have and the Bank would have.
He did not know whether the Bank had obtained advice from a legal or accountancy source as to the validity or otherwise of the interpretation of the Revenue Commissioners. He felt that it would be a matter for the tax people. He did not obtain advice. The only discussions he had were with the Bankers’ Federation. His understanding was that the branch should not open an account if the facts were known to be wrong.
The switching of funds from non-resident deposit accounts into CMI products appeared to have been marketed as a solution to the problem of bogus non-resident accounts. Mr. Brennan presumed the legality of the CMI product and relied on Mr. D’Arcy, who had experience in the insurance industry. It is difficult to understand how he ignored the reference to sensitivity, confidentiality and the artificial nature of the deposits remaining in the branches and, indeed, being drawn down. Equally curious was the benefit of such policies being outside the ambit of probate in the event of the death of the policy holder. While the fiction of the non-resident CMI depositor may have justified such claim, the reality of the solution and of the operation of the scheme should have raised suspicion to an experienced banker who represented his bank with the Irish Bankers Federation and indeed with the Revenue Commissioners. While this has, perhaps, more relevance to the issue of bogus non-resident accounts, it is also of relevance to CMI.
Whatever may have been the difficulties in understanding the failures of the Bank up to the time of the DIRT theme audit report, it seems clear that the meeting of 9th February, 1995 and Mr. Brennan’s memo to the Executive Director was critical with regard to what was known of the motivating factors for non-compliance.
No reference was made expressly to tax evasion. One can, perhaps, understand the reluctance of committing to paper this motivation for non-compliance. It is difficult to understand the failure to ask the obvious question. There is a degree to which trust borders on naivety in relation to notice of irregularity. There is also a degree to which naivety borders on duplicity. It is difficult to understand the persistence of non-compliance unless there were a fear that the elimination of bogus non-resident accounts without being channelled into CMI-like products could result in a loss of business to the branches and of profitability to the Bank.
In relation to the computing of fees, the same observations apply. There appeared to have been some pressure on branch management time being recompensed by these from customers. It was clear that, at best, this was discretionary or even haphazard. The business of banking is, of course, the business of lending and the profits derived therefrom are subject to the liquidity ratio of deposits to lending set down by the Central Bank. The provision of management services, at least in the high street banks, is somewhat secondary.
The court expresses some concern regarding the availability of documentation to Mr. Brennan. The court accepts his evidence that he did follow up each matter. He had very wide responsibilities and not alone received but generated many memos each day. He was, of course, also involved in many of the crises of the Bank in relation to the establishment of a separate bank in the Republic of Ireland, in the takeover by National Australia Bank, in the procurement and management of premises and in relation to the crisis of the kidnapping of the Chief Executive and his subsequent departure from the Bank.
However, the court does not feel that Mr. Brennan was disadvantaged from the lack of documentation available to him. While it may have been frustrating to find that the directives given in the memos sent by him were not being complied with, his role of supervision and control with regard to the three areas in relation to which the Inspectors attribute responsibility to him, remains.
In order to satisfy itself the court has had regard to the seniority of the respondent together with his experience at senior level in the Bank for a period of over ten years. The court also acknowledges the attempts made by Mr. Brennan to rectify or stop the misconduct. It gives credit to him in relation to the elimination of fictitious accounts and contrasts the ineffectiveness of his attempts to rectify the prevalence of bogus non-resident deposit accounts.
Some ten years have passed since the events relied on by the Director. The delay in making of the application by the Director is, of course, not due in any way to the respondent.
Mr. Brennan’s attitude in the proceedings has been co-operative. He has not sought to minimise non-compliance.
The consideration of the potential impact of a disqualification order on someone who has retired and is not involved in the promotion, formation or management of a company is two-fold. It is unlikely that he will become involved in business through a company. This is, however, not a reason why an order should not be made.
Mr. Brennan, as a director of Irish Banks Financial Services Limited, was an officer of that company. He was a member of the Committee of Management of National Irish Bank Limited and involved in the central management thereof, had a duty to inform himself about the affairs of the Bank and to join with his co-directors in supervising and controlling those affairs. He had a residual duty of supervision and control, even where these affairs were delegated to trustworthy and capable managers. He had a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business which extended, after the Finance Act 1986, to the retention of tax on the profits and to the insurance business undertaken by the Bank.
He was a senior manager, indeed the General Manager for Banking Administration. Rather than narrowing his responsibilities, he would appear to have had broader responsibilities with regard to the affairs of the Bank. Even where he had delegated his functions in relation to the branches and was no longer in receipt of the branch audit reports, he still had a role with regard to that function.
It does not appear to the court that it is an answer to the allegations of the Director that each of the elements of the Bank’s non-compliance for which he had responsibility, was insufficient to justify disqualification.
The court has to take into account the scope and persistence of non-compliance, especially after the DIRT theme audit report and the meeting of 9th February, 1995 and, indeed, the persistence of non-compliance after that date, notwithstanding the issue of circular 11/95:
“The findings of the Inspectors criticise the inadequacy of circular 11/95 and attribute responsibility to Mr. Brennan in that regard.”
It is clear that the failure to deal with retrospecivity was critical in this regard. It would appear that the failure even to consider, or get advice, in relation to tax which might be due on bogus accounts reflected the attitude to which the court has already referred to as those who did not want to see. The indication that, perhaps, tax might not be due because of the possible interpretation of the section was not a matter in respect of which evidence of any expert opinion was given or available to the Bank at the time. While, here again, the court acknowledges the efforts that were made by Mr. Brennan and, without seeking to rely on hindsight, it does appear that the efforts made in relation to this aspect was not as clear cut, as decisive and as backed up by disciplinary action as was the documentation in relation to fictitious accounts.
20. Decision of the Court
The court has considered the pleadings, including references to the Inspectors’ report, to the extensive affidavits and to the cross-examination and re-examination of Mr. Brennan.
The court has considered, in particular, the content and evidence of Mr. Brennan in relation to the several documents put in cross-examination.
The court has already made findings in relation to the evidence given in relation to documents put to Mr. Brennan. The conclusions reached in relation to pre-February, 1995 documents (pre DIRT theme audit) are at 13.2.1 to 13.2.10 above; those in relation to post-February, 1995 are at 14.1 to 14.6. Conclusions regarding special circulars, CMI and interest loading are at 15 to 17. Findings in relation to general responsibility are at 18.1 o 18.4.
The court is conscious of the danger of hindsight and the illusion of synoptic vision.
Nevertheless, the court considers that it was an admission of failure of management not to have been aware, over a period of ten years, of the nature and persistence of non compliance with appropriate banking and tax compliance standards. Mr. Brennan was one of the most senior managers in the Bank over the entire period of the Inspectors’ investigation. To have learnt from RTÉ on two separate occasions of two separate schemes of tax evasion unknown to him before that revelation was, in itself, indicative of a shortcoming in management and control. Despite instructions, memoranda and meetings he, with others, failed to lead decisively, to organise effectively, to organise effectively and to control adequately the implementation of the provision of the Finance Act 1986 and failed, with others, to deal decisively with bogus non-resident accounts, CMI and the improper charging of interest. His instructions in relation to fictitious accounts, on the other hand, were decisive.
It was not just a failure of control. It was ignoring or facilitating tax evasion. Deposits were sought and maintained by the Bank through the opening and maintenance of bogus non-resident accounts and the marketing of CMI policies. The responsibility of the Bank’s management, of which Mr. Brennan was, over the whole period of the Inspectors’ investigation, a General Manager was to comply with the relevant legislation. He was involved in the central administration of the Bank and, as such, the court considers him to have been an officer of the Bank.
The court declines to make an order under s. 160(2)(b) as it is not satisfied that there is sufficient evidence adduced by the Director that the respondent has breached his duty as officer under the Companies Acts. Such duties relate to administration being compliance with the provisions of the Companies Acts (see Christy Kenneally Communications Ltd. (High Court, July, 1992, Costello J.), Re Godwin Warren Control Systems plc [1993] B.C.L.C. 80, Re Barnroe Ltd., Director of Corporate Enforcement v. Rogers [2005] IEHC433 and Re Kentford Securities Ltd., Director of Corporate Enforcement v. McCann [2007] IEHC 1.)
In the circumstances, it appears to the court that, as a result of the failure to supervise and control while a senior General Manager of the Bank, the conduct of Mr. Brennan is such that it is appropriate to make a disqualification order, pursuant to s. 160(2)(d) and (e), in respect of Mr. Brennan.
The Court will hear counsel in respect of any proposals he has to be involved in companies and we will also hear counsel with regard to the period of disqualification.
The Director of Corporate Enforcement -v- Walsh & ors
[2014] IEHC 365 (23 July 2014)
JUDGMENT of Mr. Justice Barrett delivered on the 23rd day of July, 2014.
1. This is yet another case that arrives before the courts following the economic downturn that beset the nation in 2008 and continued in the years following. In this case the Director of Corporate Enforcement is seeking, pursuant to s. 160(2)(h) of the Companies Act 1990, as amended, a disqualification order in respect of each of the respondents. A disqualification order is a severe measure that prevents an affected person from having any involvement whatsoever in the promotion, formation or management of any company for the duration of the disqualification period. So what did the respondents do that the Director of Corporate Enforcement considers them to merit such censure? They were respectively the directors of one or more companies that got into financial difficulties post-2008 and which they allowed to be struck off the register of companies instead of going through a formal liquidation process. The relevant ‘strike off process is available to the registrar of companies under s.12 of the Companies (Amendment) Act 1982, as amended, which provides that:-
“(1) Without prejudice to the generality of section 311 of the Principal Act, where a company does not, for one or more years, make an annual return required by section 125 or 126 of the Principal Act, the registrar of companies may send to the company by post a registered letter stating that, unless all annual returns which are outstanding are delivered to him within I month of the date of the letter, a notice will be published in the Companies Registration Office Gazette with a view to striking the name of the company off the register.
(2) If the registrar of companies either receives an answer to the effect that the company is not carrying on a business, or does not within 1 month after sending the letter receive all annual returns which are outstanding, he may publish in the Companies Registration Office Gazette a notice stating that, at the expiration of 1 month from the date of that notice, the name of the company mentioned therein will, unless all outstanding returns are delivered to the registrar, be struck off the register, and the company will be dissolved.
(3) Subject to subsections (1) and (2) of section 12B of this Act, at the expiration of the time mentioned in the notice, the registrar of companies may, unless cause to the contrary is previously shown by the company, strike its name off the register, and shall publish notice thereof in the Companies Registration Office Gazette and on the publication in the Companies Registration Office Gazette of this notice, the company shall be dissolved.”
2. In essence, s. 12(1) establishes a process whereby the registrar may strike off a company that is in breach of its annual return requirements. This may seem a venial transgression, certainly by reference to some of the abuses that one sees reported in the company law arena. However, such a strike-off has a particular significance for the creditors of an insolvent company, as was noted by Finlay Geoghegan J. in Re Clawhammer Limited; Director of Corporate Enforcement v. McDonnell and others [2005] 1 IR 503 at p.510, when she stated that:-
“There is potential prejudice to creditors of an insolvent company if the directors, by default, permit it to be struck off the register rather than taking steps to wind it up. In such circumstances such assets of the company as remain are not applied, as a matter of course, in the discharge of creditors according to statutory priorities. Even directors who seek to discharge liabilities of the company may do so in accordance with their own preferences and possible perceived future commercial needs or future commercial intentions or to escape liabilities under guarantees. It also may be of benefit to the directors in the sense of escaping the scrutiny of their conduct of the company’s affairs which might follow an investigation by a liquidator including the possibility of being fixed with persona/liability for liabilities of the company in circumstances where same is mandated by the Companies Acts. Accordingly, I accept the submission made on behalf of the Director that the Oireachtas regards the fact that directors may have permitted a company to be struck off the register as a result of their failing to make annual returns as more than a technical breach of their obligations of the Companies Acts.”
3. Finlay Geoghegan J. delivered her judgment in Clawhammer in early-2005, some years in advance of the financial maelstrom that afflicted the State from late- 2008 onwards. While her observations are as true now as they were then, the practical context in which s.160 applications fall to be considered has changed utterly. In this regard it is worth noting that the courts do not administer justice blinkered from general facts of which they are entitled to take judicial notice such as the collapse of the national economy around 2008, the protracted financial downturn that followed, and the adverse financial consequences that all of this has entailed for many people, including the respondents and indeed the creditors of the companies of which they were directors.
4. The respondents were, between them, the directors of two companies, Walfab Engineering Limited and R.P.B. Products Limited. Walfab was a metal fabrication and manufacturing company. R.P.B. primarily imported and installed prefabricated stairways. It appears that the three respondents were the directors of Walfab, whereas only Messrs. Brendan and Patrick Walsh were the directors of R.P.B. Walfab started trading in 1992 and was steadily more successful until the effective collapse of the construction industry in 2008. At its height it had an impressive 13 full-time employees. In the period after 2008, as a result of the economic downturn and the consequent reduction in business, as well as various voluntary staff departures, the number of Walfab employees decreased, so that by the time the company ceased trading on or about 1st October, 2011, there were only three employees left, all of whom departed at that time. RPB suffered a similar fate to Walfab post-2008.
5. On 22nd May, 2011, Walfab was struck off the register of companies pursuant to s. 12(1) of the Companies (Amendment) Act 1982. R.P.B. was struck off on the same basis on 301h September, 2012. For the reasons mentioned by Finlay Geoghegan J. in Re Clawhammer and referred to above, such a strike-off has the potential to engender unfairness for creditors. It is also a matter to which the Oireachtas clearly attaches some seriousness, making such a strike-off a basis for the possible issuance of a disqualification order under s.160 of the Act of 1990. However, the Oireachtas also clearly recognises in the Companies Act 1990 that there may be instances in which, amongst other matters, a company is struck off, rather than being liquidated, but in which a disqualification order need not follow or a shortened disqualification order might be imposed. It does this through the expedient of entrusting to the discretion of the High Court the decision as to whether a disqualification order should be imposed and, if so, for how long. Insofar as is relevant to these proceedings, s.160 provides, at ss.(2), that:-
“Where the court is satisfied in any proceedings or as a result of an application under this section that …
(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 …
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.” [Emphasis added].
6. That s. 160(2) establishes a discretionary jurisdiction on the High Court was made clear by Murphy J. in Business Communications Ltd. v. Baxter (Unreported, High Court, 21st July, 1995), when he stated, at p.12, that “Section 160 confers a discretion on the Court by the use of the word ‘may’ (rather than the word ‘shall’ …) with regard to the imposition of a disqualification order”. Likewise, McCracken J. in Re Newcastle Timber Limited [2001] 4 IR 586 at p.589 notes that ” …the use of the word ‘may’ in section 160 gives the court a discretion”. When it comes to the exercise of this discretion, the consequences of a disqualification order are so severe for the person against whom it is issued that the courts, historically, have not tended lightly to issue such orders. Thus in Business Communications, Murphy J. stated, at p.13, that “there is a substantial burden to be discharged before the court has jurisdiction to make the appropriate order”. In a similar vein, the Supreme Court in Cahill v. Grimes [2002] 1 IR 372 accepted in principle that there is a heavy onus on an applicant in s.160 cases. Continuing in a not dissimilar vein in the much more recent case of Re Kentford Securities Limited; Director of Corporate Enforcement v. McCann [2011] 1 IR 585 at p.601, O’Donnell J. writes that:-
“[G]iven the penal consequences of a disqualification order for any director or other officer, a court must feel a high degree of confidence before making any such disqualification order.”
7. It was accepted by the respondents in these proceedings, and it was in any event established by the Director of Corporate Enforcement, that the facts which underpin the proceedings are such that it is open to this court to make an order against any or all of the respondents under s.160(2). In Re Kentford, O’Donnell J. refers, at p.600, to the “two stage structure” of s. 160(2). In the course of this two-stage structure, the court must look first to whether conduct falling within any of the sub categories of s.160(2) is established as a matter of fact and then to whether it should exercise its discretion in favour of or against making a disqualification order. In this case, the court finds as a matter of fact that the situation posited in s.160(2)(h) arises in respect of each of the respondents and thus that each is exposed to a disqualification order being made against him or her. The court turns now to the issue of how it ought to exercise its discretion under s.160, having especial regard to the factors considered hereafter.
8. Scale of enterprise and qualifications of directors. The courts in applying the law are of course sensitive to the personal circumstances and social background of persons who present before them. This is what makes our courts hallowed places in which, subject at all times to what the law requires, it is sought to dispense measured justice and avoid unmerited harshness of treatment. In the instant case Messrs. Brendan Walsh and Patrick Walsh are metal fabricators by trade and, though clearly commercially astute, they are not professional directors, do not possess professional qualifications, and have never served at the helm of large or quoted enterprises. Mrs. Catherine Walsh is married to Mr. Patrick Walsh and, it appears, largely because of that was appointed a director of Walfab Limited, a family enterprise, perhaps to satisfy the minimum two-director requirement that arises under law. Certainly she never took an active part in the operation of Walfab.
9. Context in which director transgressions occur. If justice can be tempered by reference to context, and it both can and should, then it follows that it must also be capable of being tempered by reference to the times, given that the times form a part of the context against which the facts of a case unfold. In this case the relevant facts unfolded in unprecedentedly turbulent times, when the respondents and the companies of which they were directors were confronted with economic challenges of such a scale and swiftness that customary practices such as the filing of returns may not have had the priority to some, the respondents among them, that legal requirements ought generally to have for all. The respondents’ failure to make the necessary returns and their apparently complacent acquiescence in the strike-off process is undoubtedly reproachable but needs to be viewed in context, a context in which, as Mr. Patrick Walsh avers in his affidavit evidence:-
“Every step [was taken} to ensure the survival of a family business that …was exposed to a period of acute market decline and its existence and survival had taken significant personal resources to establish and grow over the years. I say that the intentions of the directors were genuine, responsible, honest and reasonable at all material times and I say that the effect of the economic circumstances overwhelmed the Companies to the extent that survival of the Companies was not possible.”
10. In hindsight it may be that Messrs. Patrick and Brian Walsh (Mrs. Catherine Walsh appears to have been uninvolved) were unduly optimistic about their ability to navigate the companies of which they were directors through the economic tsunami that befell the State in 2008 and the years that followed. It may be, it almost certainly is, that they should have sought to put the companies into liquidation sooner and so ensured an orderly wind-up of the company’s affairs in accordance with the law pertaining to company liquidations. However, it seems to the court that it was precisely to ensure that disqualification orders did not issue in circumstances where mitigating factors arise that the Oireachtas, in s.160(2), entrusts the court with a discretion as to whether and for how long a disqualification order should issue when an application is brought under that provision. To put matters colloquially, the present case is not one of ‘Nero fiddled while Rome burned’; it is more a case of Nero leaving the fiddle unattended while he dashed into the burning city in a desperate bid to save what he could. One might criticise the respondents’ behaviour in failing to file their annual returns as foolish, unwise or reproachable. However, when put in context it is also to some extent understandable. It certainly does not appear to this court to be of such a nature as to require that the court must exercise its discretion so that a disqualification order now follows.
11. Past behaviour of respondents. Another factor that the courts will bear in mind in applications made under s.160 is the past behaviour of respondents. In Re Kentford, O’Donnell J. emphasised the importance of looking to this past behaviour, writing, at p.601, that:-
“In my view, it is clear from an analysis of the Act of 1990, that that Act directs attention to that past conduct as certainly the best, if not the only, guide to the necessity for disqualification.”
12. Apart from the failure as regards the submission of annual returns which led in tum to the eventual strike-offs, the court’s attention has not been drawn to any other misbehaviour on the part of any of the respondents as directors during their relatively long tenure as directors. This long period of good behaviour is a relevant factor when deciding whether any of them should be exposed to the severity of a disqualification order and inclines this Court to the view that they should not. Neither in this nor in any other respect does it appear to this Court that the behaviour of any of the respondents to these proceedings comprises that egregious behaviour at which s.160 is aimed.
13. For the reasons stated above, and having regard to all of the factors mentioned, the court does not consider that it is appropriate in this case to issue a disqualification order against any of the respondents. Having so adjudged, the court is entitled under s. 160(9A) to make a restriction order under s.150 of the 1990 Act. Section 160(9A) provides that:-
“In considering the penalty to be imposed under this section, the court may as an alternative, where it adjudges that disqualification is not justified, make a declaration under section 150.”
14. The use of the word “may” in the above-quoted text points to the power under s. 160(9A) being a discretionary power; the reasoning of Murphy J. in Business Communications and McCracken J. in Re Newcastle Timber, considered above, appears to put this beyond doubt. The discretion arising, however, seems to be confined to the court’s electing whether or not to consider if a s.150 disqualification falls to be made. Once the court goes down the path of considering whether a s.150 declaration falls to be made, it seems from the decision of McCracken J. in Re Newcastle Timber, at p.592, that the court is trammelled by all the requirements of s.150, most notably that if the criteria set by that provision are satisfied the issuance of a restriction order is mandatory, a perhaps surprising turn of the law given that s.160(9A) confers a power that, as stated, is ultimately discretionary. Under s.150 of the 1990 Act, the court must grant a restriction order unless satisfied that any of a variety of circumstances identified in s.150(2) pertain, the relevant circumstances in this case being that the respondents acted (a) honestly and (b) responsibly in relation to the conduct of the affairs of the company(ies) of which they were respectively directors and (c) there is no other reason why it would be just and equitable that any of them should be the subject of an order made under s.150. It does not appear to the court that there is any issue arising concerning the honesty of any of the respondents in these proceedings. Nor does it appear to the court that, apart from the issue of whether they each acted responsibly, there is any other reason why it would be just and equitable that any of them should be the subject of an order made under s.150. So the sole issue arising is whether they each acted responsibly. For the various reasons identified above as to why the court would not exercise its discretion to grant a s.160 order, the court finds that the behaviour of the directors in this case did not involve a lapse of responsibility. As the court noted above, the facts of this case unfolded in unprecedentedly turbulent times, when the respondents and the family companies of which they were directors were confronted with economic challenges of such a scale and swiftness that customary practices such as the filing of returns may not have had the priority for some, the respondents among them, that legal requirements ought generally to have for all. This is not a case of “O temporal O mores!” (‘Oh the times! Oh the customs!’); subsisting law transcends time and compliance with its strictures is of course a matter of obligation, not custom. The court finds that the respondents’ failure to make the necessary returns and their apparently complacent acquiescence in the strike-off process is reproachable. However, it appears to the court that such failure and acquiescence cannot but be viewed in context; when it looks to that context the court considers that the respondents’ various actions are not of such a category as would merit their being described as less than responsible. The words of McGuinness J. in the Supreme Court decision in Re Squash (Ireland) Limited [2001] 3 IR 35 at p.39 seem to the court to apply with equal vigour to the respondents in this case:-
“[S]ome criticisms of the directors may be made. Commercial errors may have occurred, misjudgements may well have been made, but to categorise conduct as irresponsible I feel that one must go further than this.”
15. One of the points touched upon in these proceedings is the extent to which a married woman, who acts as the second-named director of a company solely to satisfy the minimum two-director requirement under the Companies Acts, and who in point of fact does nothing in relation to that company, can rely upon the passive role that she has consistently played to justify the non-issuance of an order against her under s.160 of the Act of 1990. As the court considers that in any event no liability should attach to any of the respondents, it is not necessary to render judgment on the contention made in respect of the second-named respondent that she was in effect only a passive director of Walfab and ought not to be exposed to liability as a consequence. That said, it does not appear that Ms. Catherine Walsh in her actions as director was or is tainted with that “real moral blame” to which reference was made by Carroll J. in the renowned case of In Re Hunting Lodges Limited (in liquidation) [1985] I.L.R.M. 75 at p.85 as the basis for imposing personal liability on a purportedly passive director.
16. Strike-off is not an alternative to liquidation and this judgment should not be construed or relied upon to suggest otherwise. However, in the very particular circumstances in which the strike-off in this case occurred, the court considers that no order under or pursuant to s.160 is merited and that no order under s.150 is required in respect of any of the respondents.
Aventine Resources Plc & Cos Acts:
Director of Corporate Enforcement -v- Liwosz & anor
[2014] IEHC 611 (30 October 2014)
JUDGMENT of Mr. Justice Cregan delivered the 30th day of October 2014
Introduction
1. In this application the Director of Corporate Enforcement seeks a declaration pursuant to s. 160(2)(b) and (f) of the Companies Act 1990, that the two named respondents be disqualified from acting as directors of any company.
2. A significant number of affidavits and exhibits have been filed in these proceedings including four affidavits on behalf of the respondents. The respondents were also represented at the hearing of the application.
3. The company, Aventine Resources plc was incorporated on the 11th February, 1988 as Feltrim Mining plc. On 21st April, 1993, the company changed its name to Minmet plc and on 14th April, 2010, the company changed its name to Aventine Resources plc. The company is principally involved in the exploration, processing and sale of gold, metals, ores and minerals. Its registered office is at 18 Fitzwilliam place, Dublin 2. The company was incorporated in Ireland and is governed by Irish law.
4. The first named respondent has been a director of the company from 18th July, 2008, until 21st June, 2011, and from 22nd December, 2011, to date.
5. The second named respondent has been a director since 22nd December, 2011, to date.
6. At no time during these proceedings did either of the respondents seek to contest their positions as directors of the company.
Background to this application
7. Peter Durnin, an officer with the office of the Director of Corporate Enforcement (ODCE) swore the grounding affidavit in this application. In this affidavit he states that the Director of the ODCE has brought this application against the respondents because they are company directors who have exhibited a long history of poor company law compliance and who have failed, despite repeated demands and requests, to meet certain company law obligations. In addition, the respondents are in breach of two High Court orders and thereby in breach of their duties as directors.
8. Mr. Durnin states that from February 2008, the ODCE received numerous complaints from shareholders in the company about the conduct of the company. The allegations centred on certain transactions involving millions of Euros. These complaints were put up on a website set up by shareholders of the company.
9. In addition the company was admitted to trading on the Alternative Investment Market (AIM) on the London Stock Exchange in December 2005. However it was delisted on 4th December, 2008 and trading in the company’s shares ceased on that day. The company was also publicly censured by AIM that month for breaches of a number of AIM rules.
10. The respondents have objected to any evidence being admitted in relation to either the website of the shareholders or in relation to the public censure by AIM of the company on the grounds that this evidence constitutes hearsay. These issues were canvassed extensively in many affidavits put before the court. However, for the purposes of my judgment, I do not intend to have any regard to them. They are not germane to the issues which I have to consider.
11. Mr. Durnin in his first affidavit sets out in detail the ODCE’s case against the respondents.
12. The first complaint is that the accounts and financial statements for 2008 were filed late – despite persistent correspondence and threats of enforcement action from the Director to the respondents. The annual returns for the financial year December 2008 (and the financial statements attached thereto) were only filed with the Company Registration Office (CRO) late – on 19th April, 2010.
13. Moreover, these financial accounts (for the year ended December 2008), were disclaimed by the company’s then auditors DeLoitte and Touche. The auditors stated that they were unable to obtain sufficient audit evidence to enable them to form an opinion as to the appropriateness of the “going concern basis” in preparing the financial statements. The auditors also expressed concern about the “carrying value” of certain intangible assets (to the value of US$23 million), investment in subsidiaries (in the amount of US$10 million) and demands due by group undertakings (in the amount of US$7 million). Thus the auditors said that they were unable to form an opinion as to whether the financial statements gave a true and fair view of the accounts of the company.
14. Subsequently the ODCE wrote to the auditors querying these matters. It received a response from the auditors wherein it was stated that the degree of uncertainty and significance went beyond the level of uncertainty normally encountered in the course of an audit. As a result the auditors stated that they could not form an opinion on the matters set in the audit report.
15. It appears that the first respondent, – in response to correspondence received from the ODCE – expressed regret about the stance the auditors were taking and maintained that the directors were of the opinion that the company had sufficient resources to justify their “going concern opinion”.
16. Subsequently there were difficulties with the 2009 accounts. Again the accounts and financial statements for 2009 were filed late (in April 2011) despite persistent threats of enforcement action by the Director against the respondents.
17. In addition the financial statements for the company for the financial year ended 30th September, 2009, were also disclaimed by the auditors of the company. By this time the company had acquired new auditors (LHM Casey and McGrath). It is significant that these new auditors also disclaimed the accounts and indicated that they were unable to obtain sufficient audit evidence to enable them to form an opinion as to the appropriateness of using the “going concern basis” in preparing the financial statements and also as to the appropriateness of the carrying value of certain assets of the company.
18. Thus, given the view of two firms of auditors that there was an absence of sufficient evidence as to the ownership, nature and value of the company’s primary assets, the Director was of the view that this disregard for normal corporate governance in respect of a public limited company with approximately 5,500 to 6,500 shareholders was unacceptable given the perilous state of the company’s finances.
19. The Director was also of the view (i) that proper books and records were not being maintained, (ii) that the affairs of the company were being conducted in a manner which was unfairly prejudicial to the members, (iii) that there was uncertainty surrounding the value of the main assets thereby prejudicing the entitlement of the company’s members, (iv) that there was a persistent failure to register the company’s annual returns within the relevant statutory period, (v) that there were persistent delays in the holding of AGMs.
Breach of two High Court Orders
20. In addition to all of these significant breaches of company law, Mr. Durnin also gave evidence on affidavit that the first and second named respondents were in breach of two High Court orders.
21. The first of these arose as follows: In proceedings entitled Re: Aventine Resources plc, Director of Corporate Enforcement v. Re: Aventine Resources plc, John Francis Liwosz and Anthony Brown, (Record No. 2012/424 COS), (the s. 371 proceedings) the Director brought an application pursuant to s. 371 of the Companies Act (as amended) to compel the respondents to remedy their breaches of their obligations under the Companies Acts and in particular to remedy their breach in respect of their failure to submit to the Company’s Registration Office an annual return and financial statement for the year ending 2010. Numerous affidavits were filed in these proceedings. The respondents also filed affidavits. The respondents were represented at the hearing of that application in the High Court.
22. On 5th November, 2012, the High Court (Murphy J.) having considered all the affidavits and having heard submissions by the parties made an order as follows:-
1. That the company do make good its default under:
(a) Section 159 of the Companies Act 1963 as amended to send copies of its balance sheets and their appendices and the directors’ and the auditors’ reports for the year ended 31 December 2010 to its members 21 days before the annual general meeting of the Company in accordance with the requirements of that section and
(b) Sections 127 and 128 of the Companies Act 1963 as amended to submit to the Registrar of Companies the company’s annual return and its appendices for the year ended 31 December 2010 in accordance with the requirements of those Sections within eight weeks from the date hereof
2. pursuant to Section 371 of the Companies Act 1963 as amended and invoking Section 383(3) of the Companies Act 1963 that the first and second named Respondents do make good their defaults under
(a) Section 150 of the Companies Act 1963 as amended to lay the company’s group accounts for the year ended 31 December 2010 before an annual general meeting of the company in accordance with the requirements of that Section and
(b) Sections 127 and 128 of the Companies Act 1963 as amended and Section 383 (3) of the Companies Act 1963 as amended to submit to the Registrar of Companies the company’s annual return and its appendices for the year ended 31 December 2010 in accordance with the requirements of those Sections within eight weeks from the date hereof
3. that the Respondents do comply on a continuing basis with their obligations under sections 127 128 150 and 159 of the Companies act 1963 as amended
4. that the Applicant do have liberty to re- enter the within proceedings in the event of future non- compliance on the part of the Respondents each or all of them with their obligations under Sections 127 128 150 and 159 of the Companies act as amended
5. that the Applicant do recover against the first and second named Respondents jointly and severally the costs of and incidental to these proceedings pursuant to Section 371 (2) of the Companies Act 1963 to be taxed in default of agreement.
23. Despite this High Court order the first and second respondents failed to submit to the registrar of companies the company’s annual return and its appendices for the year ended 31st December, 2010. Moreover the financial accounts of the company (and the directors’ and auditors’ reports) for the year ended 31st December, 2010 were not sent to its members 21 days prior to the AGM of the company in compliance with the provisions of the Companies Act.
24. Mr. Durnin in his affidavit sets out the fact that significant amounts of correspondence passed between himself and the respondents in respect of these outstanding accounts. Repeated promises were made on the part of the respondents to complete the audit work for the accounts for the year ended 2010. However despite these repeated promises the accounts were never completed.
25. The High Court order gave the respondents eight weeks within which to comply with its order of 5th November 2012. Thus on 17th January, 2013 Ms. Keating on behalf of the ODCE wrote to the respondents and their solicitors reminding the respondents that they had 8 weeks from the date of the High Court Order within which to comply with the terms of the order.
26. Given the respondents’ persistent refusal to comply with the order of the High Court, the Director re-entered a Motion on 22nd May, 2013. The matter was made returnable for 17th June, 2013 and was heard before Laffoy J. on that date. Again affidavits were filed on behalf of the Director. The respondents did not file any affidavits in that application although they were represented at the hearing.
27. By order of the High Court dated 17th June, 2013 (Laffoy J.) the High Court ordered:
1. That the proceedings be re-entered.
2. That the respondents make good their defaults under the relevant sections of the Act and submit to the registrar of companies the company’s annual return for the year ended 31st December, 2011 (and related orders.)
28. Despite the requirements of the second High Court order the respondents still failed to submit to the registrar of companies the company’s annual return (and its appendices) for the year ended 31st December, 2011. The respondents still have not sent the auditors report and financial statements to company members 21 days prior to the AGM as required. (The respondents had until 12th August, 2013 to comply with the order of the High Court made on 17th June, 2013.)
29. Subsequently there was a further voluminous exchange of correspondence between the ODCE and the respondents (or the solicitors for the respondents) in which the respondents made repeated promises that they would comply with the court orders and finalise the accounts.
30. However although the respondents had until 12th August, 2013 to comply with the second order of the High Court they failed, neglected and/or refused to do so.
31. Therefore by letter dated the 27th August, 2013, the Director wrote to the two respondents and indicated that he intended to bring these proceedings against the two respondents.
32. The respondents – through their solicitor – indicated that they were making efforts to comply with the court orders, that they were encountering practical problems, but that the accounts were almost ready.
33. Thus, the position (as at the time this application was brought) is the following:-
1. The financial statements for the company of 2008 were filed late and disclaimed by the company’s auditors.
2. The 2009 accounts were filed late and were disclaimed by a different set of company auditors.
3. The 2010 accounts have not been filed.
4. The 2011 accounts have not been filed.
5. Books of account were not being properly kept.
6. The affairs of the company were being conducted in a manner which is unfairly prejudicial to its members in that there have been persistent delays in holding of AGMs.
7. The respondents have failed to comply with many of their statutory obligations despite persistent pressure from the Director.
8. The respondents are in continuing breach of two High Court orders.
Replying affidavits for the Respondents
34. Mr. Liwosz swore two replying affidavits in this matter. In his first affidavit he states that he is a British citizen, that he is currently resident in the United Kingdom and that he is a trained engineer in the auto and aircraft industry. He also says that he is and has been a director of a number of public and private companies advising on commercial and financial strategy. He also states that he has had an otherwise unblemished business career to date and that he had never been the subject of restriction or disqualification proceedings in any jurisdiction. He also set out a brief history of the company, the problems the company encountered in relation to a specific transaction in 2007, the subsequent difficulties the company encountered in raising funds in the aftermath of the financial crisis, the significant shareholder dissension, the suspension of the company’s trading shares on the AIM and various related matters. He says that he was first appointed as a non-executive director of the company on 2nd December, 2005, (prior to the company’s listing on AIM) and that he resigned as a director on 9th February, 2007, that at the time of his initial resignation the company was in good standing with considerable cash and assets. He says that he was subsequently asked to return to the company as a director in July 2008, following the dispute between the former board of directors and dissenting shareholders over various transactions. He became a director again from 18th July, 2008. On 25th October, 2009, he was appointed as secretary of the company. He also states that he accepts that he has been a director of the company from the 18th July, 2008 to date, (but stated that he had attempted to resign on or about June 2011.)
35. Mr. Liwosz set out an explanation as to why the 2008 accounts were disclaimed by the auditors DeLoitte and Touche. He stated that at the date of the signing of the accounts, the company had limited cash resources giving rise to a concern as to whether the company could continue operations as a going concern. He said the board conducted a review of the company’s ability to meet its commitments for the following twelve months and resolved that there was sufficient working capital to meet the board’s needs for the ensuing twelve months. He stated that the board remained of the opinion that the company had sufficient liquid resources available to it to justify its view that the company could continue to operate as a going concern.
36. He also purported to give an explanation as to why DeLoitte and Touche disclaimed the company’s accounts in relation to the carrying value of the assets by saying that the nature of exploration assets makes them difficult to assess and therefore it is sometimes impossible to form an opinion as to the value of such assets. He also said that the board believed that the assets in question did have significant value and that this was backed up by professional reports.
37. In relation to the 2009 accounts and the disclaimer by the second set of accountants in respect of the 2009 accounts, Mr. Liwosz’ explanation was that one of the reasons why the second firm of accountants disclaimed the 2009 accounts was that they were of the view that the professional reports needed to be updated, that as this would have cost a further Stg £60,000 this was impossible to obtain due to the company’s lack of funds.
38. Essentially the explanation by the first respondent for the failure to file the 2010 and 2011 accounts and for the respondents’ non compliance with the court orders was that the company was in a perilous financial state and that it had limited funds to meet its auditors fees. He said that the company had difficulty in raising funds and was forced to exhaust all avenues of financing in order to get the funds necessary to complete the filings. He also stated that the company sought to find suitable insolvency practitioners to act as examiners, but was unable to do so due to lack of funds.
39. Mr. Liwosz accepted that there had been non-compliance with the court orders but stated that:
“Such non compliance is simply because the company does not have the current assets to pay for compliance. However as I have previously explained on many occasions to the applicant being ordered to do the impossible due to lack of funds does not alter the fact that it is impossible. The company has never chosen not to comply with the High Court orders and on both occasions it neither objected nor consented to the High Court orders being made.”
40. However, in my view this explanation does not sit easily with the previous averment that on 31st March, 2010, the board had resolved that there was sufficient working capital to meet the company’s needs for the ensuing twelve months. Moreover, it does not sit easily with his averment at para. 35 of his first affidavit that:
“At present the audits for the years ended 31st December, 2010 and 2011 are almost complete. It is envisaged that 2012 could follow reasonably quickly.”
41. It appears that in fact the accounts for year ended December 2010 and year ended December 2011, were almost complete as of the date of the swearing of the affidavit (6th December, 2013) and yet despite this, when the matter came on for hearing, the accounts still had not been filed.
42. Mr. Liwosz also stated that:
“In order to raise the money to pay for the completion of the audits, the company has been attempting to find a ‘deal’ with any prospective purchaser who sees value in the company’s assets, but a search of this nature may take time. I submit that this Honourable Court should take into account the perilous financial position that the former board of directors left the company in when determining whether I have been in breach of my duty or in persistent default of my obligations. In particular I submit that this Honourable Court should consider the impossibility of the company complying with its ongoing obligations in light of its financial position where it cannot afford to meet those obligations and cannot afford to appoint an insolvency practitioner to rehabilitate or even liquidate the company.”
43. In relation to his salary, Mr. Liwosz stated:-
“Finally I have not been paid at all for my role as a director of the company for 2011, 2012 and 2013 and I was paid a total of Stg£6,000 for the 21 months from March 2009 to the end of 2010.”
44. Mr. Brown swore a replying affidavit in very similar terms. However, he says that as he was not appointed as a director of the company until 31st October 2011, the disclaiming of the company accounts for the year ended the 31st December, 2008, could not be relevant in any consideration of him in the current application. He makes a similar point in respect of the company accounts for the year ended the 31st December, 2009. In addition Mr. Brown states at para. 18 that:-
“I can now confirm that the company’s books of accounts are to be transferred to Mr. Liwosz’s offices and he will locate the information necessary to complete the audit.”
45. He also stated that he believed that, with the benefit of hindsight, he was naïve in accepting his appointment as a director of the company and he says that he has never been paid for his role as director of the company.
Response of ODCE
46. Mr. Durnin swore a replying affidavit on behalf of the ODCE. In this affidavit he sets out the extraordinary volume of correspondence between the Director’s office and the respondents in trying to insist that the respondents fulfil their statutory obligations. Indeed in respect of the 2008 statements he exhibited no less than 40 pieces of correspondence that passed between the Director, Mr. Liwosz and others associated with the company. He also points to the inherent contradiction in the respondents’ position by contending that the assets of the company have a significant value and yet also claiming that the company does not have sufficient funds to pay for an audit. Mr. Durnin also notes that both respondents in their affidavits refer to how the audits for 2010, 2011 and 2012, would be completed reasonably quickly, but notes that the Director had been the recipient of similar repeated promises from the respondents over the years claiming that the outstanding audits would be completed “as soon as possible”, that they would be completed “imminently”, that there “would be no future incidents of non compliance”, that “audit funds were in place” etc. Indeed by way of one example only, on 11th April, 2011, the first respondent sent the Director an email that he was on the brink of finalising the 2010 audit. This was over three years ago and that audit still has not been completed. Other letters offer “sincerest apologies for the lack of compliance in the past” and resolve to “move matters forward” and “to put the past well and truly behind them” and “to ensure that the company would never again be non compliant in any way at all”. It is clear however, that such promises were easily made by the respondents and easily broken. Another example of the respondents’ behaviour is that the first respondent sent a letter on 13th April, 2012, wherein he confirmed that the auditors were in funds to complete the 2010 audit and that he expected the audit to be finished by May 2012, whereas the auditors some ten days later claimed that they still had not received the audit fees.
47. Again and again it is clear from the affidavits and the correspondence that the Director repeatedly wrote to the respondents to get them to comply with their obligations under the legislation and to comply with the two court orders. Again and again the respondents promised much, but delivered little. Again and again they sought refuge in the fact that the company was in financial difficulties and yet at the same time seemed to confirm that the accounts would be shortly completed.
48. Moreover Mr. Durnin noted that although Mr. Liwosz said he was not paid at all for his role as a director of the company for 2011, 2012 and 2013, he had in fact received US$77,000 as director’s remuneration for 2008. In addition he received US$87,000 as remuneration in 2009. Mr. Liwosz’s affidavits stated that he has been paid a total of Stg£6,000 for the 21 months from March 2009 to the end of 2010. There is no reference in this averment to the fact that he had received US$87,000 for 2009. In reply Mr. Liwosz accepted that he received the remuneration set out by Mr. Durnin in respect of the years 2008 and 2009, but confirmed he had not been paid at all for 2011, 2012 and 2013. However, he says his statement that he was paid a total of Stg£6,000 for the 21 months from March 2009 to the end of 2010 is correct. That may be so, but it is entirely misleading to make this averment in circumstances where he had received a sum of US$87,000 for 2009. This averment that he had received the sum of Stg£6,000 for the 21 months from March 2009 to the end of 2010 would leave the court with the impression that he had not been paid any other monies in 2009 when that was clearly not the case.
Legal Principles applicable to this application.
49. This application is brought under s. 160(2)(b) and (f) of the Companies Act 1990, as amended.
50. Section 160(2)(b) and (f) provide as follows:-
“Where the court is satisfied 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; or
(f) a person has been persistently in default in relation to the relevant requirements;
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.”
Other relevant legal sections.
51. Whilst s.160 (2)(b) provides the circumstances under which a director may be disqualified, there are other relevant sections in the company law code which are of relevance in this application. These are as follows:
1. Under s.125 of the Companies Act 1963 every company is required to make an annual return to the Registrar of Companies.
2. Under s.127 of the Companies Act the annual return must be delivered within 28 days of the annual return date (which is 30th September of each year in respect of the company.)
3. Section 128 of the Companies Act specifies the documents which must be attached to the annual return. These include the balance sheet, the director’s report and the auditors report.
4. These documents must be first laid before an AGM in accordance with s.128 before they are to be submitted to the Registrar of Companies with the annual return.
5. Under s.150 (1) of the Companies Act, the Directors of the company must prepare company accounts each year.
6. Under s.148 (7) of the Companies Act the Directors must lay accounts before the AGM of the company within nine months of the balance sheet date. Thus any accounts for this company (which has its year end on 31st December) should be laid before an AGM no later than 30th September of the following year. (see s.150(9); s148 (7)).
52. These obligations have clearly not been complied with in the present case.
53. Moreover there is no evidence that the company’s group accounts for the period ended 31st December, 2010 were laid before an AGM by 30th September, 2011; likewise there is no evidence that the company accounts for the period ended 31st December, 2011 were laid before an AGM by 30th September, 2012 and there is no evidence that the accounts of the company for the period ended 31st December, 2012 were laid before an AGM by 30th September, 2013.
54. In addition the annual return and the financial statements for each of these years have not been filed with the Companies Registration Office. Thus in the present case there are numerous statutory sections which the respondents have repeatedly breached in addition to the failure to comply with two court orders.
Case law on disqualification
55. I have been referred to a number of recent Irish and English authorities on the grounds for disqualification and the circumstances in which the court might make a disqualification order. In particular I have been referred to Re National Irish Bank Ltd; Director of Corporate Enforcement v. D’ Arcy (2006) 2 IR 163; Re Bovale Developments Ltd; Director of Corporate Enforcement v. Bailey & anor (2013) IEHC 561; Re Kentford Securities Ltd; Director of Corporate Enforcement v. McCann (2010) IESC 59; Re National Irish Bank Ltd; Director of Corporate Enforcement v. Seymour (No. 2) (2007) IEHC 102; Re Wood Products (Longford) Ltd; Director of Corporate Enforcement v. McGowan (2008) 4 IR 598.
56. In particular I note that in Re Kentford Securities Ltd O’Donnell J. in the Supreme Court held that the appropriate test on an application for discretionary disqualification order was twofold and he stated as follows:
“That Act requires a two stage inquiry. Firstly the court must consider whether one or more of the sub paragraphs of s.160 (2) have been established. These in the words of Fennelly J. are “jurisdictional triggers” or as counsel in this case put it “gateways” to the second stage of the inquiry which is a consideration of the court’s discretion.
57. The respondents’ position is that they do not contest that they have been guilty of a breach of duty under s.160 (2) (b) of the Act. They do however dispute that they have been persistently in breach of the relevant requirements pursuant to s.160 (2) (f). Thus they concede that the applicant has demonstrated that at least one of the jurisdictional triggers of s.160 (2) has been established and therefore they admitted that the court should move to consider the exercise of the court’s discretion.
58. Whilst in my view the respondents correctly concede that they have been guilty of breach of duty – indeed they have no defence in this regard – the fact that they have disputed whether they have been “persistently in default” of the relevant requirements means that this is a matter which has to be considered by the court.
59. In this regard I note that in Re Wood Products Fennelly J. stated that the question is:
“Whether on the admitted facts there was persistent default on the part of the respondents. The Oxford English Dictionary definition of “persist” is “to continue firmly or obstinately in a state, opinion, purpose, or course of action especially against opposition.” To persist is to do more than to continue, although repetition is involved. It implies an element of determination. The dictionary offers: “firmly”. It also often suggests opposition to something, whether an idea, a rule, advice or disadvantage. Paragraph (f) uses simple everyday language. Its terms are capable of application directly to the fact of a particular case. No elaborate citation of authority is needed.”
60. Likewise Fennelly J. stated in relation to the filing of annual returns
“Limited liability should be regarded as a privilege conferred by the law. It enables business to raise capital and the promoters to limit their liability to the amount subscribed as well as to organise itself efficiently. The corollary is however that the beneficiaries must comply with the law as to companies. Too many companies have failed as a result of inefficiency, bad management, fraud or mere bad luck. The filing of annual returns offers some admittedly limited protection to possible creditors who may be able to ascertain the financial state of the company.”
61. On the fact of this case it is abundantly clear that the respondents have been persistently in default in relation to the relevant requirements. This can be seen from the following:
1. They filed the 2008 accounts late.
2. The 2008 accounts were disclaimed by the company’s auditors.
3. They filed the 2009 accounts late and again the 2009 accounts were disclaimed by a separate firm of auditors.
4. The 2010 accounts have not been finalised and have not been laid before an AGM of the company.
5. The 2011 accounts have not been finalised and have not been laid before an AGM of the company.
6. The 2012 accounts have not been finalised and laid before an AGM of the company.
7. The annual return and financial statements for each of these years have not been filed with the CRO.
62. It is clear from this recital of events that the respondents have been in breach of their statutory requirements for five successive years.
63. On the basis of the affidavit evidence before the court I have no doubt that the respondents are also guilty of persistent default in relation to the relevant company law requirements.
64. In addition the respondents have failed to comply with two court orders.
Exercise of the courts discretion
65. Given that the respondents conceded that they were in breach of s.160 (2) (b) and given my finding that the respondents are also in breach of s.160 (2) (f), I move now to consider the issue of the exercise of the court’s discretion.
66. The respondents submitted that the court should exercise its discretion within the parameters of previous case law and thus submitted that the court should engage in a comparison with previous decisions when considering whether to make a disqualification order. Thus the respondents sought to rely in Re: Newcastle Timber Ltd; Maloney v. Smullen (2001) 4 IR 586 where McCracken J. considered again the distinction between disqualification and restriction. The company in question had failed to make CRO returns, had traded whilst insolvent for a number of years, and after it had ceased to trade, it paid off trade creditors in priority to the Revenue. McCracken J. however held that it was more appropriate to restrict the directors rather than to disqualify them.
67. Likewise the respondents sought to rely on Re: Wood Products (Longford) Ltd; Director of Corporate Enforcement v. McGowan [2005] IEHC 41 in which the High Court (Laffoy J.) did not make a disqualification order in circumstances where the court held that the respondents had acted irresponsibly in that they had failed to organise the payment of the company’s tax liabilities to the Revenue. Laffoy J. was of the view that the conduct of the respondents although wrong did not warrant the lesser penalty of restriction let alone disqualification. The High Court’s refusal to make an order was upheld by the Supreme Court on appeal.
68. The respondents also sought to contrast their behaviour with a decision of the High Court and Supreme Court in Re: CB Readymix Ltd; Cahill v Grimes (2002) 1 IR 372 where the High Court (Smyth J.) (and the Supreme Court on appeal) disqualified a liquidator who had destroyed the books and records of the company and had failed to act in the interests of creditors and to have engaged in what he called a “battle” with the revenue.
69. I was also referred to other similar decisions (e.g. Business Communications Ltd v. Baxter (Unreported High Court Murphy J. 21st July, 1995); Re Clawhammer Ltd; Director of Corporate Enforcement v. McDonnell & Others (2005) 1 IR 503.
70. In addition the respondents submitted that a further discretionary matter the court was entitled to take into account was the director’s level of remuneration (see Re Vehicle Imports Ltd (Unreported High Court, Murphy J. 23rd November, 2000).
71. In summary therefore the respondents submitted that the court should compare the conduct of the respondents to the conduct of other persons who had been disqualified in previous decisions of the High Court and submitted that their conduct, although wrong, should be seen to be at the lower end of the spectrum of culpability and that it would be inappropriate for the court to make a disqualification order. In particular the respondents submitted that there had been no concerted effort to “battle” with the ODCE but instead there had simply been a lack of funds with which the company could meet its obligations. Finally the respondents submitted that the first respondent had received little remuneration and the second respondent no remuneration from their roles as directors of the company.
72. However, none of the above arguments are sufficiently persuasive in this case and I am of the view that it is appropriate to make a disqualification order against the two respondents for the following reasons:
1. The most noteworthy feature of this application is the fact that the respondents are in persistent and continuing breach of not one but two High Court orders. That is an extraordinary omission on their parts. Indeed although no application for attachment and committal has been brought by the Applicant, it is noteworthy that no substantive defence has been put forward by the respondents, which is acceptable to the court, as to why the respondents have failed to comply with two orders of the High Court. Their behaviour in this regard shows a blatant disregard not only for their obligations as directors under company legislation, but also for the express terms of two court orders directing them to comply. In my view on this ground alone it would be both reasonable and appropriate to make a disqualification order.
2. In addition however, the respondents have shown a persistent failure to comply with the requirements of the Company’s Acts. Thus the 2008 and 2009 accounts were filed late; both sets of accounts were heavily qualified by two different sets of auditors and yet the respondents have not seen fit to remedy these defects or to engage with the accountants to resolve the accountants’ concerns.
3. In addition the accounts for 2010, 2011, 2012 have still not been finalised, put before an AGM or filed with the Companies Registration Office. Thus for the last five years members of this company have been unable to ascertain what is the true financial position of the company. This is an intolerable situation for shareholders in the company or possible investors in the company. The sole responsibility for this state of affairs lies solely and exclusively with the two respondents. They are the directors of the company; they are the persons who are charged with ensuring that the company fulfils its statutory obligations. However they have over a long period of years failed to discharge these obligations in any way which is acceptable to the court.
4. Contrary to the assertions of the respondents, the respondents have indeed done battle with the ODCE. The court has been referred to countless pieces of correspondence from the ODCE to the respondents and the replies to the ODCE; the ODCE has had to bring not one but two court applications to force these directors to comply with their obligations. Despite these court applications and successful court orders the respondents have still failed to comply with their obligations. The fact that the respondents’ behaviour necessitated these court applications is sufficient proof that the Director had to “do battle” with the respondents. The respondents simply refused to comply with their statutory obligations; they refused to comply with the various directions of the ODCE; by their refusal they compelled the ODCE to bring a court application against them under s.371 of the Act. Despite the initial court order they again failed to comply with their obligations forcing the ODCE to bring a second court application in respect of these matters. By their actions and omissions they are directly responsible for forcing the ODCE to spend a significant amount of time and resources pursuing them to fulfil their statutory obligations.
5. Moreover the respondents purported explanation that the only reason they failed to comply with their obligations was that the company lacked the resources to pay for the auditors is not a convincing excuse on the facts of this case. The correspondence from the respondents to the Director has contained repeated promises from the respondents over the years stating that the outstanding audits would be completed “quickly” or “as soon as possible” or “imminently” or that “the audit funds were in place” etc. As stated above, it appears that the first respondent indicated to the Applicant that he was on the brink of finalising the 2010 audit late in April 2011 – over three years ago – and that audit still has not been completed. Indeed the chain of correspondence shows a litany of broken promises from the respondents.
6. It is unacceptable that two separate firms of auditors have qualified the accounts and that the respondents would nevertheless seek to minimise or ignore these issues. If the respondents were of the view that the assets of the company were of a certain value then they should have proved that to the auditors or provided sufficient evidence to the auditors to enable them to form a similar view. This the respondents failed to do. Given that two sets of auditors formed the view that they were unable to obtain sufficient audit evidence to enable them to form an opinion as to the appropriateness of preparing the accounts on a “going concern basis”, the respondents should have been able to provide sufficient audit evidence to enable accountants to form such an opinion. The fact that they were unable to provide sufficient audit evidence means either that the evidence was not there or that the respondents failed to provide such evidence.
73. In this regard the court has particular regard to the statement of Nicholls VC in Re Swift 736 Ltd; Secretary of State for Trade and Industry v. Ettinger (1993) BCC 312 that
“Those who make use of limited liability must do so with a proper sense of responsibility. The director’s disqualification procedure is an important sanction introduced by Parliament to raise standards in this regard”.
74. Likewise in Re National Irish Bank; Director of Corporate Enforcement v. Darcy Kelly J. referred to the dicta of Henry L.J. in Re Grayan Building Services Ltd 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.”
75. In the present case the respondents have sought to obtain the benefit of limited liability and the protection that that confers on them and yet have seen fit to persistently refuse to comply with the obligations which come with such a privilege.
Conclusion
76. In the circumstances therefore I propose to make a disqualification order against the two respondents.
Principles applicable to assessment of appropriate disqualification period.
77. Both the applicant and the respondent filed legal submissions in relation to the period of disqualification. Both parties were in agreement on the general principles which are applicable to this matter.
78. Section 160 (2) of the Companies Act 1990 provides that the court may make a disqualification order against a person for such period as it sees fit. As Finlay Geoghegan J. stated in Re Clawhammer Ltd; DCE v. McDonnell & Others 2005 1 IR 503 “there is no direct guidance from the [Companies] Acts as to the appropriate period for a disqualification order”.
79. The aims and purposes of a disqualification order were considered by the Supreme Court in Re National Irish Bank; DCE v. Byrne 2009 1 IESC 57 where the Supreme Court held that the primary purpose of a disqualification order is not to punish the individual but rather to protect the public against the future running of companies by persons whose past behaviour has shown them to be a danger to creditors and others. However in Re Kentford Securities Ltd; DCE v. McCann 2010 IESC 59 O’Donnell J. in the Supreme Court stated that “it is a significant error to characterise [s.160] as having only a single purpose – that of protecting the public from the [director] in the future”. O’Donnell J. was of the view that improving the standards of corporate governance was an additional purpose of disqualification. Moreover it appears that the principle of deterrence is also a matter to which the court can have regard (see McGovern J. in DCE v. Stakelum 2007 IEHC 486.)
80. In Re Clawhammer Ltd; DCE v. McDonnell & Others 2005 1 IR 503 Finlay Geoghegan J. considered that given that the mandatory period of restriction under s.150 is five years and given that the court must have regard to the fact that the Oireachtas intended a disqualification order to be a more serious sanction than a restriction order under s.150, that it would be appropriate to consider that a reasonable period of disqualification should be five years. It would then be a matter for the Court to consider whether the period should be greater than, or less than, five years. However everything depends on the circumstances of each case and it is a matter for judicial discretion on the facts of each case.
81. I have also been referred to the relevant authorities in respect of the appropriate approach to take in relation to considering the length of the disqualification order (see Re Ansbacher (Cayman) Ltd; DCE v. Collery 2007 1 IR 580; Re Westmid Packing Services Ltd [1988] 2 All ER 124 Re Civica Investments Ltd [1983] BCLC 456).
82. In particular I note that Finlay Geoghegan J. in Re Ansbacher (Cayman) Ltd; DCE v. Collery concluded that the principles applicable to considering the appropriate period of disqualification were that
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.
83. I have also been referred to and considered the principles set out in UK in Re Sevenoaks Stationers (Retail) Ltd (1991) CH 164 which was referred to with approval by Kelly J. in Re National Irish Bank; DCE v. D’ Arcy 2006 2 IR 163. In Sevenoaks the court divided the potential fifteen year disqualification period into three categories as follows:
(a) The top bracket of over ten years should be reserved for “particularly serious cases”.
(b) A middle bracket of between six and ten years for serious cases not meriting the top bracket.
(c) A minimum bracket of between two and five years to be applied where though disqualification under s.6 is mandatory the case is not relatively speaking very serious.
Application of these principles to the facts
85. When I consider the application of these principles to the facts of this case there are a number of significant features about which I am particularly concerned. These are as follows:
1. Both respondents are in continuing breach of two High Court orders.
2. The financial statements for the company for 2008 were filed late and disclaimed by the company’s auditors.
3. The 2009 accounts were filed late and were disclaimed by a different set of auditors.
4. The 2010, 2011 and 2012 annual returns with accounts annexed have not yet been filed.
5. The ODCE has had to do battle with the respondents over many years and has been forced to bring court applications against them on three occasions – including the current application.
86. The court views with particular seriousness the fact that no attempt has been made by the respondents to comply with the relevant court orders. I specifically asked counsel for the applicant whether the applicant was of the view that the company should have been put into liquidation. The applicant’s submission was that the company should certainly have been put into liquidation given the circumstances. I enquired of counsel for the respondents why the company had not been put into liquidation and counsel for the respondents stated that he had no instructions in relation to this matter. It is clear therefore that the respondents have made a deliberate calculation to refuse to comply with two court orders for a protracted period of time, rather than putting the company into liquidation. That is clearly a significant aggravating factor in this case.
87. Having regard to the principles and facts set out above, I am of the view that a period of restriction of seven years would be appropriate in this case.
88. I have considered the mitigating factors put before the court by the respondents. The first respondent was a director of the company from the 18th of July, 2008 until June 2011 and from December 2011 to date. He is a trained engineer and he is now in his mid fifties. He has been a director of a number of private and public companies advising on commercial and financial strategy. He is currently a director of one UK incorporated company. He has had an otherwise unblemished career to date. He has not been paid at all for his role as a director of the company for 2011, 2012 and 2013. That may well be so however I do not regard any of these factors to be a mitigating factor in relation to a continuing breach of two High Court orders.
89. In relation to the second respondent the position is slightly different. The second respondent is now in his seventies. In my view that is not a mitigating factor. However the second respondent was only appointed as a director of the company in October 2011 and he has not been paid for his role as a director. Given that the second respondent only became a director in 2011 he was not responsible for the position originally in relation to the 2008 and 2009 accounts. He is however responsible for the failure to file proper accounts since he became a director and he is also fully responsible for the ongoing failure to comply with two High Court orders.
90. In the circumstances therefore I believe that an appropriate order would be to disqualify the first named respondent Mr. Liwosz for a period of seven years and to disqualify the second named respondent Mr. Anthony Brown for a period of six years.