Limits on Duties
Companies Act
Holding of any other office or place of profit under the company by director
162. (1) A director of a company may hold any other office or place of profit under the company (other than the office of statutory auditor) in conjunction with his or her office of director for such period and on such terms as to remuneration and otherwise as the directors of the company may determine.
(2) No director of a company or intending such director shall be disqualified by his or her office from contracting with the company either with regard to his or her tenure of any such other office or place of profit or as vendor, purchaser or otherwise.
(3) In particular, neither shall—
(a) any contract with respect to any of the matters referred to in subsection (2), nor any contract or arrangement entered into by or on behalf of the company in which a director is in any way interested, be liable to be avoided, nor
(b) a director so contracting or being so interested be liable to account to the company for any profit realised by any such contract or arrangement,
by reason of such director holding that office or of the fiduciary relation thereby established.
Counting of director in quorum and voting at meeting at which director is appointed
163. A director of a company, notwithstanding his or her interest, may be counted in the quorum present at any meeting at which—
(a) that director or any other director is appointed to hold any such office or place of profit under the company as is mentioned in section 162 (1), or
(b) the terms of any such appointment are arranged,
and he or she may vote on any such appointment or arrangement other than his or her own appointment or the arrangement of the terms of it.
Other interests of directors
229. (1) Save to the extent that the company’s constitution provides otherwise, a director of a company may be or become a director or other officer of, or otherwise interested in, any company promoted by the company or in which the company may be interested as shareholder or otherwise; but neither this subsection nor anything in the company’s constitution governing the foregoing matter overrides section 228 .
(2) No such director shall be accountable to the company for any remuneration or other benefits received by him or her as a director or officer of, or from his or her interest in, such other company unless the company otherwise directs.
Power of director to act in a professional capacity for company
230. Save to the extent that the company’s constitution provides otherwise—
(a) any director may act by himself or herself, or his or her firm, in a professional capacity for the company of which he or she is a director, and
(b) any director, in such a case, or his or her firm, shall be entitled to remuneration for professional services as if he or she were not a director,
or she is director,
but nothing in this section authorises a director, or his or her firm, to act as statutory auditor of a company of which he or she is director.
Duty of director to disclose his or her interest in contracts made by company
231. (1) It shall be the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company, to declare the nature of his or her interest at a meeting of the directors of the company.
(2) Subsection (1) does not apply in relation to an interest that cannot reasonably be regarded as likely to give rise to a conflict of interest.
(3) The declaration required by this section to be made by a director shall—
(a) in the case of a proposed contract, be made at the meeting of the directors at which the question of entering into the contract is first taken into consideration or, if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after he or she became so interested; and
(b) in the case of his or her becoming interested in a contract after it is made, be made at the first meeting of the directors held after the director becomes so interested.
(4) Subject to subsection (5), for the purposes of this section a general notice given to the directors of a company by a director to the effect that—
(a) he or she is a member of a specified company or firm and is to be regarded as interested in any contract which may, after the date of the notice, be made with that company or firm, or
(b) he or she is to be regarded as interested in any contract which may, after the date of the notice, be made with a specified person who is connected with him or her,
shall be deemed to be a sufficient declaration of interest in relation to any such contract.
(5) No such notice as is mentioned in subsection (4) shall be of effect unless it is given at the meeting of directors or the director takes reasonable steps to secure that it is brought up and read at the next meeting of the directors after it is given.
(6) A copy of every declaration made and notice given in pursuance of this section shall, within 3 days after the date of making or giving of it, be entered into a book kept by the company for this purpose.
(7) That book shall be open for inspection, without any charge, by any director, secretary, statutory auditor or member of the company at the registered office of the company and shall be produced at—
(a) every general meeting of the company; and
(b) any meeting of its directors if any of its directors so requests in sufficient time to enable the book to be available at the meeting.
(8) A company shall, if required by the Director of Corporate Enforcement, produce to the Director for inspection the book kept by it in accordance with subsection (6) and shall give the Director such facilities for inspecting and taking copies of the contents of the book as the Director may require.
(9) Nothing in this section shall be taken to prejudice the operation of any enactment or rule of law restricting directors of a company from having interests in contracts with the company.
(10) Any reference in this section to a contract—
(a) shall be read as excluding a reference to a contract the decision as to whether to enter into it is taken, or falls to be taken, other than by the board of directors or a committee of which the first-mentioned director in subsection (1) is a member;
(b) shall be read as including a reference to any transaction or arrangement, whether or not constituting a contract, but, in a case where the transaction or arrangement does not constitute a contract, a like limitation to that which applies under paragraph (a) applies to the construction of reference provided by this paragraph.
(11) For the purposes of this section, a transaction or arrangement of a kind described in section 239 made by a company for a director of the company or a person connected with such a director shall, if it would not otherwise be so treated (and whether or not prohibited by that section), be treated as a transaction or arrangement in which that director is interested.
Breaches of certain duties: liability to account and indemnify
232. (1) Subject to section 233 , where a director of a company acts in breach of his or her duty under section 228 (1)(a), (c), (d), (e), (f) or (g), he or she shall be liable to do either or both (as the corresponding common law rule or equitable principle with respect to the matter would have required) of the following things, namely—
(a) account to the company for any gain which he or she makes directly or indirectly from the breach of duty;
(b) indemnify the company for any loss or damage resulting from that breach.
(2) Subject to subsection (6), where a company enters into a transaction or arrangement contrary to section 238 or 239 with—
(a) a director of the company,
(b) a director of its holding company, or
(c) a person connected with a director of the company or its holding company,
that director and the person so connected and any other director of the company who authorised the transaction or arrangement (or, as the case may be, any transaction entered into in pursuance of the arrangement) shall be liable—
(i) to account to the company for any gain which he or she makes directly or indirectly from the transaction or arrangement;
(ii) (jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the transaction or arrangement; or
(iii) to do both of those things as the circumstances may require.
(3) Subject to section 233 , where a company makes a payment to a director contrary to section 251 or 252 that director shall be liable—
(a) to account to the company for any gain which he or she makes directly or indirectly from the payment,
(b) to indemnify the company for any loss or damage resulting from the payment, or
(c) to do both of those things as the circumstances may require,
and, in the case of section 252 , this is without prejudice to subsection (3) of that section.
(4) Subsection (2) applies irrespective of whether the transaction or arrangement concerned has been avoided.
(5) Subsections (1) to (3) are without prejudice to—
(a) the company’s right at common law to claim damages for breach of duty, or
(b) the company’s right to make an application seeking the grant of equitable relief,
but the provisions of this section shall not be read as having the combined effect of enabling the company to be afforded more compensation for any damage or injury, or more protection of any proprietary right, than is just and equitable in the circumstances.
(6) Where a transaction or arrangement is entered into by a company and a person connected with a director of the company or of its holding company in contravention of section 238 or 239 —
(a) that director shall not be liable under subsection (2) (or under any law referred to in subsection (5)) if he or she shows that he or she took all reasonable steps to secure the company’s compliance with section 238 or 239 , as the case may be, and
(b) in any case, a person so connected and any such other director as is mentioned in subsection (2) shall not be so liable if he or she shows that, at the time the transaction or arrangement was entered into (or, as the case may be, at the time the particular transaction was entered into in pursuance of the arrangement), he or she did not know the relevant circumstances constituting the contravention.
Power of court to grant relief to officers of company
233. (1) This section applies to any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company.
(2) In proceedings to which this section applies the court hearing the proceedings has the power of granting relief provided under subsection (3) if it appears to the court that the officer concerned is or may be liable in respect of the negligence, default, breach of duty or breach of trust (the “wrong concerned”) but that he or she has acted honestly and reasonably and that, having regard to all the circumstances of the case (including those connected with his or her appointment), he or she ought fairly to be excused for the wrong concerned.
(3) The power referred to in subsection (2) is to relieve the officer concerned, either wholly or partly, from his or her liability in respect of the wrong concerned on such terms as the court may think fit.
Anticipated claim: similar power of relief as under section 233
234. (1) If an officer of a company has reason to apprehend that any claim will or might be made against him or her in respect of any negligence, default, breach of duty or breach of trust (the “wrong concerned”) he or she may make the following application to the court.
(2) That application is an application to be relieved of liability in respect of the wrong concerned; on the making of such an application the court shall have the same power to relieve the applicant as it would have had (by virtue of section 233 ) if it had been a court before which proceedings against that person for the wrong concerned had been brought.
Any provision exempting officers of company from liability void (subject to exceptions)
235. (1) Subject to the provisions of this section, the following provision shall be void, namely, any provision:
(a) purporting to exempt any officer of a company from; or
(b) purporting to indemnify such an officer against;
any liability which by virtue of any enactment or rule of law would otherwise attach to him or her in respect of any negligence, default, breach of duty or breach of trust of which he or she may be guilty in relation to the company.
(2) Subsection (1) applies whether the provision concerned is contained in the constitution of a company or a contract with a company or otherwise.
(3) Notwithstanding subsection (1), a company may, in pursuance of any such provision as is mentioned in that subsection, indemnify any officer of the company against any liability incurred by him or her—
(a) in defending proceedings, whether civil or criminal, in which judgment is given in his or her favour or in which he or she is acquitted; or
(b) in connection with any proceedings or application referred to in, or under, section 233 or 234 in which relief is granted to him or her by the court.
(4) Notwithstanding subsection (1), a company may purchase and maintain for any of its officers insurance in respect of any liability referred to in that subsection.
(5) Notwithstanding any provision contained in any enactment, the constitution of a company or otherwise, a director may be counted in the quorum and may vote on any resolution to purchase or maintain any insurance under which the director might benefit.
(6) For the avoidance of doubt, if—
(a) any business, trade or activity has been carried on by means of a company, or other body corporate, registered or formed under the laws of another country,
(b) the period for which that business, trade or activity was so carried on was not less than 12 months preceding the date on which this subsection falls to be applied,
(c) a provision of the kind referred to in subsection (1)(a) or (b) in relation to officers of the company or other body corporate was in being and valid under the laws of that country, and
(d) a private company limited by shares is formed and registered to carry on that business, trade or activity,
then nothing in this section invalidates the operation of the provision referred to in paragraph (c) in respect of any negligence, default, breach of duty or breach of trust occurring before that private company limited by shares is formed and registered.
(7) Any directors’ and officers’ insurance purchased or maintained by a company before 6 April 2004 is as valid and effective as it would have been if this section had been in operation when that insurance was purchased or maintained.
(8) In this section—
(a) “officer” includes a statutory auditor,
(b) a reference to an officer includes a reference to any former or current officer of the company.
The text in italics on this page is sourced from the Irish Statute Book and is re-published under the Licence for Re-Use of Public Sector Information made pursuant to Directive 2003/98/EC Directive 2013/37/EU of the European Parliament and of the Council on the re-use of public sector information transposed into Irish law by the European Communities (Re-Use of Public Sector Information) Regulations 2005 to 2015.
Cases
O’Sullivan v Conroy Gold and Natural Resources Plc
[2017] IEHC 543 (26 September 2017)
Barrett J…..
X. Director Duties
(i) General.
95. Notwithstanding the direction that the submissions took at hearing, the court notes that there is no pleading in the within application as to breach of fiduciary duty, and that there was no allegation in the case as originally formulated of any abuse of power on the part of Prof. Conroy. But given the time spent on this aspect of matters at hearing, and the desire expressed on the part of Conroy Gold at hearing to see the complaints raised comprehensively addressed, the court turns to address this aspect of matters.
(ii) A Director Occupies a Fiduciary Position.
96. It is trite law that a director occupies a fiduciary position towards the company of which s/he is director. This means that s/he must always act in the good faith in the interests of the company as a whole. (Percival v. Wright [1902] 2 Ch. 421). Writing of this requirement as to good faith, Prof. Hutchinson, in Keane on Company Law, 5th ed., 246, observes:
“The test is subjective: if the directors genuinely believe that what they are doing is in the interests of the company as a whole, the court will not interfere with their decisions even though they might appear objectively to be detrimental to the company [Re Greshem Life Assurance Soc [1872 LR 8 Ch. 446, 449]. The court will be unlikely to accept that the directors’ opinion was genuinely held, however, if there are no possible reasonable grounds for it. [Bloxham (in liq.) v. Irish Stock Exchange Ltd [2014] IEHC 93]”.
(iii) Section 228 of the Act of 2014.
97. Section 228 of the Act of 2014 identifies a variety of fiduciary duties that arise on the part of company directors. Per s.228(1):
“A director of a company shall–
(a) act in good faith in what the director considers to be the interests of the company;
(b) act honestly and responsibly in relation to the conduct of the affairs of the company;
(c) act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law;
(d) not use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless –
(i) this is expressly permitted by the company’s constitution; or
(ii) the use has been approved by a resolution of the company in general meeting;
(e) not agree to restrict the director’s power to exercise an independent judgment unless –
(i) this is expressly permitted by the company’s constitution;
(ii) the case concerned falls within subsection (2);
(iii) the director’s agreeing to such has been approved by a resolution of the company in general meeting;
(f) avoid any conflict between the director’s duties to the company and the director’s other (including personal) interests unless the director is released from his or her duty to the company in relation to the matter concerned, whether in accordance with provisions of the company’s constitution in that behalf or by a resolution of it in general meeting;
(g) exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both–
(i) the knowledge and experience that may reasonably be expected of a person in the same position as the director; and
(ii) the knowledge and experience which the director has;
and
(h) in addition to the duty under section 224 (duty to have regard to the interests of its employees in general), have regard to the interests of its members.”
98. In their written submissions, counsel for Mr O’Sullivan have placed especial reliance on the duties referred to at ss.(a), (c), (f), (g) and (h). As to s.228(1)(a), this reflects the rule in Percival v. Wright, op. cit., and retains the subjective test as to how those interests are perceived to lie. As to s.228(1)(c), the court turns to address the legal or proper purpose aspect of matters in greater detail later below. As to s.228(1)(f), this reflects, e.g., Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134 (and Gabbett v. Lowder (1883) 11 LR (Ir.) 295). As to s.228(1)(h), this reflects s.52(1) of the Act of 2014 but, for the reasons stated hereafter is a right enforceable by the company or by derivative action; it does not fall properly to be construed as conferring a direct right of enforcement on employees.
99. A trio of points might usefully be made as regards s.228(1):
(1) it does not appear that the list contained therein is intended to be exhaustive. Otherwise, for example, the effect of s.228 would be to obviate the duty that arises for directors pursuant to Nash v. Lancegaye Safety Glass (Ireland) Ltd (1958) 92 ILTR 11 to act fairly between members. There is no reason to believe that the Oireachtas intended through the medium of s.228, or the Act of 2014 more generally (an enactment that is focused in part on the attainment of better corporate governance standards) to get rid of so long-recognised and sensible a duty, nor any good reason to believe that the Oireachtas considered that it wished to see that duty enforced post- the Act of 2014 by way of the law relating to oppression. That being so, it follows that that duty should be recognised as subsisting and this can only be so if s.228 is not exhaustive.
(2) it does not appear that the various fiduciary duties as identified in s.228(1) are free-standing and separate; in truth, they appear considerably to overlap.
(3) although s.228 is headed “Statement of principal fiduciary duties of directors”, not all of the duties listed fall properly to be considered as fiduciary duties. So, for example, the duty of “care, skill and diligence” referred to at ss.(g) is a duty that arises from the contract/tort realm. Although s.227(3) provides that “The relevant duties [i.e. those set out in s.228] shall be enforced in the same way as any other fiduciary duty owed to a company by its directors”, the court understands this merely to be mean that they can be enforced by the company or by derivative action, not that there is now a novel remedy against a director for breach of such duty.
(iv) Duty to Ensure Shareholders do what is Contractually Agreed?
100. Counsel for Mr O’Sullivan have contended, inter alia, that:
“[I]n preparing for an extraordinary general meeting, which the directors had convened, the directors had a duty to enfranchise the members. The duty to act in the best interests of the Company entailed a duty to take necessary preparatory steps to ensure that the members would be properly enfranchised and that the majority will at that meeting could be properly respected and given effect”,
and
“[I]f certain formal consents or particulars were deemed to be required, it was incumbent upon the Board to request those for the purposes of giving proper effect to the members’ franchise at general meeting.”
101. No case-law has been cited in support of these contentions and the court, respectfully, does not accept them to be correct as a matter of law. As a matter of practicality, why would each of the members and the company agree in Art.85 that notice should be served on the company, if a concomitant duty immediately then arose at law whereby the directors became responsible to remind affected shareholders that they needed to do what they had agreed to do vis-à-vis the company? If that were the position that arose at law, then the more practical approach would be for the articles of association to place a duty on the board to source such details as are presently required to be notified to the company, and no more. Of course, freedom of contract carries with it the freedom to agree anything that is lawful and thus to agree something that may seem less than optimally practical to a third party such as the court. But, leaving practicality aside and recognising the full ambit of the freedom to contract, when it comes to the fiduciary duties of directors, Irish law has never recognised the concomitant obligation contended for. There is no fiduciary duty extant at law whereby company directors are obliged to ‘nudge’ shareholders who are minded not to conform with (or who forget or overlook that they have to comply with) contractual obligations arising in the relevant company’s articles of association (by which those shareholders have previously freely agreed to be bound) so that those shareholders instead place themselves in a position where they do or will so comply. And it is contractual obligations, and compliance or want of compliance with contractual obligations, that are in play: Conroy Gold is a company, not a sovereign entity, and the ‘franchise’ that its members enjoy (as members) flows from the contract constituted by the articles of association, not from some separate civil rights precept.
(v) Improper Motive?
a. The Evidence.
102. When it comes to Prof. Conroy’s conduct of the EGM, he took informed professional legal advice as to how he should act and he elected to act in accordance with that advice. That is what one would instinctively expect a reputable and sensible company chairman to do. As to the suggestion that Prof. Conroy has shown himself to be primarily motivated by his private desire to retain control of Conroy Gold, the court notes that Prof. Conroy has sworn as follows in his affidavit evidence, and that this averment has not been contradicted or challenged in the since-sworn affidavit evidence:
“The Applicant [Mr O’Sullivan] is now claiming through his solicitor that my conduct of the EGM and my observance of the rules set out in the Company’s Articles demonstrates that I am ‘primarily motivated by [my] private desire to retain control of the Company. Since that date I have been only a minority shareholder in the Company, and until the 4 August EGM I was only one of nine directors. During that time, I have not exhibited any desire to ‘control’ the Company.”
103. A legal difficulty arises, however, with the court engaging in any assessment now of Prof. Conroy’s motivation for his actions, which difficulty will become apparent in light of the court’s consideration hereafter of the decision of the United Kingdom Supreme Court in Eclairs Group Ltd v. JKX Oil and Gas plc [2015] UKSC 71.
b. Gwyer and Eclairs.
104. The court has been referred to the decision of: the High Court of England and Wales in Colin Gwyer & Associates Ltd v. London Wharf Limehouse Ltd [2003] 2 BCLC 153; and the United Kingdom Supreme Court in Eclairs. Gwyer is a case concerned with the situation where the duty owed by the directors to a company has effectively been transposed into a duty to act in the interests of an insolvent company’s creditor’s (a transposition of duty recognised in this jurisdiction in Re Frederick Inns Ltd [1991] ILRM 582, [1994] ILRM 387). Such a situation, and hence such a transposition, does not pertain here and the court turns therefore to the decision in Eclairs and the consideration therein of the so-called ‘proper purpose’ rule.
105. In Eclairs, JKX Oil and Gas plc suspected that it was the target of a hostile takeover by two shareholders, Eclairs and Glengary. JKX, through its directors had the power to require individual shareholders to disclose those with interests in the relevant shareholding and temporarily to ‘disenfranchise’ shareholders whose response was perceived to be inadequate. JKX engaged in such a process of disenfranchisement with both Eclairs and Glengary. A legal dispute focused on the legal validity of the disenfranchisement ensued (with the future control of JKX turning on the outcome). In the United Kingdom, s171(b) of the Companies Act 2006 requires that directors must “only exercise powers for the purposes for which they are conferred”, s.170(4) of the Act of 2006 adding that this rule is to be interpreted and applied with regard to corresponding common law rules and equitable principles. This is often referred to as the ‘proper purposes’ rule (and sometimes described as the doctrine of a fraud on a power). As can be seen: the duty arising under s.171(b) of the Act of 2006 is akin to the duty incumbent on a director under s.228(1)(c) of the Act of 2014, inter alia, to “exercise his or her powers only for the purposes allowed by law”; and the provisions as to interpretation in s.170(4) of the Act of 2006 are likewise akin to those in s.227(5) of the Act of 2014 (whereby the duties set out, inter alia, in s.228(1)(c) shall, inter alia, “be interpreted, and…applied, in the same way as common law rules or equitable principles”).
106. In proper purposes cases, three successive issues arise for resolution: (1) where is the boundary between the proper and improper exercise of the power in issue? (2) as a matter of fact, for what purpose or mixed purposes was the power in issue in an individual case exercised as it was in that case? (3) what consequences must follow? When the Court of Appeal came to adjudge on the Eclairs dispute, Briggs L.J. (dissenting) held that the directors’ use of the information/disenfranchisement powers had not been used for their proper purpose of securing information but to disenfranchise certain shareholders at a key point in a takeover battle. The majority in the Court of Appeal held (surprisingly perhaps) that the proper purposes rule did not actually apply to the directors’ powers there. They (the majority) were, however, unanimously reversed by the United Kingdom Supreme Court. That court only had to consider issue (1). However, Lord Sumption, in a judgment which, if the court might respectfully observe, is logically compelling and bears careful reading, also went on to consider how the courts of the neighbouring jurisdiction should approach the application of the proper purpose rule where mixed purposes present (as in real-life they so often do). But for the purposes of the within judgment it suffices to note the following observations of Lord Sumption, at 648-9:
“THE PROPER PURPOSE RULE
…Part 10, Chap 2 of the 2006 Act [the United Kingdom’s Companies Act 2006] codified for the first time the general duties of directors. The proper purpose rule is stated in s.171(b) of the 2006 Act, which provides that a director of a company must ‘only exercise powers for the purposes for which they are conferred’. The rule thus stated substantially corresponds to the equitable rule which had for many years been applied to the exercise of discretionary powers by trustees.
…
The important point for present purposes is that the proper purpose rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it as a matter of construction or implication. It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason. It follows that the test is necessarily subjective. ‘Where the question is one of abuse of powers,’ said Viscount Finlay in Hindle v. John Cotton Ltd 1919 56 SLR 625 at 630, ‘the state of mind of those who acted, and the motive on which they acted, are all important’”.
107. Clear from the foregoing is that for the ‘proper purpose’ rule to apply, the court would need to be satisfied as to the subjective intention of Prof. Conroy. There are two, perhaps three ways in which such subjective intention can be identified. First, if Prof. Conroy was to aver as to his subjective intention. Second, if he were challenged by way of cross-examination on his affidavit. Third, depending on such other averments as were before the court, if he did not comment on it at all. However, as can be seen from the above-quoted extract from Prof. Conroy’s affidavit evidence, he deals expressly with the notion that his actions were motivated by some improper desire to enjoy control of Conroy Gold. That evidence has not been contradicted on affidavit. And here the decision of the Supreme Court in Boliden v. Cosgrove and ors [2010] IESC 62 comes into play, specifically in the observation of Hardiman J., who gave judgment for the court, at 17, that:
“It cannot be too strongly emphasised that, where evidence is presented on affidavit, a party who wishes to contradict such evidence must serve a Notice of Intention to Cross-examine. In a case tried on affidavit, it is not otherwise possible to choose between conflicting versions of facts which may have been deposed to.”
108. In short, in the face of Prof. Conroy’s affidavit evidence, the notion that he was improperly motivated could only be brought home by Mr O’Sullivan by way of cross-examination, and there has been no such cross-examination. The court is being asked to make a subjective decision as regards the mind-frame of Prof. Conroy without any challenge to the evidence he has given in this regard. (In passing, the court notes that the import of the judgment of Hardiman J. in Boliden seems to it sometimes, perhaps even oftentimes to be under-relied upon by defendants to applications for summary debt relief).
(vi) Oppression.
109. The test for oppression is objective (Re Irish Visiting Motorists Bureau Ltd (Unreported, High Court (Kenny J.), 7th February, 1972). The court does not see in the actions of Prof. Conroy (or the wider board of Conroy Gold) an exercise of his or their powers in a manner that is oppressive (burdensome, harsh, and wrongful) to Mr O’Sullivan or any of the members of Conroy Gold or in disregard of his interests as a member of Conroy Gold. Indeed, though it may seem otherwise to Mr O’Sullivan in the pursuit of his present self-interest, it is, in truth, in the general interest of all shareholders, Mr O’Sullivan included, that Prof. Conroy, as company chairman, would seek to comply with the articles of association and act on legal advice as to how this might best be achieved. It follows from the foregoing that there can be no question of any order issuing from the court at this time under s.212 of the Act of 2014. (Section 212(1), the court notes, provides that “Any member of a company who complains that the affairs of the company are being conducted or that the powers of the directors are being exercised – (a) in a manner oppressive to him or her or any of the members (including himself or herself), or (b) in disregard of his or her or their interests as members, may apply to the court for an order under this section.” The court understands that the oppressive conduct suggested to arise in this case relates to how the powers of the directors or being exercised. However, for the sake of good form it notes that it does not, on the evidence before it, see that the affairs of the company are being conducted in a manner that would justify the making of an order under s.212).
XI. Operation of Conroy Gold
110. A variety of corporate-governance based and other criticisms, some quite scathing, have been made by Mr O’Sullivan as regards the past and ongoing operation of Conroy Gold. The perceptions on the part of Mr O’Sullivan which informed those criticisms also informed his actions as regards requisitioning and tabling the motions at the EGM of 4th August last. This application is not concerned with determining the veracity or otherwise of those perceptions and/or criticisms and the court makes no comment, and has no view, regarding same.
XII. Conclusion
111. Mr O’Sullivan, having failed to comply with the particular notification requirements to which he was subject under Art.85 of Conroy Gold’s articles of association, comes now to court claiming: that there was “practical and substantive” compliance with those requirements on his part; and that the court, by giving business efficacy to the said articles of association, should deem that to be compliance enough. But there is no such thing as “practical and substantive” compliance when it comes to the applicable notification requirements: there is either compliance or there is not, and here there was not. As to giving business efficacy to the reading of articles of association, that is a task that arises for a court when there is some doubt as to the meaning or sense of the articles of association, literally construed. But here there is no such doubt presenting. The notification requirements are simple and clearly worded, there is good reason why they exist and fall to be satisfied, and they were not satisfied. A commercially sophisticated, legally advised shareholder, such as Mr O’Sullivan, who is attempting to place a number of directors on the board of a public company can reasonably and properly be taken to be familiar with the rules applicable to such attempt, be those rules prescribed in the relevant company’s articles of association and/or applicable statute. Regardless, there was no obligation on Conroy Gold to remind Mr O’Sullivan of the notification obligations incumbent upon him in order that he might discharge those obligations in a timely manner. For these reasons, and for the reasons stated elsewhere in the court’s judgment, the within application must fail. All of the reliefs sought by Mr O’Sullivan at this time are respectfully refused by the court.
Grace (Liquidator) v. Kachkar & Ors
[2005] IEHC 63 (21 February 2005)
Judgment of Ms. Justice Finlay Geoghegan delivered on the 21st day of February, 2005.
The applicant is the official liquidator of each of the companies named in the title. He was so appointed by order of the High Court made on the 11th December, 2002. Prior to that he had been examiner, appointed by the High Court, of each of those companies.
This judgment relates to his application under s. 150 of the Companies Act, 1990, for a declaration of restriction in respect of each of the first and second named respondents, Mr. Kachkar and Mr. Carrigan.
It is undisputed that each of Mr. Kachkar and Mr. Carrigan were directors of each of the companies named in the title within twelve months of the date of commencement of the winding up. It is further undisputed that each of the companies is insolvent and accordingly s. 150 of the Act of 1990 applies to each of the companies and to Mr. Kachkar and Mr. Carrigan.
The liquidator made reports to the Director of Corporate Enforcement under
s. 56 of the Company Law Enforcement Act, 2001, and was not relieved of his obligations to bring these applications.
Background facts
Miza Ireland Limited is the holding company of the other four companies (“the Irish Miza Group”). The Irish Miza Group was a manufacturer of branded and non-branded generic pharmaceutical products. All products were manufactured by Mitek Pharmaceuticals Limited.
Miza Ireland Limited is a wholly owned subsidiary of Miza Pharmaceuticals Inc. (“Miza Inc.”) a company incorporated and registered in Canada.
The companies in the Irish Miza Group (other than Miza Ireland Ltd.) were formerly part of the Antigen Group along with a least three other Irish companies. The Antigen Group had similarly manufactured in Ireland branded and non-branded generic pharmaceutical products. The additional companies had responsibility for the sale and distribution of generic and branded pharmaceutical products manufactured by the Antigen Group worldwide.
The former Antigen Group companies were required to upgrade their Irish manufacturing processes in order to comply with standards required by the Irish Medicines Board. This necessitated the closure of the pharmaceutical production facility in July 2000 with consequent adverse effects on revenue. It would appear, as a direct result of this, the High Court was petitioned in May 2001 for the appointment of an examiner to the Antigen Group. On the 9th May, 2001, Mr. Jason Sheehy (“the Examiner”) was appointed interim examiner and his appointment was subsequently confirmed on 28th May, 2001.
A scheme of arrangement was formulated by the Examiner and put before the creditors in August 2001. It provided for the payment in full to the creditors of the principal sums over a period of time ranging from 3 months to 30 months. The investor for the scheme of arrangement was a joint venture between Miza Inc. and Goldshield. In essence they (or their subsidiaries) were to provide a total of approximately IR£24m for the purpose of funding the acquisition of the Antigen Group from Mr. George Fasenfeld, the shareholder in Antigen Holdings Limited, for the sum of IR£6.7m and to fund the creditors in the scheme of arrangement amounting to IR£17.3m. The above scheme of arrangement was approved by the creditors. It was to be implemented by a complicated series of agreements and transactions.
The scheme of arrangement was approved by the High Court on the 8th November, 2001. Thereafter the agreements already entered into commenced to be implemented and certain further agreements were entered into. The effect of these agreements and their preliminary implementation may be summarised as follows for the purposes of this application.
Goldshield through a subsidiary, Startville Limited, acquired the shares in three companies then owned by Antigen Holdings Limited concerned with the marketing, distribution and sale of the pharmaceutical products. Startville Limited paid IR£6.7m for the product licences, authorisations, goodwill and finish stock of Antigen Pharmaceuticals Limited and certain equipment of Antigen Limited. This sum was paid to Antigen Holdings Limited which in turn loaned it to Miza Ireland Limited which used it to acquire the shares held by George Fasenfeld in the Antigen Group.
A manufacturing and supply agreement was entered into between Miza Ireland Limited, Goldshield Group plc and Miza Inc. pursuant to which the Irish Miza Group was to sell and Goldshield was to purchase all of its production. Gross margins were provided for under the agreement.
There is a difference on the affidavits between the liquidator and Mr. Kachkar as to the true meaning and import of the agreements in relation to the provision of the funding by Miza Inc. and its subsidiaries on the one hand and Goldshield on the other for the sums due to creditors under the scheme of arrangement. The liquidator contends that the agreements required the sums to be provided on an equal basis by Miza Inc. and Goldshield through its subsidiaries whereas Mr. Kachkar essentially takes the view that in accordance with a KPMG report done in November 2001 the sums due under the scheme of arrangement should have been capable of being financed out of the monies to be paid by Goldshield for the product manufactured by the Irish Miza Group with the addition of a small asset-based loan of approximately IR£1.5m. It is not necessary for me for the purposes of this application to determine the precise contractual obligations.
Notwithstanding the agreements put in place in November 2001 there appears to have been a delay in the implementation of the new relationships and production arrangements in the first quarter of 2002. Mr. Kachkar appears to blame this at least in part on Goldshield and again I need not resolve this.
The first payment under the scheme of arrangement to creditors was due on the 12th February, 2002. The Irish Miza Group defaulted in paying the full amounts then due. Difficulties arose between the Irish Miza Group and Goldshield in relation to the production agreement and cashflow in the Irish Miza Group deteriorated.
It appears from the facts set out in the affidavit that at the same time Miza Inc. was involved in a major financing initiative in Canada. It appears that this was intended to fund worldwide operations and capital investments of the Miza Group including those in Ireland. Preliminary confirmation of financing was received from Genstar Capital in the US in the summer of 2002 which with Genstar’s consent was notified to Miza’s creditors.
Following the Genstar commitment CCL Industries Inc. (“CCL”) a Miza Inc. shareholder agreed to provide Miza companies with interim financing of $3m. Of this Miza Inc. made available to the Irish Miza Group a total of approximately $1m in two tranches of €795,832.29 and €201,481.81 respectively at the end of July 2002. However, over the following month approximately the Irish Miza Group appear to have transferred out €501,526 to Miza Inc. and Miza U.K. In August 2002 Genstar decided not to proceed with the financing. There were continuing disputes between Miza Inc. and Goldshield. The perilous state of the Irish Miza Group was recognised by the directors at latest in early September 2002. The first meetings of directors of which minutes were produced were held on 9th and 10th September, 2002.
Subsequently in September 2002 attempts appear to have been made by the then Irish management of the Irish Miza Group (who were not directors of any of the companies named in the title) and representatives of Goldshield and CCL to procure investments/funding for the Irish Miza Group. Relations between Mr. Kachkar and Mr. Carrigan on the one hand and the Irish management on the other appear to have broken down at this time and pursuant to a request made by the Irish management with the support of representatives of Goldshield and CCL Mr. Kachkar and Mr. Carrigan resigned as directors on the 9th October, 2002.
On the 29th October, 2002, the liquidator was appointed as interim examiner on the petition of the Bank of Ireland and the Bank of Scotland (Ireland) Limited and on the 11th December, 2002, following an unsuccessful examinership, he was appointed official liquidator of each of the companies.
Issues
On the facts set out in the affidavits filed herein no issue arises as to the honesty of Mr. Kachkar and Mr. Carrigan in relation to the conduct of the affairs of each of the five companies in the Irish Miza Group whilst they were directors of same. This is acknowledged by the liquidator pursuant to his investigations and I am so satisfied. The liquidator, in accordance with the practice direction in relation to applications under s. 150 has raised matters for consideration by the court under four headings which he submits mean that Mr. Kachkar and Mr. Carrigan cannot discharge the onus placed on them by s. 150 of the Act of 1990 of establishing to the satisfaction of the court that they acted responsibly as directors of the companies.
1. As directors of Miza Ireland Limited (to which they had been appointed on 2nd November, 2001) they put up to the High Court a scheme of arrangement which was dependent on investment from Miza Inc. when they had not in place funding for Miza Inc. which would permit such investments to be made.
2. Mr. Kachkar and Mr. Carrigan either permitted or directed the payment from the Irish companies of significant sums of money and assets in the order of €2.8m. It is contended that these were transferred on the basis of inter-company charges but with no real basis for same, that the companies were insolvent at the time the transfers were made and also at the same time unable to make the payments due to the scheme creditors.
3. Mr. Kachkar and Mr. Carrigan procured that the Irish companies give two sets of securities at a time when they were insolvent: firstly, a composite guarantee and mortgage debenture between the Irish companies and Miza Inc. on 11th December, 2001 and, secondly, a composite guarantee and mortgage debenture between the Irish companies and CCL Industries Inc. on 13th September, 2002.
4. Mr. Kachkar and Mr. Carrigan permitted the Irish companies to continue to trade whilst insolvent and it is submitted that it was irresponsible to permit the continued trading after February 2002. It is contended that the creditors of the companies have been adversely affected in that there has been an increase of approximately IR£9m between the amount due to creditors under the scheme of arrangement and that due at the commencement of the winding up.
Applicable law
Section 150 of the Act of 1990 imposes a mandatory obligation on the High Court to make a declaration of restriction unless the court is satisfied “as to any of the matters specified in sub-s. (2)”. The relevant matters to this application are “that the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company . . .”.
An application such as this brought by a liquidator under s. 150 (4) pursuant to his obligation under s. 56 of the Act of 2001, is not a normal inter partes adversarial application. The onus of establishing that he/she acts responsibly rests on the director. Whilst in practical terms a director may primarily seek to address the matters raised by the liquidator, pursuant to the practice direction referred, the director is not relieved of the general onus established by s. 150 of the Act of 1990.
The matters to which the court should have regard in determining the responsibility of a director for the purposes of s.150(2)(a), as set out by Shanley J. in La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM 345 and as approved by the Supreme Court in Re Squash (Ireland) Limited [2001] 3 IR 35, are:
“(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts, 1963-1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the director’s responsibility for the insolvency of the company.
(d) The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.
(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.
In a judgment given in the matter of Tralee Beef and Lamb Limited (In Liquidation), Unreported, High Court, Finlay Geoghegan J., 20th July, 2004, I concluded that the court under para. (a) above should also have regard to the duties imposed on a director at common law. Further, in that case I agreed with the general formulation of the duty of an individual director as stated by Jonathan Parker J. in Re Barings plc. and Ors. (No.5); Secretary of State for Trade and Industry v Baker and Ors [1999] 1 BCLC 433 in the following terms:
“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.”
In a judgment given in the matter of 360atlantic (Ireland) Limited (In receivership and liquidation), Unreported, High Court, Finlay Geoghegan J., 21st December 2004, I considered albeit on a very different factual basis the possibility of differing principles applying to persons who were directors of wholly owned Irish subsidiaries within a worldwide group and at the same time directors of other companies within the group. In that judgment I made the following observations which appear relevant to the issues I have to consider herein:-
“The fact that the Company is a wholly owned subsidiary within a worldwide group does not appear to alter the legal principles applicable to the duties of directors but rather to create a particular factual scenario which must be taken into account when considering the discharge of those duties.”
[“…”]
. . . it would appear totally permissible and indeed a proper exercise of the duties of directors in the interests of the [Irish] Company for the directors to fully take into account and indeed even to follow the policies adopted for the entire group when managing the business of the Irish Company.”
[“…”]
Accordingly it appears to me that where a group corporate structure exists, such as in the present case, and the issue under s.150 of the Act of 1990 is whether a director of the wholly owned Irish subsidiary company acted responsibly in the sense of discharging the minimum common law duties, he must be able to establish at a minimum that he did inform himself about the affairs of the Irish subsidiary company as distinct from any other company within the group and together with his fellow directors that he did take real steps to consider and take decisions upon at least significant transactions to be entered into or projects undertaken by the Irish subsidiary company. There must be evidence of a real consideration by the directors of whether significant transactions or operations to be undertaken were desirable in the interest of the Irish subsidiary company or could be said to be for the benefit of the Irish subsidiary company. I readily recognise that in many instances the interests of the Irish subsidiary company may be so intertwined with the affairs of the group as a whole that the answer may be obvious. However, the fact that the answer is obvious does not appear to absolve the directors from at least addressing the question.
If the issue of the responsibility relates to the nature of decisions taken (which it does not on the facts of this application) as distinct from the absence of any decisions different and further considerations may apply. It is not necessary to consider those on the facts of this case.”
On the facts of this case it may be that the nature of the decisions taken may arise. Further consideration is given to this below.
Conclusions
I have considered the entire tenure of Mr. Kachkar and Mr. Carrigan as directors of Miza Ireland Limited and other companies within the Irish Miza Group as I am bound to do in accordance with the decision of the Supreme Court in Re Squash (Ireland) Limited [2001] 3 IR 35. Each were directors of each of the companies for a period of between ten and eleven months. Each were appointed directors of the five companies named in the title on varying dates in November and December 2001 and each resigned as directors of all the companies in October 2002.
I have also taken into account the fact that each of Mr. Kachkar and Mr. Carrigan were executive directors of other companies within the worldwide Miza Group. Each have stated on affidavit, and I accept, that they were under obligations to all the companies within the Miza Group and had to “ensure that each company within the Miza Group succeeded”. In accordance with the above principles it appears appropriate that this fact should be taken into account.
I have also taken into account that fact that Mr. Kachkar and Mr. Carrigan were the only executives within the Miza Group to be directors of the Irish Miza Group. The only other director of four of the companies named in the title was Ms. Buckley who was a non-executive director. She was invited to become a director to fulfil the requirement of an Irish resident director. She appears to have been introduced through her brother who acted as consultant to the Miza Group in Canada. Mr. Kachkar and Mr. Carrigan have very properly accepted on affidavit that they were more familiar with the detailed affairs of the Miza Group and the Irish Miza Group and in particular the financial matters than Ms. Buckley.
I must also take into account the fact the Mr. Kachkar and Mr. Carrigan were appointed as directors of the Irish Miza Group at a time when that company was coming out of examinership and had obligations under a scheme of arrangement which had been put to and approved by the High Court with their support. Whilst I do not consider that their support for the scheme without funding available to Miza Inc. would preclude the court finding they acted responsibly as directors of the Irish Companies it is a relevant fact in considering their actions as directors of the companies named in the title hereof in the subsequent period. The Irish Miza Group were companies in straitened financial circumstances at the end of 2001 and dependent upon the success of the proposed scheme of arrangement and joint investment from Miza Inc. and Goldshield for their survival. Even on Mr. Kachkar’s view of the joint investment arrangements he envisaged that in addition to monies coming from Goldshield pursuant to the production agreement the Irish Miza group would need a loan of about £1.5m.
I do not consider that the continued trading after February 2002 of itself precludes the Court from finding that Mr. Kachkar and Mr. Carrigan acted responsibly as directors as submitted by the liquidator. As previously decided, the court must be very careful not to judge such decisions made by directors with the benefit of hindsight. The delay in the resolution of issues with Goldshield and approaching finality and perceived improvements in production probably justified continued trading. However, the precarious financial position of the Irish Miza Group after February 2002 must be taken into account when considering the appropriate control and supervision of the financial affairs of the Irish Miza group required of the directors to discharge their common law duty of care.
I have concluded on the facts set out in the affidavits that Mr. Kachkar and Mr. Carrigan have failed to discharge the onus on them to satisfy the court that as directors of each of the five companies named in the title to these proceedings they acted responsibly in relation to the conduct of the affairs of such companies.
I wish to make clear that this Court is only considering whether Mr. Kachkar and Mr. Carrigan have satisfied the Court that they acted responsibly in relation to the conduct of the affairs of the five Irish Miza Group companies. The Court is not considering their actions as directors or senior executives of any other companies within the Miza Group. It is only taking those positions into account in the limited sense of giving rise to what may have been from time to time competing obligations.
There are significant disputes between Mr. Kachkar and Mr. Carrigan on the one hand and Mr. Michael Cormack on the other, in relation to facts pertaining in particular to transfer of monies from the Irish Miza Group to Miza companies in Canada, US and UK and the basis for same. However, even on the picture of financial control and management which emerges from the affidavits of Mr. Kachkar and Mr. Carrigan and in particular relating to intra-group corporate charges and transfers out of Ireland to other Miza Group companies and the granting of security in September 2002 to CCL Industries the Court could not be satisfied that they acted responsibly in relation to the control and supervision of the financial affairs of the Irish company.
Mr. Cormack was the financial controller of Mitek Pharmaceuticals Limited, the only trading company in the Irish Miza Group. Both Mr. Kachkar and Mr. Carrigan seek to distance themselves from any control of Mr. Cormack. In the Miza worldwide group structure he appears to have reported directly to Mr. John Van Scheppen, the chief financial officer of Miza Inc. Mr. Van Scheppen held no position in the Irish Miza Group. Notwithstanding this it appears that he was the person who primarily gave directions to Mr. Cormack in relation to financial matters in the Irish Miza Group. Mr. Kachkar and Mr. Carrigan as directors of the companies in the Irish Miza Group do not appear between February 2002 and August 2002 to have taken steps to supervise and control the financial affairs of the Irish Miza companies particularly in relation to transfers of monies from it to other companies within the Miza worldwide group. There is no evidence that Mr. Kachkar and Mr. Carrigan as directors of the Irish companies took any decision in this period as to the appropriateness of the transfers being directed having regard to the then financial situation of the Irish companies. There are limited examples of Mr. Kachkar directing Mr. Cormack to make such transfers but these appear to relate to the needs of other companies within the Miza Group.
In February 2002 the Irish companies failed to discharge the full amount due, at that date, to the creditors under the scheme of arrangement. There also had been delay in finalising the segregation of the manufacturing and marketing arms of the business in accordance with the agreements with Goldshield. This delay and alleged lack of funding by Goldshield is blamed for some of the financial difficulties of the Irish Miza Group in this period. I am prepared to accept that these factors may have contributed to the difficult financial situation then pertaining in the Irish Miza Group. However, if anything this increased the obligations on Mr. Kachkar and Mr. Carrigan as directors of the Irish companies to control and supervise the financial affairs of those companies. I am satisfied as a matter of probability that monies or debts aggregating approximately €2.8m were transferred out of the Irish Miza Group to Miza companies in the UK, US and Canada between February 2002 and August 2002. Against this there were loans made at the end of July 2002 of approximately €1m from Miza Inc.
Much of the dispute in the affidavit centred on whether or not the Miza Group applied a system of corporate charges to the Irish Miza Group in 2002. I accept on the affidavits that as a matter of probability at Mr. Van Scheppen’s direction there were included in the budget and accounts for the Irish Miza Group corporate charges to other Miza companies. However even if the work done by executives of other Miza companies for the Irish Miza Group was such as to justify the imposition of corporate charges there is a quite separate question as to the appropriateness of the Irish companies making payments to meet such charges in the period between February 2002 and August 2002 when the Irish companies were unable to pay the amounts due to the creditors under the scheme of arrangement and were under very considerable financial pressure from its own suppliers. There is no evidence in this period of Mr. Kachkar and Mr. Carrigan either considering or taking a decision as to whether such payments at the relevant times were appropriate and justified in the interest of the Irish Miza Group. Even if there were competing demands from other Miza companies to which they had obligations, at minimum they must be considered to be under an obligation to consider the issue as directors of the Irish companies. Further there is no evidence that they considered the amount of such charges from the perspective of the Irish Miza Group.
By the beginning of September 2002 Mr. Kachkar and Mr. Carrigan were properly concerned about the ability of the Irish Miza Group to continue trading. Notwithstanding this, on the 13th September, 2002, a debenture creating security over the Irish Miza Group was given in favour of CCL Industries Inc. This is justified as being based on an earlier contractual commitment. Such commitment appears to have been a commitment by Miza Inc. There is no real explanation offered by Mr. Kachkar and Mr. Carrigan as to how they considered it proper to issue a debenture in favour of CCL Industries Limited on the 13th September, 2002, in the light of the very proper discussions which appear to have taken place between the full board (via telephonic meeting) on the 9th and 10th September. In the absence of very clear explanations the Court could not be satisfied that Mr. Kachkar and Mr. Carrigan had acted responsibly in issuing the debenture.
Not being satisfied that Mr. Kachkar and Mr. Carrigan acted responsibly as directors in relation to the conduct of the affairs of the companies named in the title hereof, the Court is bound to make the declarations sought.
Approved: Finlay Geoghegan J.