Restriction Process
Cases
Murphy -v- O’Flynn & anor
[2016] IEHC 197
Keane J.
“2. Before dealing with the merits of the restriction application against Mr O’Flynn, it is necessary to address, as a preliminary issue, the question of the proper enactment by reference to which that application should be considered and pursuant to which any appropriate order should be made. The issue arises because, between the 9th March 2015, when the motion grounding the application issued, and the 13th July 2015, when it first came on for hearing, the relevant provisions of the Companies Act 2014 (“the 2014 Act”) came into operation on the 1st July 2015, in accordance with the terms of the Companies Act 2014 (Commencement) Order 2015 (S.I. No. 169 of 2015).
Companies Act 2014 – transitional provisions
3. S. 4 of the 2014 Act repealed the whole of the 1990 Act, including s. 150. The jurisdiction to make a declaration restricting a director of an insolvent company can now be found in s. 819 of the 2014 Act, which is couched in similar, though not identical, terms to those of the section it replaces.
4. S. 5 of the 2014 Act deals with savings and transitional provisions. S. 5 (7) gives effect to the particular savings and transitional provisions contained in Schedule 6 to the Act. Paragraph 1 of that schedule states that the continuity of the operation of the law relating to companies is not affected by the substitution of the 2014 Act for the prior Companies Acts. Paragraph 7 (1) of the same schedule goes on to state that, without prejudice to the generality of paragraph 1, the continuity of the law relating to the restriction of directors is not affected by the substitution of the relevant provisions of the 2014 Act for those of Part VII of the 1990 Act.
12. In summary, whereas paragraph 8 (1) of Schedule 6 of the 2014 Act and s. 26 (2) (c) of the 2005 Act provide that an application for a declaration of restriction under s. 150 of the 1990 Act, which commenced but was not completed prior to the repeal of that section, may be continued and completed under s. 819 of the 2014 Act, those provisions apply without prejudice to the terms of s. 27 of the 2005 Act, whereby proceedings commenced under s. 150 of the 1990 Act may be continued as if the 1990 Act had not been repealed.
13. It seems to me that the word ‘may’ in paragraph 8 (1) of Schedule 6 to the 2014 Act; s. 26 (2) (c) of the 2005 Act; and s. 27 (2) of the 2005 Act is used in the truly permissive sense (that is to say, the enabling rather than mandatory sense) in each instance, which has the practical effect of conferring a discretion upon the Court to continue and complete an application such as the present one under either s. 819 of the 2014 Act or s. 150 of the 1990 Act, as the requirements of justice dictate in the particular circumstances of each case.
14. In considering the requirements of justice, it is useful first to take an overview of the potential effect of the transitional provisions of the 2014 Act upon the various situations that will arise. First, in the case of a declaration of restriction under s. 150 of the 1990 Act made prior to the commencement of the 2014 Act, paragraph 7 (2) of Schedule 6 provides that, subsequent to the commencement of the latter Act, it will continue in force and operate as a restriction declaration made under s. 819 of that Act. It seems that this will be the case even though the conduct at issue is necessarily conduct that occurred prior to the commencement of the 2014 Act.
15. Second, in a case such as the present, where a restriction application has been brought under s. 150 of the 1990 Act but not determined prior to the commencement of the 2014 Act, the provisions described above confer a discretion upon the Court to continue and determine that application under either s. 150 of the 1990 Act or s. 819 of the 2014 Act. As with the previous case, such applications will necessarily relate to conduct alleged to have occurred prior to the commencement of the 2014 Act.
16. Third, in cases where a restriction application has been brought under s. 819 of the 2014 Act, subsequent to the commencement of that Act, though in relation to conduct alleged to have occurred prior to its commencement, there seems to be no question but that the application must be determined under the provisions of s. 819. Different considerations would, of course, arise should such an application be brought under s. 150 of the 1990 Act, after the commencement of the 2014 Act, in reliance upon the terms of s. 27 (2) of the 2005 Act whereby proceedings in respect of any obligation or liability incurred under a repealed enactment may be instituted as if the enactment had not been repealed.
17. Accordingly, its seems to me that, once it is acknowledged that in every case within the first and third categories the relevant order, where made, must and will operate as one under s. 819 of the 2014 Act, it is immediately apparent that to treat any case in the second category as one governed instead by the provisions of s. 150 of the 1990 Act, is to create an obvious anomaly.
18. Imagine the situation of three different directors of three separate insolvent companies, where the honesty or responsibility of each director is in question in respect of broadly similar acts or omissions in the conduct of the affairs of his or her company alleged to have occurred in each case in the latter half of the year 2014. Imagine further that: in the case of the first, a restriction application was brought and determined under s. 150 of the 1990 Act just prior to the commencement of the 2014 Act on the 1st July 2015; in the case of the second, a restriction application was brought under s. 150 of the 1990 Act before the 1st July 2015 but not determined until after that date; and in the case of the third, a restriction application was brought and determined under s. 819 of the 2014 Act after the 1st July 2015. Were each application to succeed, it seems to follow that the first and third directors would be the subject of a s. 819 restriction declaration, whereas, by sheer fortuity from the perspective of the director in the second case, the possibility arises that he might instead be the subject of a s. 150 restriction declaration by operation of the terms of s. 27 (2) of the 2005 Act.
19. For that reason, it seems to me appropriate, at least in the absence of any significant countervailing factor, to consider an application in the second category, such as the present one, in accordance with the terms of paragraph 8 (1) of Schedule 6 to the 2014 Act – that is to say, as one that falls to be determined pursuant to the terms of s. 819 of the 2014 Act.”
“20. In reaching that conclusion, I do not disregard the potential effect of the two significant differences between the old section and the new one.
21. The first such difference is that the test for restriction has been slightly recast under s. 819 of the 2014. Under the new section, the defence to restriction whereby it is open to a director to establish that he has acted honestly and responsibly in relation to the conduct of the company’s affairs is now expressly required to be considered by reference to that conduct whether before or after the company became insolvent. Moreover, that defence now includes an express requirement that the respondent director establish that he or she has, when requested to do so by the liquidator, co-operated as far as could reasonably be expected in the conduct of the winding up.
22. There is plainly an argument to be made that these differences in form between the words of the new s. 819 and those of the old s. 150 add nothing of substance to the requirements of the relevant defence. Under both formulations, the respondent director must satisfy the Court that there is ‘no other reason why it would be just and equitable’ to make a restriction declaration. In La Moselle Clothing Ltd v Soualhi [1998] 2 ILRM 345 at p. 352, Shanley J. expressed the view that this requirement “allows the court to take into account any relevant conduct of the director after the commencement of the winding up or the receivership (for example, any failure to co-operate with the liquidator or receiver) in deciding whether or not to make an order under s. 150(1) of the Companies Act 1990.” Decisions such as that of MacMenamin J. in Re DCS Ltd [2006] IEHC179 (at para. 42), demonstrate that this Court has consistently construed and applied s. 150 in that way.
23. No doubt it was a consideration of authorities such as these that prompted the following observation in the judgment of Murphy J. in Cahill v. O’Brien [2015] IEHC 817 at para. 54:
“The Court notes that s. 819 does not differ significantly to s. 150 of the 1990 Act and such differences as exist merely involve giving statutory effect to considerations which were previously considered by courts in practice in applications of this nature.”
24. Even if it were possible to advance an argument that the difference in wording between the old and the new section creates some difference of substance in the test to be applied, capable in turn of supporting the contention that a respondent director should not be deprived of whatever benefit might inure from the application of the old test, that is not an argument of any relevance to the present application. In this case, the liquidator has not sought to raise any issue of dishonesty or irresponsibility on the part of Mr O’Flynn after the company became insolvent, nor is any issue raised of any failure by him to co-operate with the liquidator. The resolution of any such argument as there may be should, therefore, await the presentation of a case in which it directly arises.
25. The second difference between the terms of the old section and those of the new one is the greater capitalisation requirements that the new section imposes in respect of any company with which a restricted director may lawfully be involved during the period of his or her restriction. Under s. 150(3)(a)(ii) of the 1990 Act, the applicable capitalisation requirement in respect of any such company – other than a public limited one – was €63,486.90, whereas under s. 819(3)(a)(ii) of the 2014 Act that requirement is €100,000.
26. Whatever argument may be advanced that the application of the new capitalisation requirements of s. 819 to any person the subject of an order made under that section in respect of conduct occurring prior to its commencement amounts to a breach of the constitutional prohibition on retroactive penal legislation, is one that would have to take account of the decision of the Supreme Court in Minister for Social Community and Family Affairs v Scanlon [2001] 1 IR 64. As I perceive it, that decision is authority for the proposition that a subsequent modification of, or limitation upon, a statutory concession, as opposed to a vested right, does not offend the prohibition. A company directorship is as much a creature of statute as a company itself. I hasten to add that, in the present case, there is no question before the Court regarding the constitutionality of paragraph 8 (1) of Schedule 6 to the 2014 Act or of any other provision of that Act.
27. The same authority would have to be considered and, it seems to me, distinguished in respect of any argument advanced that either the double construction rule or the presumption against retrospective effect prevents the application of the capitalisation requirements of s. 819 of the 2014 Act to a respondent director based upon his or her conduct prior to the commencement of that Act, as expressly permitted by the terms of paragraph 8 (1) of Schedule 6 to that Act.
28. It may or may not be relevant, in the context of any such argument there may be, to note that the concern of the legislature in this respect, prior to the enactment of paragraph 7 (2) of Schedule 6 to the 2014 Act, appears consistently to have been to ensure that any increase in capitalisation requirements applicable to a restricted directorship should take effect only in relation to a declaration made after the commencement of the primary or secondary legislation providing for that increase. Thus, s. 41 of the Company Law Enforcement Act 2001, having increased the relevant capitalisation requirements under s. 150 (3) of the 1990 Act in subs. (1), goes on to provide in subs. (2) that those amendments are not to have effect in relation to any declaration made prior to the commencement of that section. Neither that section, nor any other provision of the 2001 Act, attempts to prohibit the making of a declaration governed by the newly increased capitalisation requirements in respect of dishonest or irresponsible conduct occurring prior to the introduction of those increases.
29. Similarly, neither s. 835 (2) of the 2014 Act, which provides that any increase to any capitalisation requirement specified in s. 819, subsequently made by order of the Minister, “shall not operate to effect any increase in relation to a declaration under section 819 (3) made before the commencement of the order”, nor any other provision of the 2014 Act, attempts to exclude from the effect of any such increase, a declaration made after the commencement of such order but concerning dishonest or irresponsible conduct that occurred before its commencement.
30. In summary, while I do not purport to express a definitive view on any of the arguments just described, as none of them was directly raised in the context of the present application, I have been unable to identify any applicable principle of construction or other countervailing consideration in the circumstances of the present case, sufficient to displace the conclusion I had otherwise reached that, in accordance with the terms of paragraph 8 (1) of Schedule 6 to the 2014 Act, it is appropriate to deal with this application pursuant to the terms of s. 819 of the 2014 Act.”
Duignan v. Carway
[2002] IEHC 1
McCracken J.
“I will be returning to this later in relation to another matter, but it is sufficient to say for the purpose of this point that the proceedings are mandatory, and the Section provides that the Court must be satisfied as to certain matters. That being so, there can be no question of such proceedings being settled, and there would have been no power in the liquidator to undertake as part of an overall settlement not to pursue the Section 150 proceedings. I should say that in the other proceedings, and the Respondents have not sought to argue that the settlement did in fact encompass the Section 150 Motion, but only that the fact that there was a settlement of similar issues creates an estoppel. There can be no question of the liquidator being estopped, as Section 150 raises an issue between the Directors and the Courts and not between the Directors and the liquidator.”
Kranks Korner Ltd -v- Companies Acts
[2008] IEHC 423
Finlay Geoghegan J.
“Section 150 of the Act of 1990 does not contain any express provision dealing with the order for costs which may, or should, be made by the court on an unsuccessful application, whereas in this instance, the applicant is a liquidator who made a report to the Director pursuant to s. 56 of the Act of 2001, and was not relieved of his obligation to bring the application and is therefore bound to do so pursuant to s. 56 (2) of the Act of 2001. In Murphy v. Murphy [2003] 4 IR 451, I concluded that in such an application O. 99, r. 1 of the Rules of the Superior Courts is applicable. That conclusion has been followed and applied by other judges of the High Court. It was not suggested by counsel for either party that I should revisit that conclusion.
The relevant provisions of O. 99, r. 1, are that the costs of the proceedings are in the discretion of the court and that, “the costs of every issue of fact or law raised upon a claim or counterclaim, shall, unless otherwise ordered, follow the event” (O.99 r.1 (4)).
Counsel for the respondents submits that I should apply O. 99, r. 1(4) (commonly referred to as the principle that “costs follow the event”) as meaning that the normal rule on a s. 150 application where, as in this instance, the respondents satisfy the court that they acted honestly and responsibly and the court refuses to make a declaration of restriction, as being that the respondents obtain an order for costs against the liquidator.
Counsel for the respondents relies upon the judgment of Peart J. in the matter of USIT Ltd. [2005] IEHC 481. In that decision, Peart J. refused to make declarations of restriction pursuant to s. 150 of the Act of 1990 against two respondent directors and, on the application for costs, approached the exercise of his discretion under O.99, r. 1, on the basis of the above principle that costs should follow the event, unless otherwise ordered, should apply, and found on the facts of the application that there was no special reason for which he should not make an order for costs in favour of the successful respondent directors against the liquidator.
Counsel for the applicant disputes this starting point and relies, in doing so, on the judgment of O’Leary J. in Stafford v. Beggs and Ors. [2006] IEHC 258.
That decision was on an application for costs by the third and fourth named respondents therein, where the Court had formed the view, on an application under s. 150 that they had acted honestly and responsibly and should not be restricted. In considering O. 99, r.1, and the question as to whether an application under s. 150 of the Act of 1990 comes within the type of claim envisaged by O. 99, r.1 (4), O’Leary J. stated:
“This possible interpretation is, in the view of the Court, supported by (but not dependent on) the description (amounting possibly to a qualification) of the issues falling within the rule within O. 99, r. 1(4) as relating to a ‘claim or counterclaim’. Can an application (pursuant to a legal duty) by a liquidator for adjudication by a court on the pre-liquidation (or post liquidation) behaviour of a director be properly called a claim or a counterclaim? The liquidator is merely the presenter of the application not a claimant or party with any interest in the outcome either for himself or on behalf of the creditors.
A comparable situation arises in criminal matters. When an accused in a criminal matter is charged with an offence he is under an obligation to use his/her funds to fight the case. In such cases the awarding of costs is very unusual and limited to cases where the prosecution has misbehaved in some way.
For all the foregoing reasons, the court is of the view that the proper application of O. 99, r. 1 of the Rules of the Superior Courts leads to a conclusion that costs should not be normally awarded to a director who satisfies the court that he/she should not be the subject of a restriction order under section 150.”
I would respectfully prefer the approach of O’Leary J. and agree with him insofar as he has determined that an application by a liquidator pursuant to s. 150(4), which is brought by reason of the obligation imposed on him by s. 56(2) of the Act of 2001 (as distinct from some decision of his own to so pursue the application), is probably not one which comes within what is envisaged in O. 99, r. 1 (4) as a claim or counterclaim for the reasons he states. I agree with the conclusion which follows that the courts should not, in such applications under s. 150, start from a point, where respondent directors, or persons to whom s. 150 applies by reason of the provisions of s. 149 of the Act of 1990, satisfy the courts that they acted honestly and responsibly, that the normal rule is that they be awarded their costs against the applicant liquidator.
However, I would respectfully differ from O’Leary J., if, in the final paragraph of the extract cited, he was intending to suggest that in all applications under s. 150 of the Act of 1990, where a respondent director satisfies the court that he should not be the subject of a declaration of restriction, that costs should not normally be awarded to such a director. Rather, it appears to me, that having regard to the highly unusual manner in which such applications come before the Court, i.e. an involuntary applicant who is legally bound to bring the application (on some occasions against views expressed by him), following submission of a report to the Director under s. 56 (1) of the Act of 2001, that the court should not start from a position where there exists a normal rule which applies to applications, but rather exercise its discretion in each case, having regard to the relevant facts and the statutory scheme.
There is a limited subset of applications pursuant to s. 150, where I have, in a number of ex tempore decisions, followed an approach which would almost amount to the “normal rule” to which O’Leary J. referred. Those were applications where there was no dispute that s. 150 of the Act of 1990 applied to the company in liquidation, and to the respondents as directors of the company in liquidation. Further, that the liquidator had put before the Director all the relevant facts when making his s. 56 report and the respondent directors had been given an opportunity of either commenting on those facts in advance or furnishing the liquidator with the relevant information in response to queries. In such circumstances, a liquidator cannot in any way be considered responsible for the commencement of the application under section 150. On the relevant facts, where the Director takes the view that the liquidator should not be relieved of his obligation to bring the application under s. 150, the liquidator is, as stated by O’Leary J., obliged, pursuant to s. 56 of the Act of 2001, to bring the application. The statutory scheme in such circumstances now requires persons who are, or were, within twelve months of the commencement of the winding up, directors of an insolvent company, to then satisfy the High Court that they acted honestly and responsibly if they are to avoid a declaration of restriction. If, they succeed in so persuading the court, it appears to me that it is an inevitable consequence of the statutory scheme put in place by the Oireachtas that they may have to bear their own legal costs of defending the application which the liquidator has been required to bring. There does not, in those circumstances, appear any justification for making an order for costs against a liquidator which would have to be borne by him, either personally, or if he was entitled to an indemnity out of the assets of the liquidation (and there were funds in the liquidation), effectively by the creditors of the insolvent company.
Carolan & Anor v. Fennell
[2005] IEHC 340 (24 October 2005)
Judgment of Ms. Justice Finlay Geoghegan delivered 24th October, 2005.
On 4th March, 2005, the High Court (Clarke J.) made a declaration of restriction pursuant to s. 150 of the Companies Act, 1990 (as amended) in respect of each of Gary Carolan and Niall Cosgrave, the applicants herein.
By notice of motion issued on 22nd April, 2005, the applicants brought an application pursuant to s. 152 of the Companies Act, 1990, seeking relief from the terms and conditions of the Order of the High Court of 4th March, 2005. The applicants were directors of CMC (Ireland) Limited (in voluntary liquidation) (“”the Company””). The application under s. 150 of the Act of 1990 was brought by Ken Fennell, the liquidator of the Company. He is named as the respondent to the application under s. 152 of the Act of 1990.
By a notice of motion issued on 19th August, 2005, the Director of Corporate Enforcement (“”the Director””) brought an application to be added as a notice party to the application under s. 152 of the Act of 1990. This judgment is given in that application of the Director.
Counsel for the Director submits that this Court has jurisdiction to join the Director as a notice party pursuant to O. 15, r. 13 of the Rules of the Superior Courts, 1986 or otherwise; is not precluded from doing so by s. 152(4) of the Act of 1990 and by reason both of the statutory role and functions of the Director, the facts relied upon by the applicants and the matters which the Director considers should be brought to the attention of the Court that it is a proper application in which to exercise the Court’’s discretion to join the Director.
The applicants oppose the application of the Director. Counsel on their behalf relies on s. 152(4) as prohibiting the appearance on an application of any person other than those named therein.
The liquidator did not participate in the hearing of the Director’’s application. The Court was informed that the liquidator is not consenting to the application under s. 152 but does not propose putting any evidence before the Court in relation to the application.
Statutory Framework
Section 152 of the Act of 1990 provides:
“”152.-(1) A person to whom section 150 applies may, within not more than one year after a declaration has been made in respect of him under that section, apply to the court for relief, either in whole or in part, from the restrictions referred to in that section or from any order made in relation to him under section 151 and the court may, if it deems it just and equitable to do so, grant such relief on whatever terms and conditions it sees fit.
(2) Where it is intended to make an application for relief under subsection (1) the applicant shall give not less than 14 days’’ notice of his intention to the liquidator (if any) of the company the insolvency of which caused him to be subject to this Chapter.
(3) On receipt of a notice under subsection (2), the liquidator shall forthwith notify such creditors and contributories of the company as have been notified to him or become known to him, that he has received such notice.
(4) On the hearing of an application under this section the liquidator or any creditor or contributory of the company, the insolvency of which caused the applicant to be subject to this Chapter may appear and give evidence.
(5) Any liquidator who contravenes subsection (3) shall be guilty of an offence and liable to a fine.””
Counsel for the applicants relies upon the maxim “”expressio unius est exclusio alterius””. Maxwell, The Interpretation of Statutes 1969 explains the maxim at p. 293 as follows:
“”By the rule usually known in the form of its Latin maxim, mention of one or more things of a particular class may be regarded as silently excluding all other members of the class.””
It is not disputed that it is appropriate to apply this rule as an aid to statutory construction. It was, for example, referred to by Keane C.J. in construing s. 223A of the Fisheries Consolidation Act, 1959 (inserted by s. 9 of the Fisheries (Amendment) Act, 1978, amended by s. 4 of the Fisheries (Amendment) Act, 1983) in Browne v. Ireland [2003] 3 IR 205.
Counsel for the applicants also referred to my decision in Re Document Imaging Systems (Unreported, High Court, 22 July, 2005) in which I concluded that the Oireachtas by the insertion of sub-s. (4A) to s. 150 of the Act of 1990 as provided in s. 41 of the Company Law Enforcement Act, 2001, intended that applications under s. 150 be brought by persons named in s. 150(4A) and not by any other person. Whilst I made no reference to the Latin maxim as such, I construed s. 150 of the Act of 1990 (as amended by s. 41 of the Act of 2001) in accordance with the rule as explained by Maxwell on The Interpretation of Statutes.
It is undisputed that the High Court in any proceedings before it has a discretion under its inherent jurisdiction or O. 15, r. 13 to join a person “”whose presence before the court may be necessary in order to enable the court effectually and completely to adjudicate upon and settle all the questions involved in the cause or matter …””. It is also common case that this discretion is a wide discretion. The jurisdiction is, of course, subject to the proviso that there is no specific rule of law excluding the joinder of the additional parties to the particular proceedings.
The first issue which I have to decide is whether s. 152(4) of the Act of 1990 excludes the joinder of persons other than those set out in the sub-section to an application under s. 152.
Section 152(4) of the Act of 1990 gives to the persons named therein, i.e. the liquidator or any creditor or contributory of the company, a statutory right to appear and give evidence at the hearing of an application under s. 152. However, it does not appear to me that s. 152(4), by the words used and in the context of the statutory scheme created by the entire of s. 152 and the other provisions in Chapter 1 of Part VII of the Companies Act, 1990, means that the Oireachtas intended to specify exhaustively therein the persons who might appear and give evidence at a hearing under s. 152 and thereby exclude the jurisdiction of the court to add as parties to the application such persons as it might consider necessary or desirable in the interests of justice.
Section 152(4) of the Act of 1990 sets out the classes of persons who are given a statutory right to appear and give evidence on an application under s. 152 of the Act of 1990. It follows logically from the notice provisions of ss.152(2) and 152(3). It does not either expressly or by necessary implication limit the court’’s jurisdiction to allow persons appear before it on an application under s.152. Nor does the section, either expressly or by necessary implication provide that the only person who might appear on such an application is a person with a statutory right to do so.
The position is quite different from that pertaining to s. 150(4A) of the Act of 1990, considered by me in Re Document Imaging Systems. The jurisdiction conferred on the High Court by s. 150 of the Act of 1990 is a new statutory jurisdiction. In our legal system a jurisdiction conferred on the courts has to be invoked by an application or other commencement procedure made by a person or persons. Section 150(4A) of the Act of 1990, as inserted by s. 41 of the Act of 2001, now specifies the persons who may invoke the court’’s jurisdiction under s.150. For the reasons set out in that judgment I concluded that the Oireachtas intended only those persons listed in s. 150(4A) to bring applications before the High Court under s. 150 of the Act of 1990.
However, in relation to a pending application or proceedings the Court has a well-established jurisdiction to permit persons to be added as parties. There is nothing in s. 152(4) which indicates an intention to limit that jurisdiction. Rather it seeks to give to certain persons, who the Oireachtas considered may have an interest in appearing, a statutory right to appear and give evidence. Accordingly, I have concluded that the Court is not precluded by the terms of s. 152(4) of the Act of 1990 from joining the Director as a notice party if it considers it necessary or desirable in the interests of justice to do so on the facts of this application.
I have also concluded that it is both necessary and desirable to join the Director as a notice party on the facts of this application. In reaching this conclusion, I have taken into account the fact that the Director was not the applicant (as he might have been) under s. 150(4A) of the Act of 1990. However, it does not appear to me that this fact should preclude the Director now being joined.
My reasons for joining the Director as a notice party are as follows. The discretion conferred on the court under s. 152(1) is a wide discretion. The court may grant relief from the declaration of restriction made “”if it deems it just and equitable to do so”” and it also may grant such relief “”on whatever terms and conditions it sees fit””. Those general criteria must, of course, be construed in the context of the purpose and scheme of Part VII of the Companies Act, 1990. Nevertheless, it is a very wide discretion.
The jurisdiction intended to be exercised by the court under s. 152(1) is not confined to the facts pertaining to the company in liquidation nor the facts considered in the application for the declaration of restriction under s. 150. It is not in any sense an appeal from the decision making the declaration of restriction. Rather it is a consideration of the issue as to whether, notwithstanding the declaration of restriction, there are other facts pertaining to the applicants which make it just and equitable to grant them relief (either in whole or in part) from the restrictions imposed by the declaration of restriction and on whatever terms and conditions as the court sees fit.
The liquidator in this application quite understandably has indicated to the Court that he does not propose offering any evidence to the Court on the application under s. 152 of the Act of 1990. To participate in such an application and either oppose it or even seek to be represented and put before the Court matters which he thinks the Court should take into account can only be done at a cost to the liquidation. Even if there are funds in this liquidation (about which I am not aware) it is doubtful that the creditors would appreciate such funds being expended in response to an application under s. 152. At present in this application there is no person with a right to appear who intends testing the evidence or submissions of the applicants.
Amongst the facts relied upon by the applicants herein are that they are directors of three other trading companies employing approximately seventeen people and that, if they were required to invest approximately €190,000 in the companies to enable them remain directors, it would place a considerable financial burden on those companies and a third investor in the business.
The Director submitted that in an application such as this, the following factual matters are, inter alia, relevant:
“”(a) How have the applicants behaved with regard to other companies, particularly other companies of which they are seeking to be, or remain as, directors? Are such companies compliant with company law, tax and other obligations? Are such companies solvent? Do the governance structures of such companies address the matters giving rise to the applicants’’ Restriction?
(b) Have the applicants established a need for relief? What are the financial situations of the applicants? What is the financial situation of the companies of which they seek to become or remain as directors? Are such companies adequately capitalised having regard to their businesses? How can it be said that the capitalisation requirements of Part VII would pose an excessive or intolerable burden on those companies and/or the Applicants and/or their backers or associates?””
The Director submits that he is in a position to put before the court relevant evidence and make submissions pertinent to such issues. The Court was informed, that he has written an open letter to the applicants outlining a number of matters which he considers should be put before the court in relation to the companies referred to in the applicants’’ affidavits. The Court has not been furnished with this letter at this stage.
Without wishing to decide that the precise issues raised in the above submission on behalf of the Director are necessarily relevant to the s. 152 application, I am satisfied that in s. 152 application such as this it will be relevant for the court to consider matters relevant to the applicants’’ positions as directors of the other companies referred to by them and their entitlement to relief, having regard to the facts relied upon and to the purpose of s. 150 of the Act of 1990. It is desirable in our adversarial system of justice that there is a party before the court who is either opposing the application or at minimum has an interest in examining with the benefit of relevant facts and expertise, the validity of the application and making relevant submissions to the court. This is particularly so where, as in an application under s. 152, the court is exercising a wide discretion. The Director appears an appropriate person to put before the Court by way of admissible evidence, facts which the Court should take into account and to make relevant submissions.
In deciding to join the Director in this application I wish to make clear that I am not deciding that he should be joined in all applications under s. 152 of the Act of 1990. The Oireachtas has not specified that he is a person to whom notice must be given by the liquidator under s. 152(3). Also, the Oireachtas has created a class of persons with an automatic right to appear and give evidence in s. 152(4). Whether the Director should be joined in any particular application will depend on the relevant facts and the court determining that it is necessary or in the interests of justice to do so.
Accordingly, there will be an order that the Director be joined as a notice party to the s. 152 application.
Approved: Finlay Geoghegan J.
Duignan v. Carway
[2001] IESC 74 (31st July, 2001)
JUDGMENT of the Court delivered the 31st day of July 2001 by FENNELLY J.
[nem. diss.]
1. This appeal is taken against the refusal of O’Donovan J to strike out, on the ground of delay, an application brought by the liquidator of an insolvent company pursuant to section 150 of the Companies Act, 1990 for an order restricting its directors from acting as director or secretary or otherwise participating in the promotion of a company for a period of five years.
Section 150(1) in Part VII, Chapter I of the act provides in relevant part as follows:
“The court shall, unless it is satisfied as to any of the matters specified in subsection (2), declare that a person to whom this Chapter applies shall not, for a period of five years, be appointed or act in anyway, whether directly or indirectly, as a director or secretary or be concerned or take part in the promotion or formation of any company unless it meets the requirements set out in subsection (3);”
2. That section applies, by virtue of section 149, to any company shown to be unable to pay its debts either at the commencement or during the course of its winding-up and to any person who was a director at the date of or within twelve months prior to the winding-up. It can be assumed, for the limited purposes of this appeal, that the section applies.
3. The most material potential relieving provision is that in section 150(2)(a) which permits a court to decline to make a declaration if it is satisfied by a director that he “has acted honestly and responsibly in relation to the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section.”
4. Furthermore, the severity of the restrictions mandated by the section is significantly ameliorated by section 150(3). They do not affect participation in any public company with an allotted share capital paid up in cash of £100,000. In the case of other companies, the qualifying figure is £20,000.
5. The liquidator, in the present case, (the Applicant, Respondent on the appeal) having brought the application required by the section allowed it to lie in abeyance for more than five years, before reactivating it. I will refer to him as the liquidator. Accordingly, a chronology of the relevant facts is essential to an appreciation of the present application.
On 10 th August 1994, the High Court made an order that Verit Hotels and Leisure (Ireland) Limited (the company), be wound up by and the Applicant was appointed official liquidator.
On 10 th November 1994, the liquidator wrote to each of the respondents (whom I will call the directors) stating that it appeared that the company was insolvent and that they might wish to consider their position having regard to Part VII of the act.
6. The liquidator by Notice of Motion dated 6 th December 1994 returnable for 16 th January 1995 gave notice to each of the directors of his intention to ask the High Court to make an order pursuant to section 150. In his grounding affidavit, he certified the insolvency of the company pursuant to section 149(1)(b) of the act.
7. The application did not proceed in 1995. Two sets of legal proceedings between the parties supervened.
8. Firstly, the directors mounted a constitutional challenge to the relevant legislation and in particular the power of the liquidator to certify insolvency. This was done by means of a motion within the liquidation. In November 1995 an order was made for the trial of this issue which was heard by Carroll J on 18 th June 1996 and was determined by her against the directors in her judgment dated 3 rd July 1996. (See Carway v Attorney General [1996] 3 I.R. 300.)
9. Secondly, the liquidator brought proceedings against the directors described variously as being based on a fraudulent preference and for mismanagement of the company (which I will call the damages claim). These proceedings were clearly serious. They were also protracted and appear to have involved several interlocutory motions and appeals to the Supreme Court. They were compromised on the agreement of the directors to pay £500,000 and the costs of the proceedings to the liquidator. The implementation of the settlement led to some further difficulties which were not fully resolved until mid 1999.
10. The liquidator gave notice on 10 th March 2000 of re-entry of the Notice of Motion of 6 th December 1994. The directors brought the present motion on 21 st March 2000 to have that motion dismissed on the ground of excessive delay. They said that the liquidator had delayed excessively. There was no reason for the delay after the judgment of Carroll J in July 1996 and the liquidator had given no satisfactory explanation for his subsequent delay of three years and nine months. They also said that they had assumed that the matter of the declaration was no longer being pursued especially after the December 1998 settlement.
11. O’Donovan J noted that the directors accepted that the delay during the currency of the constitutional proceedings was excusable. He also held that the delay during the period of processing of the damages claim was totally reasonable. If the directors had successfully defended those proceedings, they would probably have succeeded also in resisting the section 150 motion.
12. The directors have not contested that aspect of the decision of the learned trial judge. Thus the crucial period is that between the conclusion of the damages claim and the notice of re-entry. In this respect, the liquidator accepted that the delay was inexcusable, but said that it was not inordinate. The learned trial judge disagreed. He held that this period of delay was both inordinate and inexcusable. The liquidator has not challenged that conclusion.
13. The learned trial judge cited the decision of this Court in Primor plc v Stokes Kennedy Crowley [1996] 2 I.R. 459 to the effect that “even where the delay has been both inordinate and inexcusable the court must exercise a judgment on whether, in its discretion, on the facts the balance of justice was in favour of or against the case proceeding.” Pointing out that this passage showed that he had to exercise a discretion which required him to take into account a number of considerations relevant to where that balance of justice lay, he posed the question as to whether “the delay has given rise to a substantial risk that it is not possible to have a fair trial or is likely to cause or has caused serious prejudice to the Respondents.” In his conclusion on this issue, the learned trial judge observed the very general nature of the prejudice relied upon by the directors and referred to the public interest, admitted by the directors, in seeing that unsuitable persons should not be directors of companies. He did not consider the defendants right to a fair trial had been compromised and dismissed the motion.
14. The directors, in their appeal make two essential points:
1. The directors had a right, in particular by virtue of, or more probably by analogy with the provisions of the European convention of Human Rights and Fundamental Freedoms, to a fair trial, which encompasses the notion of a speedy trial.
2. There is prejudice to the directors in two respects: the fact of the pending application is itself of a character to affect their reputations, so that the longer the period of delay the greater the prejudice; secondly, general prejudice should be inferred from the delay, in the form of natural fading of memory, even without evidence of specific prejudice.
15. It is common case that, in an appropriate case, the Court has jurisdiction to dismiss an application of the sort at issue here on the ground of excessive delay. The criteria are those laid sown in Primor, and in particular in the following passage from the judgment of Hamilton C.J. (Page 475):
“The principles of law relevant to the consideration of the issues raised in this appeal may be summarised as follows:-
(a) the courts have an inherent jurisdiction to control their own procedure and to dismiss a claim when the interests of justice require them to do so;
(b) it must, in the first instance, be established by the party seeking a dismissal of proceedings for want of prosecution on the ground of delay in the prosecution thereof, that the delay was inordinate and inexcusable;
(c) even where the delay has been both inordinate and inexcusable the court must exercise a judgment on whether, in its discretion, on the facts the balance of justice is in favour of or against the proceeding of the case;
(d) in considering this latter obligation the court is entitled to take into consideration and have regard to
(i) the implied constitutional principles of basic fairness of procedures,
(ii) whether the delay and consequent prejudice in the special facts of the case are such as to make it unfair to the defendant to allow the action to proceed and to make it just to strike out the plaintiff’s action,
(iii) any delay on the part of the defendant – because litigation is a two party operation, the conduct of both parties should be looked at,
(iv) whether the delay or conduct of the defendant amounts to acquiescence on the part of the defendant in the plaintiff’s delay,
(v) the fact that conduct by the defendant which induces the plaintiff to incur further expense in pursuing the action does not, in law, constitute an absolute bar preventing the defendant from obtaining a striking out order but is a relevant factor to be taken into account by the judge in exercising his discretion whether or not to strike out the claim, the weight to be attached to such conduct depending upon all the circumstances of the particular case,
(vi) whether the delay gives rise to a substantial risk that it is not possible to have a fair trial or is likely to cause or have caused serious prejudice to the defendant,
(vii) the fact that the prejudice to the defendant referred to in (vi) may arise in many ways and be other than that merely caused by the delay, including damage to a defendant’s reputation and business.”
16. One of the particular considerations to be taken into account in the present case is the intrinsic character of the proceeding itself. It is right to point to the mandatory character of the court’s jurisdiction. (See the judgment of Murphy J in Business Communications Limited v Keith Baxter and another, unreported 21 st July 1995.) The use of the word, “shall” connotes an obligation to make the declaration in the ordinary case, though the relieving provision of section 150(2) significantly qualifies that. It was fairly and properly accepted on behalf of the directors both in the High Court and at the hearing of the appeal that the section gives effect to a public interest in seeing that persons should no longer enjoy the unqualified right to become involved in the formation of companies, where they have been directors of companies which have failed due to insolvency. That public interest diminishes, it was said, when there is excessive delay such as in the present case. That proposition was contested by counsel for the liquidator, though he ultimately accepted that the public interest in question may be outweighed if there is such delay as to put a just and fair hearing at risk.
17. While it is true that there are a number of significant differences between section 150 and the provisions of the Companies Directors Disqualification Act 1986 in England, none of them seems to me to affect the appropriateness of the approach adopted in the Court of Appeal to the exercise of the jurisdiction to strike out an application for a disqualification order under the legislation on the grounds of delay. In Re Manlon Trading Ltd. [1995] BCLC 578, Staughton L.J. (at page 592) said that “the public interest in the disqualification of unfit directors may …… have to yield to the lapse of time.” The question he posed was “whether that public interest is outweighed by the requirements of justice in the particular circumstances of the particular case.”
18. However it is expressed, I think the result is the same. There is a public interest represented by the section. However, excessive delay may render it unjust to permit the liquidator to proceed with his application.
19. I turn then to address the two propositions advanced by the directors.
20. It cannot be contested that the directors have had at all material times a right to a fair and speedy trial of the issue as to whether their normal rights to become directors and promote and take part in the formation of companies should be limited restricted or taken away. It is unnecessary, in order to establish the existence of this right, to resort to the European Convention, however undisputed the value of the rights guaranteed by that instrument at international level may be. It is inherent in the notion of fair procedures guaranteed by the Constitution, as is clear from the passage from Primor cited above, and identified in a long line of cases. (See, for example, in the field of criminal justice, S.F. v Director of Public Prosecutions [1999] 3 I.R. 235.)
21. In the present case, it appears to me that the real question is not the existence of the right but whether it has been violated. A court will not so readily infer a violation of a right where its beneficiary had at his disposal the means for its protection and failed to avail of them. This is apparent from several of the subheadings, in particular (d) of the passage quoted above from Hamilton C.J. Litigation, and more particularly civil litigation in our system of law is, as the learned Chief Justice said “a two party operation.” It is notorious that a defendant, in making the finely balanced decision as to whether he should bring a motion to dismiss, is conscious on the one hand of the possible preference for “letting sleeping dogs lie” and, on the other, that he may be accused of lack of vigilance in the protection of his own rights when he brings such a motion after a long delay by the opposing party. Finlay P, as he then was, said in his judgment in Rainsford v Limerick Corporation (unreported judgment of July 1979, but now reported at [1995] I.L.R.M. 561]):
“Delay on the part of a defendant seeking a dismiss of the action and to some extent a failure on his part to exercise his right to apply at any given time for the dismiss of an action for want of prosecution may be an ingredient in the exercise by the court of its discretion.”
22. When considering, in this context, decisions of the European Court of Human Rights, it is important to recall that the parties in our adversarial system enjoy greater rights to take the initiative to protect their interests than may in some cases arising from legal proceedings in contracting states outside the common-law tradition. For example, in Capuano v Italy [ 13 E.H.R.R. 271] a first instance court was considered responsible for a three year delay in the preparation of experts’ reports. Nonetheless, where the relevant codes of civil procedure leave matters to the initiative of the parties, that will, in fact, be taken into account by that court. (See Vernillo v France E.H.R.R. ?? Reference) Needless to say, it is also important to remember that the decisions of the European Court concern the responsibility not of individuals but of contracting states under the Convention. The court does not concern itself with whether particular proceedings should be dismissed by reason of delay.
23. In the present case, the relevant period of delay is either from December 1998 or mid- 1999 to March 2000. The directors, through the affidavit sworn by their solicitor, claim merely to have taken for granted that the matter was not being pursued. They made no enquiry from the liquidator, who had been pursuing them for substantial damages for several years, as to whether this was correct. They furnish no rationale for this conclusion. Indeed, to the extent that any rationale can be deduced, it would seem to run to the contrary of this argument. However, any comment on aspect of the matter should be reserved so as not to prejudice the hearing of the motion. I am satisfied that this argument is without merit.
24. The other issue is prejudice. Only the most general prejudice is alleged. Firstly, the allegation of the existence of prejudice by reason of the pendency of the proceedings seems contradicted by two matters. Firstly, during the greater part of the period, the liquidator was pursuing serious claims for damages against the directors personally. That would appear, on the facts of this case, likely to have been at least as prejudicial to their reputations as the effect of the pendency of the section 150 motion, indeed probably more so. In any event, prejudice arising from the pendency of the application is so some extent the inevitable result of the expectation, even if an obligation is not to be presumed, of the liquidator to bring an application under the section (admittedly the section is silent on this – see Murphy J in Business Communications, cited below ). It is only to the extent that the application is pending for an excessively long period, that relevant prejudice can be invoked. Peter Gibson L.J. stated in Manlon Trading: “Prejudice resulting from the mere pendency of proceedings if not caused by such delay, seems to me to be irrelevant.” In the result , the relevant period in the present case, is that which occurred after the conclusion of the settlement of the damages claim. In respect of that precise period, the directors have in fact said not that they were prejudiced but that they had taken for granted that the application was not proceeding.
25. The remaining matter is the claimed general prejudice necessarily occasioned by delay in any civil action and consisting of the dimming of memories, the loss of evidence and any other elements tending to compromise the fairness of the hearing. Here, it is notable that the directors enjoy the right to seek to persuade the court of their effective stewardship of the affairs of the company – that they acted “honestly and responsibly.” They may bring forward evidence to establish that fact. If they were truly placed at a disadvantage in attempting to exercise that statutory right, that would be a most relevant consideration on the hearing of a motion to dismiss the liquidator’s application, but it is clear from the cases that the burden of proof of that fact lies on the applicant, in this case the directors. As is admitted, they have produced no such evidence. That is not surprising. The directors were on notice from an early date of the existence of the application. They were fully aware of its importance to the extent of bringing a constitutional challenge to the validity of the section. Furthermore, they were engaged for some four to five years in protracted litigation with the liquidator about their management of the company. There is, in short, no basis for presuming prejudice. In my view, prejudice will not be presumed.
26. That is enough to dispose of the application. I believe the learned trial judge correctly identified the discretion he had to exercise and correctly exercised it. I would dismiss the appeal.
Wallace ( Liquidator) -v- Edgeworth & ors
[2017] IEHC 475 (19 July 2017)
Judgment of Mr. Justice Robert Haughton delivered on this 19th day of July, 2017.
1. In these proceedings, the applicant as the liquidator of Shemburn Limited (“the Company”) seeks orders pursuant to the Companies Act 2014, or in the alternative the Companies Act 1990, restricting the respondents from being directors.
2. The first named respondent filed two affidavits in this matter and in his second affidavit dated 4 April, 2017, he averred that he was not opposing the application for restriction. The court having considered the papers was satisfied that he had not acted responsibly as a director and accordingly made an order that he be restricted with effect from the date of hearing on 3 July, 2017.
3. The third named respondent failed to file any replying affidavits opposing the restriction and was not represented or present in court. The court considered the papers and not being satisfied that he had acted responsibly made an order restricting him from the date of hearing on 3 July, 2017.
4. The second named respondent, who is a commercial airline pilot and is the son of the first named respondent, was represented by solicitor and counsel and fully opposed the application for restriction. This judgment relates solely to this respondent.
5. In determining this application, I have considered the affidavits of the applicant, two replying affidavits sworn by the first named respondent and one affidavit on behalf of the second named respondent. I have also had the benefit of written and oral submissions on behalf of the applicant and the second named respondent.
Background
6. The Company was incorporated on 5 March, 2000, and its primary activity was the leasing of aircraft to associated companies, Skytrace Limited (“Skytrace”) and The Pilot Training Centre of Ireland Limited (“PTCI”), for the training of commercial pilots. The Company and PTCI were linked companies which formed the Shemburn group. The Company purchased aircraft and these were leased to PTCI. In essence, the Company was established to act as an asset holding vehicle for PTCI due to the aviation training industry being VAT exempt. Its sole purpose was to allow the group to reclaim VAT on capital expenditure. The first respondent states that such practice was standard in the airline industry.
7. PTCI encountered financial difficulties and was placed into liquidation on the 28th September, 2012. At this time, the Company owed PTCI approximately €1,512,530. It appears that the first named respondent took an active approach in this liquidation and engaged with the liquidator of PTCI, Mr Michael McAteer, in attempts to realise the assets of the Company for the benefit of PTCI. The first named respondent in his affidavit avers that he agreed to the sale of the aircraft of the Company but was unwilling to do so at the time that PTCI was placed into liquidation as the market was in difficulty due to the financial crisis. At paragraph 9 he states, “I knew that if the sale of the aircraft was carried out in a proper managed way over a period of 12 months we could obtain market value for them and therefore, create far more benefit to the creditors.”
8. In January 2013, both Mr McAteer and the first named respondent decided to sell the assets of PTCI, over which AIB had a lien. In order to sell the assets in a manner which would benefit the interests of both PTCI and AIB, the first named respondent and Mr McAteer decided that it would be appropriate for all stakeholders, that is AIB, Mr McAteer, the Company and the first named respondent, to enter into a forbearance agreement. Mr McAteer’s legal team drafted a forbearance agreement which was signed by the first named respondent in August 2013. Mr McAteer then sought and obtained Court approval for said agreement on 3 September, 2013, however he refused to sign the agreement until he had the approval of major creditors of the Company, which included AIB.
9. By letter dated 9th September, 2013, the first named respondent authorised the creditors of the Company to engage with Mr McAteer. Negotiations between Mr McAteer, AIB and the first named respondent in relation to the signing of the forbearance agreement appeared to continue into January 2014, however AIB was unwilling to sign the agreement resulting in such negotiations coming to an end. In January 2014, Mr McAteer decided that the best course of action was to put the Company into liquidation. The Company was put into liquidation and the applicant was appointed as liquidator on 26 May, 2014, nearly two years after the winding up of PTCI.
The provisions relevant to the restriction application
10. In the Originating Notice of Motion dated 11 August, 2016, the applicant seeks orders of restriction pursuant to section 819(3) of the Companies Act, 2014, or, in the alternative, pursuant to section 150(3) of the Companies Act, 1990.
11. An issue may arise as to which provision is applicable in the circumstances in the light of the fact that the Company was wound up prior to the enactment and commencement of the Companies Act, 2014. In both written and oral submissions to the court, the applicant submitted that the approach of the court in this regard appeared to be to apply s.819 of the 2014 Act. The court was directed to the decision of Keane J. in Re BOD Investment (Ireland) Limited [2016] IEHC 197. In this case, Keane J. analysed the interpretative provisions in schedule 6 of the Companies Act, 2014 alongside sections 26 and 27 of the Interpretation Act, 2005 and concluded that the court has a discretion to apply the provision dictated by the requirements of justice in the circumstances of each individual case. In that case, despite the proceedings being initiated pursuant to the 1990 Act, Keane J. deemed it appropriate in all the circumstances to determine the application under the 2014 Act. Such an approach was also taken by Binchy J. in both Re MJBCH Limited (in liquidation) [2016] IEHC 145 and Re Manvik Ireland Limited (in voluntary liquidation) [2016] IEHC 122. I currently tend to the view that at least where the application is brought after the commencement of the 2014 Act, that Act should apply. However it is not necessary for the court to determine this issue at this point in time because, as the parties agreed, the principles that apply in relation to the court’s determination of whether or not the second named respondent should be restricted in all the circumstances are not materially different whether the application is considered under s.819 or s.150. I will address the relevant principles later.
The grounds upon which restriction is sought
12. The applicant presents a number of grounds upon which it is asserted that the second named respondent ought to be subject to a restriction application.
13. First, he asserts that he failed to wind the Company up in a timely fashion. As the Company’s main source of revenue was PTCI, he avers that when PTCI was wound up, the Company “ceased to have any prospect of survival.” He states that the Company should have been placed into liquidation as soon after the winding up of PTCI as possible. Instead the directors failed to put the Company into liquidation at all and as a result, assets were devalued and sums owing to the airport storing their aircraft substantially increased. He avers in paragraph 23 of his affidavit that the value of the aircraft owned by the Company depreciated in value from €395,000 on 12 February, 2013 to €225,000 by June 2014. Such depreciation was allegedly caused by the storage of the aircraft outdoors which resulted in weather damage. He further states that the sums now owed to Weston Airport and Waterford Airport are €105,600 and €40,000 respectively.
14. The third ground of complaint of the applicant is that the second named respondent failed to respond to a request for information required by him. In a letter dated 3 June, 2014, the applicant wrote to the second named respondent informing him of his appointment as Official Liquidator and enclosing a questionnaire which was to be filled out by the second named respondent and returned to the applicant as soon as possible. The applicant received no response to this request.
15. The second ground advanced by the applicant relates to the failure of the directors to locate a log book for the third aircraft which allegedly resulted in a depreciation in value of the aircraft by circa. 80%. This ground of complaint was not pursued at any great length during the course of legal submissions and the court does not consider it to be of any substance. Accordingly the court is concerned only with the first and third grounds of complaint as detailed above.
Response to Failure to wind up the Company in a timely fashion
16. In his affidavit sworn on the 15 March, 2017, the second named respondent gives a detailed account of the events leading up to the liquidation of the Company. In response to the allegation of failure to wind-up the Company in a timely fashion, the second named respondent avers that following the financial crisis which occurred in 2008, his father made him aware of the difficulties that the Company and PTCI were experiencing. He states that his father had taken active steps to ensure that PTCI continued to trade even through this difficult period. In 2009, the second named respondent, after consultation with his father, decided that he would train as a commercial airline pilot “while continuing to be briefed on the welfare of the business”. It appears that though he was not actively engaged in the day-to-day running of the Company, he was kept up to date with matters by his father.
17. The second named respondent avers that after the financial difficulties experienced by PTCI, his father attempted to procure further investment through the examinership process. He applied to the Court for protection which was initially successful, however after failing to source an investor this protection was lifted and the Company went into liquidation. After this, the second named respondent avers that his father engaged with Mr McAteer in the hope of realising the assets of the Company for the benefit of PTCI. The second named respondent does not go into any great detail in relation to this process and the delay which this caused. To this end he merely states at paragraph 21 of his affidavit that “I am aware that there were competing interests in relation to the assets of the Company and that the process was not straightforward and ultimately was unsuccessful. This led to the liquidation of the Company.”
18. In respect of the delay, the second named respondent avers that he agreed with the course of action taken by his father and “I did not and do not believe that the steps that he took at this time were inappropriate”. He then avers that in his non-executive role in the Company he was reliant on his father for information and trusted his judgment, “in particular in high level commercial matters.” Significantly he states that in spite of this less active role, he would not have interfered with the manner in which his father dealt with the Company at that time. He states “Therefore, quite apart from the nature of my role, I would not have called on him to change a strategy which appeared to be and still appears to me to be, a reasonable one – namely to engage with Mr McAteer.” The second named respondent did not seek any independent advice or engage with the Company auditors to ascertain whether the approach taken by his father was indeed the correct one or whether an alternative course of action would be more appropriate, such as the placing of the Company, which was at this stage hopelessly insolvent, into liquidation.
Response to Failure to respond to a request for information
19. This allegation relates to a questionnaire posted to the second named respondent by the applicant requiring certain information to be furnished. The second named respondent vehemently denies any failure to cooperate and states that his lack of response to the questionnaire was actually as a result of a number of circumstances. The first of these was that the questionnaire was sent to his father’s address as opposed to his address in Italy where he was residing at the time, and his father did not send this on to him. He further states that he did not receive any emails or phone calls and there was no attempt to follow-up with the initial letter. He states that as there was no follow-up by the applicant, he did not appreciate the importance of the questionnaire and the importance of his obligation to furnish a completed copy to the applicant. He avers that if there was any such indication of its importance he would have discharged this obligation immediately.
20. The second named respondent further states that he was aware that his father was fully cooperating with the applicant at this time and that he knew his father was providing the applicant with all necessary information. He states that though he was not a “passive director”, he was reliant on his father for information as to the goings-on of the Company and so was not in a position to offer any further information to the applicant. On this point he avers “At this time I was a pilot based in Bergamo, Italy. I did not have access to any of the books and records of the Company and was being apprised of its affairs by my father.” He essentially avers that had he submitted the questionnaire, this would not have provided the applicant with any additional information with which he had not already been furnished.
Non-executive Director Defence
21. In his affidavit, the second named respondent describes the nature and scope of his role within the Shemburn group. He states that it was the intention of both him and his father that he complete his studies and learn the aviation business. At the time of his initial appointment as director, the second named respondent was still in attendance at college and his role was minimal. He describes his role during this initial stage as being limited to weekends and summer holidays which entailed “odd jobs”, such as washing planes and moving aircraft.
22. In 2006, the second named respondent completed his college studies in IT and took up a more involved role in the business in Waterford. He was responsible for handling the scheduling and rostering but was kept abreast of Company affairs more generally by his father. As the business continued to expand so too did his role and eventually he became involved in the fitting out of new offices with supplies and IT facilities. He also became involved in the acquisition of equipment through negotiation with various schools and businesses. Over time as the business expanded to both the UK and Florida, the second named respondent was despatched to assist with the IT setup. He also became involved in software development which eventually led to a joint venture of software supply to schools worldwide. This occupied his day-to-day work until 2008.
23. During this time, the second named respondent states that his father was focused on bringing in further investment to the Shemburn group companies. He states that though he was made aware of any developments in this regard and took an interest in them, he was “not in a position to second guess or challenge what appeared to me to be reasonable and responsible decisions made by my father on the advice of others with relevant qualifications.”
24. In 2008, the companies of the Shemburn group were severely impacted by the economic recession and the second named respondent and his father discussed their concerns relating to this. The upshot of these discussions was a decision that the second named respondent should train to be a commercial airline pilot. From this point on it appears that he ceased to have full-time involvement with the Company. He undertook this course in January 2009 and qualified 18 months later. He then took up a position as a pilot with a major airline and has since progressed to be an airline captain. In paragraph 17 of his affidavit, the second named respondent avers that he and his father discussed the possibility of his resignation from the position of Director but he states he “did not get around to fulfilling this requirement”. He also avers that they envisioned him taking up a consultancy role with the Company at some point in the future when he had gained sufficient airline experience.
25. After taking on the position of commercial pilot, the second named respondent kept up-to-date with the Company solely through communications with his father, which took place frequently. At paragraph 27 of his affidavit he states “I discussed with my father the affairs of the Company and the other business in which we had an interest regularly and was aware of what was taking place.” The second named respondent allowed his father to continue to manage the affairs of both companies uninterrupted and merely asked to be kept informed of steps taken. He avers that as his father was superior in knowledge and qualifications, he was unwilling to question his judgment or to intervene in any way with the approach taken by his father.
Relevant legal principles
26. As already stated whether this application falls to be considered under section 150 of the Companies Act 1990 or section 819 of the Companies Act 2014 does not make any material difference. It is not suggested that the second named respondent acted dishonestly, and it is important to state this at the outset. Accordingly the core question is whether he has satisfied the court that he acted responsibly in relation to the conduct of the affairs of the company, and whether “there is no other reason why it would be just and equitable that he should be subject to restriction”. The third issue raised is whether he failed to cooperate with the liquidator. It is common case that the onus is on the second named respondent to so satisfy the court.
27. The principles established by Shanley J in La Moselle Clothing Ltd v Soualhi [1998] 2 ILRM 345 and enunciated at page 352 are helpful: –
“Thus it seems to me that in determining the “responsibility” of a director for the purposes of s.150(2)(a) the court should have regard to:
(a) the extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963 – 1990.
(b) the extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) the extent of the directors responsibility for the insolvency of the company.
(d) the extent of the directors responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.
(e) the extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.”
It is also clear that “simply bad commercial judgement” does not equate with lack of responsibility, that the court should not permit a witch-hunt against directors, and that the court should be careful “not to view the matter with the inevitable benefit of hindsight” – see Ms Justice Finlay Geoghegan in O’Neill Engineering Services (ex tempore, 13 February 2004).
28. It is also clear that the court must consider the evidence in context, and must take into account all relevant circumstances. This is emphasised in the judgement of Fennelly J in Re Mitek Holdings Ltd: Grace v. Kachkar [2010] 3 IR 374, at p.397 where he states: –
“[80] there will usually be a real difference between the duties of executive and non—executive directors. The latter will usually be dependent on the former for information about the affairs and of the finances of the company, a fact which will impose correspondingly larger duties on the former…”
However the mere fact that a person is a non—executive director does not exonerate them from responsibility. In Re Vehicle Imports Ltd (Unreported, High Court, 23 November 2000), Murphy J. approved a summary of directors’ duties given in the judgment of Parker J. in Re Barings plc. & Others (No.5) [1999] 1 B.C.L.C. 433, parts of which summary were cited by Finlay Geoghegan J. with approval in Kavanagh v. Delaney [2005] ILRM 34, at p.40 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…
(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 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 had been discharged, depended on the facts of each particular case, including the director’s role in the management of the company.”
29. The issue of delay in the winding up of a company is one that can give rise to a finding that directors did not act responsibly. It is well established that where a company is insolvent and unable to pay its debts the directors have a duty to wind it up. Addressing this in Re Careca Investments Limited [2005] IEHC 62, Clarke J. noted:
“That duty does, of course, depend on all the circumstances of the case and there may well be appropriate instances where, at least for a period of time, it may be appropriate to postpone winding-up pending attempts to deal with the issues that arise by virtue of insolvency.”
In Re Swanpool Limited [2005] IEHC 341 the same judge noted at paragraph 3.7 of his judgment three different types of situation in which the court is typically required to consider restriction applications, the third being –
“3. Compliance by directors with the obligations identified in Frederic Inns to ensure that once the company was facing insolvency its assets were dealt with in a manner designed to ensure the proper distribution of those assets in accordance with insolvency law.”
It is evident that directors of a company that is insolvent have a duty to consider all creditors and should not act in a manner that has the effect of preferring, or potentially preferring, one creditor over another or risking loss that would adversely affect all, or all of a class of, creditors.
Decision
30. The liquidator’s primary concern is the failure to wind up the Company in a timely fashion, and in particular the delay following the liquidation of PTCI on 26 July, 2012, until the appointment of Mr Wallace on 26 May, 2014, some 22 months later. There is no doubt that this was irresponsible on the part of the first named respondent as executive director. At the date of liquidation PTCI was owed over 1.5 million euro. The Company was plainly insolvent. It was also dependent on the continued existence of PTCI for income from the lease of aircraft, and when PTCI ceased trading it should have been obvious that the Company would have to be liquidated. This is all the more so because – and this has not been contested – following the liquidation of PTCI all of the Company’s aircraft were grounded. It should also have been plain to all the directors that the aircraft would have to be stored pending sale, and that this would entail ongoing payments to Waterford Airport and Weston Airport, apart from other ongoing company expenses. While a short delay might be acceptable, to explore an early, orderly and beneficial sale of the Company assets, in the circumstances this might reasonably have been measured in weeks or a few months, but should not have extended into 2013. Only if a forbearance agreement had been reached with all creditors within a short timeframe might that have justified any greater delay in liquidating the Company. Dragging out that process for over 18 months was not responsible conduct.
31. The second named respondent asks the court to excuse him from responsibility on the basis that his role as a director was non—executive, that his role initially was limited to odd jobs and then developing the company’s IT systems, that he was “not particularly qualified or experienced on the financial workings of the business”, that from January 2009 he trained to be a pilot, qualifying 18 months later and thereafter becoming a captain with a major European airline and being based much of the time in Bergamo. In addition he says he kept abreast of his father’s attempts to rescue PTCI through the examinership process, and, after that company went into liquidation, the first named respondent’s attempts to achieve a consensual resolution with PTCI’s liquidator and the Company creditors over the realisation of the Companies’ aircraft. At paragraph 22 of his affidavit he states: –
“I believe that it is clear when one considers the nature of my role in the Company that I relied on my father (a) to receive information in relation to matters ongoing with the Company and that (b) I trusted his judgement in particular in high-level commercial matters. As a matter of objective judgement, I did not and do not believe that the steps that he took at this time were inappropriate. Therefore, quite apart from the nature of my role, I would not have called on him to change a strategy which appeared to be and still appears to me to be, a reasonable one, namely to engage with Mr McAteer.”
32. It seems to me that this ignores the second named respondent’s general duties as a director, even as a non-Executive Director, to exercise supervision over the affairs of the Company. This is particularly so in the context of the crisis that led to the liquidation of PTCI with the obvious implications for the Company, and its creditors. In his affidavits the second named respondent does not elaborate on what discussions he had with his father in relation to the Company at the time of or immediately after the liquidation of PTCI. He does not appraise the court of the information that he sought or the nature of any debate that he may have had over the future of the Company at that time. In particular there is no evidence to suggest that the second named respondent had any contact with the Company accountant or auditor, or sought any outside advice as to the appropriate action to be taken by or in respect of the Company.
33. The question of whether or not to appoint a liquidator to the Company immediately post the liquidation of PTCI was not in the category of routine or even a significant “commercial judgement”. It was a question that had to be addressed in the context of the duties owed by all of the directors under the Companies Acts, and the general duties of directors mentioned earlier. The liquidation of the Company became inevitable following the failed examinership of PTCI, and the decision to wind up the Company should have been straightforward.
34. Moreover by 2012 the second named respondent was over 30 years of age, he was an experienced pilot, and he had been involved in the family companies and their businesses since 2001. He cannot have been entirely without business experience and some knowledge of corporate compliance and the responsibilities of directors. He ought to have had occasion to attend many annual general meetings of the Company or PTCI and to have considered annual financial statements/accounts. He clearly had considerable knowledge of the airline industry. Objectively if he had sat down and properly and responsibly considered the position of the Company in the summer of 2012 he should have realised, having regard to the enormous debt due to PTCI, that incurring further debt for storing aircraft pending sale would have implications for new or existing unsecured creditors, who would ultimately be unable to recover their debt. At the very least he should have sought advice rather than accepting his father’s decision-making and strategy, apparently without question.
35. His duty was owed individually, as well as collectively. Had he consulted with an independent accountant or the company auditor he would almost certainly have been advised that the Company should immediately be put into liquidation – and if not so advised he might still be held to have acted responsibly by seeking and relying on professional advice. Had the question been canvassed he would probably have been advised that in a liquidation all expenses associated with selling the aircraft, including storage pending sale, could have been discharged in full by the liquidator, and that a liquidator might have welcomed the assistance of the respondents in marketing the aircraft. Instead – admittedly primarily due to the first named respondent’s scheme to sell the aircraft without the Company going into liquidation – by the time of the liquidator’s First Report Weston airport was owed €105,600 and Waterford Airport was owed an estimated €40,000. As unsecured creditors there will be no funds in the liquidation to discharge this indebtedness. Some indebtedness of this nature – but not as much as accumulated over the 22 months before liquidation – was reasonably foreseeable.
36. The liquidator suggests that the delay in the sale of the aircraft led to inevitable devaluation of these assets, in the order of €170,000 between February 2013 and June 2014. I am not satisfied that this reflects lack of responsibility on the part of the second named respondent as a director. This depreciation was largely due to the fact that the aircraft in Waterford were stored outdoors and damaged by bad weather. There is no evidence that the second named respondent was aware of the outside storage, and weather-caused damage is not something that the second named respondent could necessarily have foreseen. Nonetheless, in the context of the third consideration highlighted by Shanley J. in La Moselle, the second named respondent must bear some responsibility for the increases in the unsecured indebtedness of the company to Weston and Waterford airports during the period when it should have been put into liquidation.
37. I do not accept that the second named respondent acted irresponsibly in respect of the liquidator’s request for information, and in failing to complete a questionnaire. In this respect I accept his evidence that the questionnaire was not brought to his attention, having been posted to his father’s address. While the second named respondent may be criticised for not having updated the CRO on his change of address, I also accept his averment that he was not in possession of any information that could have added to the information already provided to the liquidator by his father who did provide a Statement of Affairs. That this omission was not a matter of great concern to the liquidator is reflected in the fact that no reminder letters or other correspondence were issued by the liquidator.
38. Accordingly, I find that the second named respondent did not act responsibly in failing to take appropriate action to have the company wound up in a timely fashion following the liquidation of PTCI. As previously stated I do not find that he was in any way dishonest. Nor do I find any irresponsibility in his a failure to fill in a questionnaire or provide information to the liquidator in all the circumstances.
39. I will hear counsel further in relation to whether the restriction order should be made pursuant to section 150 or section 819.
McMahon -v- Larkin & anor
[2016] IEHC 483 (24 June 2016)
JUDGMENT of Mr. Justice David Keane delivered on the 24th June 2016
Introduction
1. This is an application for a declaration of restriction against each of the respondent company directors under s. 150 of the Companies Act 1990, as amended (“the 1990 Act”).
Background
2. Pauraic Larkin and Associates Limited (“the company”) was incorporated on the 30th August 1999 and commenced trading in the month of January 2004. The company was engaged in the provision of professional advisory services, and in the sale of hedging plants or trees, to the agricultural sector.
3. The applicant is a chartered accountant and was appointed liquidator of the company on the nomination of the Revenue Commissioners by resolution passed at the meeting of the creditors of the company held on the 19th December 2012, pursuant to the requirements of s. 266 of the Companies Act 1963, as amended (“the 1963 Act”).
4. The first named respondent is a qualified agricultural advisor. He operated and managed the company’s business. He became a director of the company at its inception on the 30th August 1999 and continued to act in that capacity until the company went into liquidation.
5. The second named respondent is the spouse of the first named respondent and is a bank official by occupation. She became a director of the company on the 16th July 2007. She was a non-executive director and had no other role in the business beyond making bank lodgements on its behalf for a brief period and at one point arranging for the transfer of the company’s bank account from one financial institution to another. While it is not in dispute that the second named respondent resigned her position as director prior to the commencement of the winding up of the company, precisely when she did so is a matter of controversy between her and the applicant.
The necessary proofs
6. The applicant avers that the company was unable to pay its debts on the date of the commencement of its winding up and that proposition has not been disputed by either of the respondents. Nor is it in issue that the first named respondent was a director of the company at the date of the commencement of its winding up. As it is accepted that the second named respondent had resigned as a director of the company before then, under s. 149 (2) of the 1990 Act the applicant bears the burden of establishing that she was a director ‘within 12 months prior to’ that event. Whether he has discharged that burden is a question to which I will return. Finally, the applicant avers that the Director of Corporate Enforcement has not relieved him of the obligation otherwise incumbent on him under s. 56 (2) of the Company Law Enforcement Act 2001 (“the 2001 Act”) to apply for a declaration of restriction against each of the respondents, and he exhibits certain relevant correspondence in support of that assertion.
The defence under s. 150(2)(a) of the 1990 Act
7. In anticipation of the assertion by either of the respondents that he or she is entitled to avail of the defence under s. 150(2)(a) of the 1990 Act that he or she acted ‘honestly and responsibly in relation to the conduct of the affairs of the company’, the applicant avers to a number of matters that, he contends, preclude that defence from being made out. For the purposes of the present judgment, it is only necessary to refer to three of those.
8. The first is that, while the statement of affairs presented to the meeting of the company’s creditors on the 19th December 2012 disclosed a liability to the Revenue Commissioners of €10,650, a subsequent investigation by the Revenue Commissioners resulted in an assessed liability of €345,050.09, comprising €178,039 in unpaid VAT between February 2008 and October 2012; €105,000 in corporation tax incurred between March 2010 and February 2011; and €62,011.09 in unpaid PAYE for the years 2010 and 2011.
9. The second matter raised by the applicant is that, at the creditors’ meeting on the 19th December 2012, the first named respondent informed him that the company had two employees at the commencement of its winding up. The applicant has since received confirmation from those employees that they did not receive any minimum notice or redundancy payments. The applicant’s subsequent investigations have disclosed that neither employee was issued with a P45 and that no payroll record exists for the period of their employment, nor is there any record of any taxation or social insurance deductions taken from their salaries.
10. Third, the applicant avers that the company continued to trade after the commencement of the voluntary winding up of the company (which, under s. 253 of the 1963 Act, is deemed to have occurred at the time of the member’s resolution to that effect, necessarily prior to the holding of the creditors’ meeting) in that the first named respondent accepted a customer deposit of €1,000 from a customer who was unaware of the company’s insolvency.
The position of the first named respondent
11. The first named respondent did not appear either in person or through any legal representative in opposition to the present application. Being satisfied that the necessary proofs are in order, and as I cannot be satisfied that the first named respondent acted either honestly or responsibly in relation to the conduct of the company’s affairs, I must therefore make the appropriate declaration of restriction concerning him. For the reasons set out in my judgment in Murphy v. O’Flynn & Anor [2016] IEHC 197, I propose to do so pursuant to the terms of s. 819 of the Companies Act 2014.
The position of the second named respondent
12. The position of the second named respondent is very different. While the arguments advanced on her behalf at the hearing of the present application were directed to seeking to persuade the court that she had acted honestly and responsibly in the conduct of the company’s affairs (by, in effect, accepting appointment as a director of the company without playing any meaningful part whatsoever in the conduct of its affairs), it seems to me that a more fundamental issue clearly arises.
13. That issue, already flagged above, is whether she is a person to whom Chapter 1 of Part VII of the 1990 Act, on the restriction of directors of insolvent companies, applies. S. 149(2) of the 1990 Act states:
“This Chapter applies to any person who was a director of a company to which this section applies at the date of, or within 12 months prior to, the commencement of the winding up.”
14. Under s. 253 of the 1963 Act, a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up. The relevant resolution is that contemplated under S. 251(1)(c) of that Act, whereby a company may be wound up voluntarily ‘if the company in general meeting resolves that it cannot be reason of its liabilities continue its business, and that it be wound up voluntarily.’
15. At paragraph 2 of the affidavit that the applicant swore on the 4th March 2015 to ground the present application, he avers that ‘on 19th day of December 2012, it was resolved pursuant to s. 251 of the 1963 Act that the company be wound up and that your deponent be appointed as liquidator.’ There is some reason to doubt the accuracy of that averment in the following circumstances.
16. S. 266(1) of the 1963 Act states:
“The company shall cause a meeting of the creditors of the company to be summoned for the day, or the day next following the day, on which there is to be held the meeting at which the resolution for voluntary winding up is to be proposed….”
17. The applicant has exhibited minutes of the creditors’ meeting that was held on the 19th December 2012. Those minutes record a statement by one Ian McKeown of McKeown Associates that he had been nominated as liquidator of the company at a meeting of the members of the company held the previous day, the 18th December 2012.
18. Perhaps understandably, as the applicant was only appointed liquidator at the creditors’ meeting on the 19th December 2012, he has not exhibited the members’ resolution to wind up the company, which ought to have been passed at a meeting of the members earlier on the day of, or on the day preceding, the creditors’ meeting. He has exhibited a peculiar kind of hybrid document, which purports to record the ‘ordinary resolutions’ passed at the meeting of the company’s creditors on the 19th December 2012. Those resolutions were to wind up the company and to appoint the applicant as liquidator. However, the form utilised is the old Companies Registration Office ‘Form 16A’, which is, or certainly was, the standard form used to record ordinary resolutions of the members of a company passed at a general meeting.
19. The author of Doyle The Company Secretary (Dublin, 1994) expresses the view (at p. 233) that “[i]n practice, the creditors’ meeting will generally take place on the same day as, and shortly after, the winding up meeting.”
20. In summary, while there is a strong suggestion that the members in general meeting resolved to wind up the company on the 18th December 2011, that is not the position adopted by the applicant and it is, at least, possible that the applicant is correct in his understanding that the relevant general meeting did not occur until the 19th December 2011.
21. The issue of the precise date upon which the winding up of the company commenced is crucial because of the controversy concerning the date on which the second named respondent resigned as a director of the company.
22. The applicant has exhibited the Form B10 (‘change of director or secretary form’) recording the termination of the second named respondent’s relationship with the company as its director. That form is dated the 1st December 2012 and is stamped received by the Companies Registration Office on the 13th December 2012, which, the applicant seeks to emphasise, was just six days prior to the creditors’ meeting at which he was appointed liquidator. This fact, in turn, appears to form the basis for the applicant’s assertion on affidavit that the second named respondent “was a director of the company within twelve months prior to the winding up of the company.”
23. However, as the applicant accepts, the relevant Form B10 recites on its face that the date upon which the relevant change of directorship was to take effect was the 19th December 2011. The applicant appears to be submitting, by implication if not expressly, that the court should reject that assertion as a convenient fiction, contrived by the respondents just prior to the commencement of the winding up, to spare the second named respondent from the risk of a declaration of restriction under s. 150 of the 1990 Act. As against that, the second named defendant has now deposed at length and on oath to the particular personal and professional circumstances in which she resolved to resign in or about November 2011 and did resign with effect from the 19th December 2011, as recorded in a letter of resignation of that date, which she has exhibited to an affidavit that she swore in opposition to the present application on the 20th November 2015.
24. Beyond an apparent invitation to the court to draw an inference from the failure to file the relevant Form B10 prior to the 13th December 2012, the second named respondent has adduced no evidence of any statement or action by the second named respondent inconsistent with her sworn evidence that she did indeed resign as a director of the company on the 19th December 2011.
25. In Re Cavan Crystal Group Ltd (26 April 1996, unreported, High Court), Murphy J. held that the position of a director who had resigned more than twelve months prior to the commencement of a receivership (equivalent to a liquidation) was not captured by the requirements of s. 149 of the 1990 Act, even though in that case the termination of his directorship was never notified to the Companies Registration Office. That conclusion reflects the approach that has been adopted by the Chancery Division of the High Court in England to the equivalent provisions of the law there, as exemplified by the following passage from the decision of Jacob J. in POW Services Ltd and anor. v. Clare and ors [1995] 2 BCLC 435 (at 440-441):
“What then is the legal position? First, a word about registration of a person as a director or company secretary (or as a person who has resigned as such) at Companies House. The general rule is that the fact of registration or no has nothing whatever to do with whether a person is in fact a director or company secretary. Subject to one exception there is no deeming provision arising from registration. It is the company, acting by the procedures under the articles, which makes or sacks a director or company secretary. There are statutory requirements for registration of the persons whom the company has made a director with sanctions for non-compliance. It may well be that where a company has permitted registration of a person who is not in fact a director or secretary, the company would be estopped as against a third party who relied upon the registration from denying it, but that is as far as the matter goes. The only exception relates to the first directors and secretaries. By s 13(5) of the [UK] 1985 Act the persons named on the appropriate form (Form 10) as these persons are deemed to be such.
I cannot help thinking that in this case the parties (on both sides) have sometimes thought the law goes further – that registration or not itself made a person director or not.”
26. Thus, the question of when the second named respondent ceased to be a director is one of fact, the answer to which is in no way contingent upon when the occurrence of that event is notified to the Companies Registration Office.
27. Of course, the applicant bears the burden of establishing the necessary proofs in a s. 150 application. In this case, I have come to the conclusion that the applicant has failed to establish on the balance of probabilities that the second named respondent remained a director of the company at any time after the 19th December 2011 or that the winding up of the company commenced at any time prior to the 19th December 2012.
28. S. 18(h) of the Interpretation Act 2005 (“the 2005 Act”) provides that where a period of time is expressed to begin on or be reckoned from a particular day, that day shall be deemed to be included in the period and, where a period of time is expressed to end on or be reckoned to a particular day, that day shall be deemed to be included in the period. It seems to me that the 12 month period prescribed under s. 149 of the 1990 Act is expressed to be reckoned to the day upon which the winding up of the company concerned commences. In this case, I cannot be satisfied that the winding up commenced on any date prior to the 19th December 2012. Accordingly, the 19th December 2012 must be included as the last day of the relevant 12 month period reckoned to that date.
29. McCann v. An Bord Pleanála and Sligo County Council [1997] 1 ILRM 314 was a case involving the application of a one month time limit for appeal under certain planning legislation to an appeal received on the 7th July 1995 in respect of a decision made on the 7th June 1995. The High Court (per Lavan J.) held that the “corresponding date” rule, whereby the relevant period ends on the corresponding date in the next month (or, where appropriate, the next year), was expressly disapplied under s. 11(h) of the Interpretation Act 1937, a provision identical in all material respects to s. 18(h) of the 2005 Act.
30. Applying the same analysis to the facts in this case as I have found them to be, I cannot be satisfied that the period of 12 months prior to the commencement of the company’s winding extended backwards in time beyond the 20th December 2011.
31. It follows that the applicant has failed to satisfy me that the second named respondent was a director of the company within 12 months prior to its winding up and that, accordingly, I cannot be satisfied that I have jurisdiction to consider an application for her restriction as a director under s. 150 of the 1990 Act. For that reason, I must decline to make the declaration sought against the second named respondent.
Greenmount Holdings Ltd -V- Companies Act
[2007] IEHC 246 (31 July 2007)
JUDGMENT of Mr. Justice Brian McGovern delivered Tuesday 31st July, 2007.
1. This is an application brought by the liquidator of Greenmount Holdings Limited (“the Company”) for a declaration that the respondents, being persons to whom chapter 1 of part VII of the Companies Act, 1990 applies, shall not for a period of 5 years be appointed or act in any way, whether directly or indirectly as a Director or Secretary or be concerned or take part in the promotion of formation of any company unless that company meets the requirements set out in sub.s (3) of s. 150 of the Companies Act, 1990 (as amended).
2. The company was incorporated on the 11th November, 1994. From the 11th November, 1994 until the 27th July, 2005 the Directors were the first and second named respondent. The first respondent resigned as director on the 12th November, 2004. The third named respondent was appointed a director on the 12th November, 2004. The second and third named respondents resigned as directors on the 27th July, 2005 on which date the second named respondent sold his interest in the company to the fourth named respondent. The fourth named respondent was at the time an undischarged bankrupt. Subsequently the fifth named respondent became a Director.
3. These proceedings only concern the first, second and third named respondents. The fourth and fifth named respondents have already submitted to a restriction order.
4. Background.
The company was incorporated on the 11th November, 1994. The company operated serviced office facility under the trade name “Executive Suites” at the Harcourt Centre, Dublin 2 on a short term licensed basis. The company leased the premises from Damovo. The company had sufficient space to offer 22 offices available for rent at any one time. On the date of the appointment of the official liquidator 17 offices were occupied by licensees or tenants. Three were vacant and two were occupied by companies related to either the first or second named respondent. One of the company’s key tenants which occupied seven of the offices on the third floor had given notice to vacate the premises from October, 2005.
5. The company also owned an apartment in the International Financial Services Centre as an investment property. This was sold by the liquidator following his appointment. The company became insolvent and the liquidator was appointed on the 21st September, 2005 pursuant to a petition presented by Damovo Ireland (Limited) on 30th July, 2005
6. For some years prior to the commencement of the winding up relations between the first and second named respondents broke down. The last set of audited accounts filed in the Companies Registration Office was for the year 30th June, 2000. Due to the breakdown of relations between the first and second named respondents no further audited accounts were prepared by the company. The first and second named respondents blamed each other for this. The first named respondent says that she attempted to ensure that books and records were prepared at all times and made every effort to rectify the deficiencies. She said that she employed Farrell Grant Sparks at her own expense in order to bring the books and records up to date prior to her resignation as a Director in November, 2004. From the time it commenced trading the company employed a Book Keeping firm, G.M. Financial Services, to write up the books and financial records on a monthly basis. The company also employed Mr. Gerard T. Murphy to audit the company’s accounts. The first named respondent says that in 2002 in emerged that no day to day book keeping was carried out and she was informed that Mr. Gerard T. Murphy refused to accept the figures of Mr. Gerry Doyle, the person responsible for preparing the monthly accounts. For that reason Farrell Grant and Sparks were employed by her to bring the company books up to date. There were disputes between the first and second named respondent over the second named respondent’s removal of books and records of the company from the possession of Farrell Grant and Sparks. In mid 2002 the first named respondent discovered that Mr. Murphy had forged her signature on accounts submitted to the Companies Registration Office and to the Revenue Commissioners. She made a complaint to the ICAI which was upheld and Mr. Murphy was severely reprimanded and fined. At a board meeting on the 10th March, 2003 Mr. Murphy was dismissed as auditor of the Company and Oliver Freeney & Company were appointed auditors. A dispute arose as to the level of fees claimed by Mr. Murphy and he refused to hand over the books and records to the new auditors. The first named respondent says that she personally discharged the bill of Farrell Grant Sparks from her own funds and she engaged the services of a former employee of the company to assist in this task.
7. The second named respondent says that in March, 2002 he became concerned with a number of issues which were brought to his attention by the company auditors. These issues concerned the payment by the company of a sum of money to a Polish company in which neither the company nor he had any involvement but in which the first named respondent had an interest. He was also concerned about the withdrawal of monies by the first named respondent from the company’s Visa account and the transfer out of the company’s bank account of a sum of money on foot of a bank transfer form which purported to contain his signature but he did not sign. As a result of the disagreements between the parties the second named respondent commenced s.205 proceedings.
8. It is clear that the major factor precipitating the insolvency of the company was the diminishing rental income being obtained by the company for the executive suites coupled with a rent review which significantly increased the annual rent which the company was required to pay to the Damovo. After the rent review took place there were also substantial arrears of rent to be paid.
9. It seems that the third named respondent’s role in the company was rather passive. She is the wife of the second named respondent and it was suggested that she was appointed as a director to “make up the numbers”. For her part she accepts that she played no role in the day to day management of the affairs of the company but she did discuss Company matters with her husband from time to time. She had replaced the first named respondent as director. When the first named respondent resigned as director she was paid by the company the sum of €130,000.00 on foot of an agreement of the 15th November, 2004.
10. The Applicant’s Case.
The applicant submits that there are seven issues which the court ought to consider in determining whether the first, second and third named respondents acted responsibly during their tenure as directors of the company. These are:
(a) Whether the directors in general and the first and second named respondents in particular, properly functioned as a board of directors and if not, whether any negative consequences were caused to the company by this;
(b) Whether the respondents ensured that the company maintained proper books of accounts;
(c) Whether the decision of the first, second and third named respondents to procure the company to purchase the first named respondents share capital in the company for €130,000.00 was a reasonable decision and a transaction that was in the best interest of the company;
(d) Whether the decision of the second and third named respondents to transfer control of the company to the fourth named respondent was a responsible decision;
(e) Whether the first named respondents decision to procure the company to issue invoices to the Polish company, Genyslabs, was a responsible decision; and
(f) Whether the third named respondent adequately discharged her duties as a director of the company.
11. The court was referred to the decision of Shanley J. in Le Moselle Clothing Limited v. Souhali which set out the criteria which the court can have regard to when considering whether a director acted responsibly during his tenure. At page 352 Shanley J. said:
“Thus it seems to me that in determining the “responsibility” of a director for the purposes of s. 150(2)(a) the court should have regard to:
(a) The extent of which the director has or has not complied with any obligations imposed on him by the Companies Act, 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 Kavanagh v. Delaney (Re: Tralee Beef & Lamb Limited) (Unreported, High Court, Finlay Geoghegan J. 20th July, 2004) the learned judge stated that at common law directors owe duties to the company which are normally divided into duties of loyalty based on fiduciary principles developed initially by the Courts of Equity and duties of skill and care developed by the common law courts from the in the law of negligence. Finlay Geoghegan said that:
“Accordingly, it appears to me that when considering the matters referred to by Shanley J….under paragraph (a) the court should have regard not only to the extent to which a director has or has not complied with any obligation imposed on him/her by the Companies Acts but also with duties imposed by common law.”
In that case she cited with approval the remarks of Jonathan Parker J. in Re: Barings plc and Others (No. 5) Secretary of State for Trade and Industry the Baker and Others where he said:
“Each individual director owes a duty to the company to inform himself about [The Company’s] affairs and to join with his co-directors in supervising and controlling them.”
She also referred to three general proposition which Jonathon Parker J. derived from earlier authorities. These are as follows:
“(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 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.”
12. The applicant contends that the respondents failed to properly function as a board of directors. There is no doubt that this is true as, unhappily, differences arose between the first and second named respondents which led to litigation and also lack of communication. I am satisfied that the company failed to maintain proper books and records as required by s. 202(1) of the Companies Act, 1990. The last audited accounts prepared in respect of the company were for the year ending 30th June, 2000. While draft accounts were prepared for succeeding years ending 30th June, 2001, 2002 and 2003 these accounts were not approved.
13. As a result of the failure to keep proper books of account it was not possible at any time after the 30th June, 2000 to enable the financial position of the company to be determined with reasonable accuracy.
14. The respondents do not deny that audited accounts were not prepared between 2001 and 2004 and that proper books of account were not kept but seek to explain why this was so. The first and second named respondents maintain that it was due to the ongoing disputes between them that it was not possible to have the accounts prepared. It is not possible for this court to determine which of the respondents is personally responsible for the failure to ensure that the company produced audited accounts after the year ending 30th June, 2000 and the failure to maintain proper books of account. The applicant argues that the directors are under an individual and collective duty to supervise the company’s affairs and that the respondents were in breach of that duty.
15. The sale of the first named respondents shares to the company.
The applicant contends that this decision was irresponsible and not in the best interest of the company because the company was insolvent at the time. Furthermore, the applicant contends that at the time of the transaction the company had inadequate distributable reserves to fund the payment. The agreement to pay the sum of €130,000.00 was made on the 15th November, 2004. The applicant contends that there was substantial trading loses at that time and that a review of the company’s trading operations between 31st July, 2003 and November, 2004 would have shown further trading loses. On the 27th July, 2004 the company’s landlord raised an invoice in the sum of €167,424.54 for back rent for the period 8th May, 2003 to 8th August, 2004 following on a rent review becoming operative. This raised serious questions as to the company’s ability to continue trading. The respondents say that they got expert advice on the matter. The first named respondent says that she had legal advice from Messrs. William Fry and the second named respondents says that he obtained independent legal advice from Messrs. Arthur P. McLean & Company, William Fry Solicitors and Gerard T. Murphy and Oliver J. Freeney & Company. At no stage did any of these professionals call into question whether or not the company had sufficient reserves and cash in the back to finance the buy back of shares. The second respondent points out that in fact Mr. Pauraic Ward of Oliver Freeney & Company stated on the 5th November that:
“The company will have sufficient reserves and cash at Bank to finance the buy-back of the shares.”
The second named respondent points out that the liquidator has not taken steps to recover the sum of €130,000.00.
16. “Abandonment” of the Company by the second named respondent.
On the 27th July, 2005 the second named respondent sold his interest in the company to the fourth named respondent €1.00. The fourth named respondent was an undischarged backrupt. At this time the company was engaged in a long running dispute with its landlord Damovo (Ireland) Limited regarding the rent arrears due. It appears as the fourth named respondent was an undischarged backrupt he asked his son, the fifth named respondent to become a director of the company. Cleary the fourth named respondent could not be appointed a director as he was an undicharged bankrupt but the applicant contends that he was a shadow director of the company. Furthermore significant sums of rent under the terms of the rental review had accrued. The company’s auditors were due to be paid and the company was having difficulty selling the apartment which was an investment property. The applicant argues that the company was insolvent and the second named respondent acted in an irresponsible way in disposing of the company in this matter. The second named respondent complains that the applicant as looking at the transaction with the benefit of hindsight and that he is not permitted to do this. See Business Communications Limited v. Baxster (Unreported, High Court, Murphy J. 21st July, 1995). In an affidavit sworn on the 14th December, 2006 the second named applicant says that:
“I say that in mid July, 2005 I commenced negotiations with Mr. Michael Kelly, a personal friend of mine for many years. I knew that Mr. Kelly had been made a bankrupt but was informed by Mr. Kelly and believed that he was in the process of being discharged from bankruptcy. I say that Mr. Kelly volunteered Damovo the landlord of the leasehold premises, and reported to me that he believed he could negotiate a deal with Damovo which would lead to a long term survival of the company. As my relationship with Damovo had become strained, due to many continued attempts to settle the arrears of rental issue and the company’s continual inability to make a capital payment, I believed that it would be preferable if Mr. Kelly took over the negotiations on the company’s behalf and consequently I transferred by shareholding to Mr. Kelly’s son for €1.00 and both my wife, Barbara Carberry and I resigned as directors. Subsequently I was informed by Mr. Kelly and believed that he had negotiated a deal with Damovo but later he informed me that Damovo had resiled from their position, he believed due to communications which had been made to Damovo by Mrs. O’Connor.”
17. The position of the third named respondent is that she appears to have been a passive director who was appointed to replace the first named respondent. The applicant maintains that as a director she had a duty to take all steps to preserve the assets of the company for the benefit of the creditors.
18. Issuing of invoice to Genyslabs.
It is alleged that the first named respondent had an interest in Enterprise Holdings, a business in Warsaw, Poland which operated serviced offices. It is contended by the applicant that the company facilitated a client at Enterprise Holdings to evade tax, without the knowledge of the second named respondent. The client in question was Genyslabs which did not want to deal directly with the Polish company but required an agreement with an EU based company for tax purposes. The applicant alleges that this request was facilitated by the first named respondent by issuing, or causing to have issued, through the company, a rental agreement for signature by the directors of Genyslabs together with invoices for rent of an office in Warsaw which it did not own. No corresponding licence agreement was put in place between Enterprise Holdings and the company nor, where invoices received from Enterprise Holdings. The invoices were issued to Genyslabs by the company and were not recorded by the company in its books or records and the applicant contends that this transaction was entered into purely for the benefit of the first named respondent’s other business interests. The first named respondent refutes the allegation and points out that the applicant has never produced the alleged false invoices or any evidence that they issued.
19. Findings and Conclusions.
Having regard to the authorities which have been opened to me I determine the responsibility of the respondents as follows:-
(i) I find that the respondents failed to maintain proper books of account as required by s. 202 of the 1990 Act and failed to file audited accounts beyond the 30th June, 2000. I accept that the first and second named respondents were in dispute with each other for this period and that it is not possible for the court to resolve the issues between the parties in this motion. There is sufficient evidence from the first and second named respondents to establish that they were making some attempts to regularise the situation and that their attempts to do so were impeded by the disputes between them and the litigation brought under s. 205 of the Companies Acts. In the circumstances I do not find sufficient grounds to make a restriction order with regard to the first and second named defendants on this issue. It seems to me that the third named respondent was only a director for a short period of time (14th November, 2004 – 25th July, 2005) and while she was in breach of her duties to the company I am satisfied that she was not is a position to alter events in the circumstances that arose and I make no order restricting her on the basis of this ground.
(ii) While I am satisfied that the respondents failed to properly function as a board of directors I make no order restricting them in connection with that failure for the reasons set out at paragraph (i) above.
(iii) I am not entirely convinced that the company was solvent or had adequate distributable reserves to make the decision to purchase the first named respondent’s share capital in the company for €130,000.00 a responsible decision. However there appears to have been some good reasons why she should be bought out in view of the long standing disagreements between her and the second named respondent. In any event I am satisfied that the respondents obtained proper professional advice in the matter and that this advice did not go against the completion of the transaction. In the circumstances I make no restriction order in relation to the respondents in respect of that issue.
(iv) I am satisfied that at the time when the second named respondent took a decision to sell the shares in the company to Michael Kelly for €1.00 the company was insolvent. Although the third named respondent had a legal responsibility in regard to this decision it seems that effectively she was not part of the decision and the evidence suggest that the decision was made by the second named respondent. Accordingly I make no order restricting the third named respondent in respect of that action.
(v) However I find that the action of the second named respondent in disposing of the shares of the company in those circumstances and to an undischarged bankrupt was irresponsible and militated against an orderly winding down of the company’s affairs in circumstances where the company was no longer viable. I find that in taking such action the second named respondent acted in a manner which would amount to a “lack of commercial probity”. On that basis I make a restriction order in respect of the second named respondent in the terms of paragraph 1 of the notice of motion for a period of 5 years.
(vi) I am somewhat concerned about the allegation against the first named respondent concerning the issuing of false invoices to Genyslabs. If this allegation were proved it is obviously a serious matter. However it is denied by the first named respondent and the evidence in respect of the allegation is not sufficient to enable me to make a restriction order against the first named respondent on that account.
Murray -v- Browne
[2015] IEHC 651 (20 October 2015)
JUDGMENT of Mr Justice Max Barrett delivered on 22nd October, 2015.
PART 1: OVERVIEW
1. To expect perfection is to expect too much. Mistakes happen and, when it comes to the liquidator here, that is all that happened. There was no deliberation, only inadvertence. He misplaced the letter from the ODCE advising him that he was not relieved of his obligation to bring a ‘s.150 application’ under the Companies Act 1990. As soon as he realised this, he contacted the ODCE and the within proceedings then commenced. The liquidator was honest in his dealings with the ODCE, he was honest in his dealings with the court, and that honesty is to be applauded. But the liquidator’s error does have the consequence that the within proceedings have been commenced long out of time. The question for the court is whether Mr Browne ought now to benefit from the liquidator’s mistake. The court concludes that he must, though it concludes too that it would not in any event have been obliged to issue a declaration of restriction against him under s.150.
PART 2: TIMING UNDER SECTION 56
2. Under s.56(1) of the Company Law Enforcement Act 2001:
“A liquidator of an insolvent company shall, within 6 months after his or her appointment…and at intervals as required by the Director [of Corporate Enforcement] thereafter, provide to the Director a report in the prescribed form.”
3. Under s.56(2) of the Act of 2001:
“A liquidator of an insolvent company shall, not earlier than 3 months nor later than 5 months (or such later time as the court may allow and advises the Director) after the date on which he or she has provided to the Director a report under subsection (1) apply to the court for the restriction under section 150 of the Act of 1990 of each of the directors of the company, unless the Director has relieved the liquidator of the obligation to make such an application.”
4. A mark of the significance that the Oireachtas attaches to compliance with the foregoing requirements, including the timelines prescribed therein, is the provision in s.56(3) of the Act of 2001 that:
“A liquidator who fails to comply with subsection (1) or (2) is guilty of an offence.
5. One might – this Court respectfully does – query whether regulatory sanction by a professional body, rather than criminal sanction by the courts, with all the consequences such a form of sanction invariably entails (including the potential to be struck off as a professional in the event of a conviction being sustained) would not be the more appropriate sanction in the unlikely occurrence of a deliberate transgression by a liquidator of s.150 – and here, the court notes again, there was no deliberation, just inadvertence.
6. In any event, the liquidation of Eyecom commenced on 14th January 2013. The first report to the Director was filed slightly out of time on 14th August, 2013. If one ignores this delay, any application for restriction ought, by virtue of s.56(2), to have commenced sometime between 14th November, 2013 and 14th January, 2014. Consistent with the honest manner in which he has approached these proceedings, the liquidator accepts this to be so, averring in his affidavit evidence that “The application herein ought to have been brought by me before the 14thof January 2014.” In fact, the Notice of Motion grounding the within application is dated 18th February, 2015. So the application was commenced at least 13 months out of time.
7. Mr Browne contends, by reference to case-law and the European Convention on Human Rights, that the delay arising in the within proceedings is such that the court ought now to refuse to allow the proceedings to continue. In effect, he seeks that (1) the court now exercise its discretion under s.56(2) of the Act of 2001 not to allow the continuation of proceedings that were commenced significantly out of time and/or (2) by reference to Article 6(1) of the European Convention on Human Rights, the court should not allow these s.150 proceedings to continue.
PART 3: SOME RELEVANT JUDGMENTS CONCERNING DELAY
8. When it comes to the issue of delay, the court has been referred to three judgments of interest, namely the High Court decisions in Dowall v. Cullen [2009] IEHC 580 and Taite v. Breslin [2014] IEHC 184, and the decision of the European Court of Human Rights in Davies v. United Kingdom [2002] 355 EHRR.
a. Dowall v. Cullen
9. This was as.150 application in which McKechnie J. observed as follows, at para.92 of his judgment:
“It would thus appear that in the context of s. 150…certain specific factors should be taken into account which render it particularly unjust to allow an application to proceed where there has been a large lapse of time, notwithstanding that no actual prejudice can be identified….[I]n a s. 150 application the mere inordinate passage of time, due to the special features of the section, in particular the burden on a respondent to show that he has acted honestly and responsibly in relation to the affairs of the company, and that there are no just and equitable reasons for restricting him, would render it particularly iniquitous to allow such an application to continue where a large period of time has elapsed. In those circumstances, the passage of time would severely hamper a respondent’s delay to properly defend himself, and thus tend to tip the scales of justice in favour of the respondent even in the absence of any specifically identifiable prejudice.”
10. Counsel for the liquidator has pointed to the fact that Dowall ultimately did not fall to be decided on the issue of timing (see para.111 thereof) and thus the above-quoted text is obiter. However, given the eminence of McKechnie J., this Court is inclined to pay heed to the above-quoted observations regardless of whether or not they form part of the ratio in Dowall. McKechnie J. makes, in essence, two points when it comes to s.150 proceedings: (1) delay per se may tip the scales of justice in favour of a respondent even in the absence of any specifically identifiable prejudice; and (2) this is because “a large lapse of time” may hamper a respondent in discharging the burden on her or him under s.150.
11. When it comes to (2), it is important to note that McKechnie J. is referring to delay within the context of s.150 of the Companies Act 1990, not s.56 of the Act of 2001. When it comes to that latter provision, it is clear from the tight timelines it prescribes, and the criminal sanctions that can arise for a liquidator if those provisions are breached, that the Oireachtas expects swift action by a liquidator pursuant thereto. Given this ‘need for speed’ which s.56 clearly apprehends, a circa.14-month delay in commencing proceedings, i.e. a period almost three times longer than the 5-month maximum contemplated by s.56(2), is in that context a very significant delay. It may not have been such as to hamper Mr Browne in discharging the burden on him under s.150. But, if the court might borrow from Macbeth, the idée fixe of s.56 is that when it comes to any s.150 application contemplated thereby, “’twere well it were done quickly” – and here ‘’twere not’. This being so, the court considers the delay arising has to tip the scales of justice in Mr Browne’s favour when it comes to deciding whether the within application should be allowed to continue.
b. Taite v. Breslin
12. The second judgment to which the court was referred in this regard was the decision of this Court in Taite v. Breslin, another s.150 application, in which the court observed as follows, at para.17:
“If a liquidator is guilty of particularly egregious delay, it may be possible for an affected director to sustain an objection to a s.150 application on the grounds of such delay. This was expressly contemplated by Finlay Geoghegan J. in Coyle [v. O’Brien [2003] 2 I.R. 627], albeit with the suggestion, at 633, that within the constraints of a s.56(2) application, the courts should not consider the position of directors. Whether it will be practicable in all instances to uncouple the actions of a liquidator from the consequences for directors of those actions may arise for consideration in one or more future cases.”
13. It seems to the court that the within proceedings afford agood example of a case in which it is not practicable to uncouple the actions of the liquidator from the consequences that have ensued. It is the liquidator’s error, innocent though it was, and honestly though he has behaved since he discovered it, that has led to the entirely unnecessary delay in the commencement of the within proceedings for a period that is a multiple of the maximum period contemplated by s.56. Mr Browne is in no way responsible for that delay; however, it is exclusively him who has had to suffer all the additional angst and worry that has arisen as a consequence, not knowing what the future would bring or what the court would decide. This despite the fact that it was the clear intention of the Oireachtas in setting the tight timelines under s.56 that justice would be done quickly.
14. The court notes in this last context the liquidator’s averment in his affidavit evidence that “[T]he delay has not caused any prejudice to [Mr Browne]…in defending the application”. That is not the same as saying that it has caused Mr Browne no prejudice at all. The Sword of Damocles threatened its eponymous victim for but the shortest of time. Here, thanks to the liquidator’s inadvertence, Mr Browne has had at least 13 months of completely unnecessary worry hanging over his head. That is very great prejudice indeed. Particularly when one bears in mind that it comes at a time when Mr Browne’s wife, regrettably, has become unemployed, and that latterly the home in which they live with their three young children has, unfortunately, become the target of repossession proceedings.
c. Davies v. The United Kingdom
15. In this case an application was brought before the European Court of Human Rights claiming a violation of Article 6(1) of the European Convention on Human Rights. That Article provides that “In the determination of his civil rights and obligations…everyone is entitled to a hearing within a reasonable time by [a]…tribunal”. In the case of Mr Davies, disqualification proceedings had been commenced against him (in his capacity as a sometime company director) in July 1992. They appear to have been abandoned in January 1998. That timeframe was held by the European Court of Human Rights to involve a breach of Article 6(1).
16. The delay Mr Browne has suffered in the within proceedings is nowhere near the almost 6 year delay in Davies. Nonetheless it is, perhaps, arguable that the delay that has arisen in these proceedings is unreasonable when one has regard to the relevant yardstick of reasonableness, being the strict timelines identified in s.56 for the commencement of related s.150 proceedings. All that said, the court does not consider that it is necessary to decide this point or even to have recourse to Article 6(1) of the European Convention in deciding the within proceedings; s.56(2) of the Act of 2001 suffices.
PART 4: THE PUBLIC INTEREST
17. The public interest in the bringing of s.150 proceedings was a matter to which counsel for the liquidator repeatedly referred during the hearing of the within application. He argued in effect that any delay arising paled when viewed against the public interest in the pursuit of allegedly errant directors under s.150. But, of course, the public interest in the prosecution of proceedings under s.150 quickly runs up against a competing public interest, namely that entrepreneurs such as Mr Browne and others who found and operate the businesses which generate employment and are the lifeblood of our national economy should at some time be freed from a Janus-like existence in which they seek to move forwards but are forced ever to look backwards. Who better to determine where the public interest lies in such complicated circumstances than our elected public representatives? And the Oireachtas has determined, as is its right, that subject to the discretion afforded the court under s.56(2), the making of timely reports under s.56(1) and the commencement of timely proceedings under s.56(2) is so important that deliberate breach of the time-requirements arising is grounds for criminal prosecution. In the face of such a clear manifestation of legislative belief in the ‘need for speed’ when it comes to s.56 and the commencement of the s.150 proceedings contemplated thereby, this Court does not find persuasive the argument that an, at best, 13-month delay for no good reason is of such little consequence as to justify the invocation and application by the court of the discretion granted to it in s.56(2).
PART 5: CONCLUSION AS TO DELAY
18. For the reasons stated above, the court is not satisfied to allow any extension of time under s.56(2) for the commencement of the within proceedings. The court considers that Mr Browne’s application in this regard might perhaps have been made sooner but, in all the circumstances, the court does not consider that this is a reason for refusing him the relief that he now seeks. The foregoing has the result that the court declines to allow these proceedings to continue and thus has no need to adjudicate on whether or not a restriction order falls to issue pursuant to s.150.For the sake of completeness, however, the court indicates below how it would have determined matters had it decided that it was necessary to adjudicate on the substance of the s.150 application.
PART 6: SECTION 150 APPLICATION
19. Eyecom specialised in providing certain mobile phone software. The essence of the application made by the liquidator under s.150 was that over the three-year period from 2009 to 2012, Mr Browne allowed Eyecom to run up liabilities of about €185k to the Revenue Commissioners. However, it is clear from the liquidator’s own evidence that Eyecom was encountering some financial difficulty from 2008. Thus it had a retained loss of just under €18k for the year ended 30th June, 2008, a retained profit of just over €22k for the year ended 30th June, 2009, and by 2010 was seriously unstable, its current liabilities in that year exceeding its current assets by just under €50k. There were realistic prospects that Eyecom might secure a very large tender in 2011 but this fell through. This disappointment, plus other changes in the fast-changing telecommunications sector, meant that Eyecom quickly became an unviable concern. Perhaps unsurprisingly in the last couple of years, some filings went missed and director remuneration/expenses became Eyecom’s pre-dominant outgoing. However, it does not seem to the court that these could be described as even remotely excessive: for example, in the calendar year 2012, director remuneration/expenses amounted to €43k. That does not suggest to the court that the directors were ‘making hay while the rain poured’.
20. When it comes to applications under s.150, when it is suggested, for example, that a person has evinced a lack of honesty and/or responsibility, the court considers that it is reasonable to look at the wider course of an individual’s conduct in order to gauge the particular actions that are impugned. Here Mr Browne’s actions since the company’s liquidation show him to be anything but the type of man who is prone to want of honesty or responsibility. So, for example, since the liquidation of Eyecom commenced, Mr Browne has been served with an income tax bill of about €76k arising from the company’s activities, of which he has paid an impressive €50k thus far. That does not seem the hallmark of a man who is generally wanting in honesty; quite the contrary. Moreover, apart from the issue of non-payment of taxes, there seems to be no suggestion that Mr Browne has ever shown himself to be wanting in responsibility. So when one finds that (a) the company’s non-payment of tax liabilities arises in a context in which Eyecom was in a state of flux from 2008 and deeply unstable from 2010, and (b) director attentions were focused from about 2009 on winning new business in a context where this remained realistic, is the court to find that (i) Mr Browne was wanting in honesty and/or responsibility, or (ii) that Mr Browne was doing the very best he could in very trying circumstances? This Court inclines towards the latter view. The not insubstantial but still un-princely payments to directors in the last full year of trading do not incline the court to the opposite view. In truth, it seems an all but inevitable feature of the waning days of any trading concern that liabilities to directors, and indeed employees, will begin to loom larger in the company accounts than if the company was trading into a profit.
21. During the course of argument, counsel for the liquidator placed some reliance on the decisions of the court in Stafford v. Fleming [2007] IEHC 55 and Kelly v. Monson [2014] IEHC 573.
22. It seems to the court that Stafford is entirely distinguishable from the present case on its facts. Stafford involved a close on €1m liability to the Revenue Commissioners, a liability of such a scale that it would likely have a significant influence on any judge called to decide a s.150 application. It also featured a business arrangement that, to use a phrase beloved of sommeliers, had an ‘interesting’ bouquet, involving a pre-insolvency transfer of a company’s valuable goodwill for what appears to have been nil value. That is a factor which would likely loom large in any judge’s thinking when presented with a subsequent s.150 application. Here, by contrast, the liabilities to the Revenue Commissioners, though not insubstantial, are more limited; they arose over a time when the company was generally in difficulty and (from 2010) failing; and there are no unusual transactions or transfers. Instead one is greeted with the, sadly, very usual picture of a director trying unsuccessfully to save a sinking company that still has some prospects of being turned around and, as a result, not having the time to be sufficiently attentive to other aspects of the company’s affairs. Notably too, there is also the dimension presenting here that Mr Browne has, since the company’s liquidation, paid significant sums to the Revenue Commissioners in respect of certain Eyecom-related tax liabilities arising.
23. As for Kelly, counsel for the liquidator sought to draw a parallel between that case and this by reference to the ongoing director payments that were made by Eyecom in, e.g., 2012. Counsel suggested that the facts of Kelly were not on ‘all fours’ with those presenting here. In truth, the two cases are like chalk and cheese. As this Court indicated in its judgment in Kelly, at para.2, the details of the director remuneration paid by the insolvent company in that case made for “startling reading”. Thus in the last four years of its trading, director remuneration in the relevant company as a percentage of turnover rose from 63% in 2009, to 77% in 2010, to 134% in 2011, to 175% in 2012. It was these figures that led this Court to conclude, at para.11 of its judgment, that one of the directors against whom the s.150 proceedings were brought “evinced a lack of commercial probity and/or a want of proper standards in allowing director remuneration to increase as it did, and for those amounts to be paid as they were, during a period of overall decline in the financial performance…[of the relevant company] from 2009 through to 2012.” (The other director who was the subject of the s.150 proceedings in that case escaped liability for other reasons arising). In this case there is no suggestion that anything similar was afoot within Eyecom: the only reason that director remuneration/expenses, e.g., in 2012, seem to loom somewhat large within Eyecom – and, in truth, they are not tremendously large – is because the company was otherwise pretty much at rock-bottom in terms of what it was earning and how it was performing. Such a state of affairs is hardly “startling”; on the contrary, it is perhaps to be expected to some extent in any failing company.
PART 7: CONCLUSION AS TO SECTION 150 APPLICATION
24. For the reasons stated above, the court does not consider that the within s.150 application should be allowed to proceed. However, even if the court were required to make an adjudication under s.150 – and it does not consider that this is required of it – the court, again for the reasons stated above, would have found that Mr Browne has not evinced that want of honesty or responsibility that would have necessitated the issuance of a declaration of restriction under s.150. Nor would the court have found any other reason as to why it was just and equitable that such a declaration should issue.
Kavanagh v. Cooke & Anor
[2005] IEHC 219 (
Judgment of Mr. Justice John MacMenamin delivered the 29th day of June, 2005.
These proceedings pursuant to s. 150 of the Companies Act, 1990 were heard directly after proceedings of a similar nature against the first named respondent, John Cooke, relating to a company called Cookes Events Company Limited. While the factual background of this company is somewhat distinct I will, where necessary, refer to the applicable legal principles which were summarised in the case heard first in time, that is the proceedings relating to Cookes Events Company Limited (in Liquidation).
On 1st May, 2003 the company in the instant proceedings resolved at a general meeting that it be wound up. Mr. Tom Kavanagh, the applicant herein, was appointed liquidator. At that time, John Cooke and Paul Cooke were the directors of the company.
The only matter to be dealt with by this court relates to an application concerning the first named respondent herein, John Cooke.
Background
The first named respondent was a director of the company from his appointment on 11th May, 1992 until the date of its winding-up. The company itself was incorporated on 28th November, 1991. It operated Cookes Café, a restaurant at 14th South William Street, Dublin 2. The company traded successfully for a number of years. In 1997 a second restaurant known as “The Rhino Room” was operated on the first floor of the premises. From the year 2000 until April, 2002 (when a separate company Cookes Events Company Limited was incorporated) the company also operated concession restaurants at the National Museum of Ireland premises at Collins Barracks and Kildare Street and subsequently at the Irish Museum of Modern Art premises at the Royal Hospital, Kilmainham.
From 1998 onwards the company began to experience financial difficulties. The respondent attributes this to a number of factors. He contends the company’s cost base increased significantly. He states the turnover did not increase in line to cover these costs. He also states that additional costs included increased insurance, increased staff costs due to the introduction of the National Minimum Wage, an increase in wage costs for experienced front of house and restaurant staff and a greater necessity to use recruitment agencies which led to increased fees.
Furthermore, the first named respondent contends that due to an underestimation of the amounts payable to the Revenue Commissioners there occurred a substantial shortfall built up in the 1997/8 tax year. This liability was paid in the first instance by direct debit and the sum paid was insufficient to meet the company’s ongoing liabilities. As a result, a substantial shortfall of approximately IR£130,000 occurred in that year. This liability was “rolled into” following years.
The first named respondent states that the company took some steps to address the matter and entered into instalment arrangements with the Revenue Commissioners to pay off outstanding amounts which remained in place up to mid-2001. Mr. Cooke adds that throughout 2000 and 2001 regular meetings took place with the Revenue Commissioners and other major creditors of the company. He states that increases in staff costs, PAYE and PRSI made it difficult for the company to keep up with the arrears payments and also to pay taxes as they fell due.
In the course of affidavits sworn in these proceedings Mr. Cooke describes a number of steps taken to reduce revenue liabilities, including reduction in days of trading and staff levels, and an alteration in the market niche of the business to a less expensive “brasserie-style” establishment.
Attempts which were made to interest investors in this project in the year 2001 did not succeed. While the company decided to continue trading over the Christmas 2001 period, it ultimately ceased operations in March, 2002.
The applicant states that he put up the leasehold interest (held in his own name) on 14 South William Street for sale. He states that he intended to use the proceeds to discharge the company’s liabilities and gave undertakings to pay certain creditors of the company, including the Revenue Commissioners, G.E. Capital Woodchester Finance, Grants of Ireland and the Bank of Ireland out of the proceeds of the sale of the leasehold interest. On the date in question the Revenue Commissioners were owed €259,155.86; G.E. Capital Woodchester Finance were owed €26,805.89; Grants of Ireland Ltd. were owed €21,726.62 and Bank of Ireland €12,000.00.
It was originally estimated that the leasehold interest in the premises might yield between €700,000 and €900,000. On a number of occasions Mr. Cooke contends, offers for sale came close to fruition but none was completed.
He states that in early 2003 in the light of lack of interest in purchasing the leasehold, he decided not to sell it and instead to re-visit the idea of re-opening Cooke’s Café as a brasserie. He states that the Revenue Commissioners agreed to release him from his undertaking in circumstances where he did not proceed with any sale of the lease.
In February, 2003 however, on reviewing the financial position of the company and on the recommendation of Jane Cathcart & Associates, Financial Advisers, he took further advice from Melin & Associates, Chartered Accountants. It became clear that re-opening the restaurant was not a viable option for the company and consequently, on the advice of Melin & Associates, he took steps to have the company wound up.
Liquidator’s Concerns
In the course of his affidavit the liquidator identifies a number of areas of concern regarding the first named respondent’s conduct as managing director of the company.
By way of preliminary the liquidator points out that on 2nd November, 2002, a fire occurred in the Liffey Trust Centre, Sheriff Street, Dublin, 1, where the majority of the books and records of the company were held. These books and records were stated to be destroyed in this fire. He was presented with a number of records that included some creditor invoices and statements, some bank statements, and miscellaneous items of correspondence. However, he states the records are not sufficient for him to build a picture of the company and its overall state over the last three years since the last set of audited accounts. The absence of such material also affected his ability to substantiate a debt that was outstanding from Cookes Bakery Limited, as referred to in the statement of affairs prepared by the directors.
The largest asset disclosed in the statement of affairs was a debt due by Cookes Bakery Limited, the company of which the first named respondent is also a director. According to the statement of affairs there was an amount due from Cookes Bakery Limited of €13,865.00 and lease payments due for Cookes Bakery of €9,012.00, giving rise to a total of €147,662.00. According to the statement of affairs these sums are due and owing by Cookes Bakery Limited.
The first named respondent disputes the indebtedness and has also submitted a counterclaim on foot of Cookes Bakery Limited which, in the view of the liquidator has not been substantiated to any extent. The first named respondent has informed the liquidator that Cookes Bakery Limited was in severe financial difficulties and not in a position to pay the sums due and owing to the company.
Non-filing of statutory accounts
The last set of accounts lodged in the Companies Registration Office was for the year ended 31st May, 2000. Turnover for that year was recorded in the accounts at IR£1,049,550.00 (€1,332,654.00) with a retained profit for the year of IR£54,272.00 (€68,911.00). There were no audited accounts submitted to the Companies Registration Office subsequent to this date. No accounts after the year ended 31st May, 2000 were prepared. The first named respondent has stated to the liquidator that the reason for this was that a significant amount of money was due to auditors which the company was not in a position to discharge. Consequently the auditors were not prepared to prepare any further accounts until such time as the amounts due were discharged. Investigations also showed that no management accounts were prepared by the company since year ended 31st May, 2000. The liquidator considers that the directors were not in a position accurately to state the financial position of the company during the last three years of trading at a time when the company was encountering financial difficulties.
Discrepancy between statement of affairs and the actual realisable assets
At the creditors’ meeting of 1st May, 2003 a statement of affairs prepared by the directors showed that the total deficit of the creditors was the sum of €474,362.00 which included expected realisable assets of €197,662.00. However, the only assets in fact realised in the liquidation were fixtures and fittings of €6,897.00. Therefore it is suggested that a more realistic deficit is €665,127.00.
Revenue liability
There is, according to a statement from the Revenue Commissioners a sum due to them of €280,180.07. A significant amount of the revenue liability is in respect of periods going back to May of 1999. Whilst the revenue liability was allowed to accumulate over a number of years as disclosed in a Revenue Commissioner’s print-out, the evidence shows that other creditors were paid during those periods, including the landlord of the premises.
It is also to be noted that the lease was not in the name of the company but in the name of the first named respondent. However, it is described as an asset in the statement of affairs. No sum has been realised by the liquidator in respect of this asset. In response to these concerns the first respondent states that the company employed an in-house book-keeper who managed the weekly payroll, processed supplier payments, carried out bank reconciliations and produced monthly management accounts. He states that the directors had access to monthly management reports including analysis of revenues costs and expenses, management profit and loss statements, weekly analyses of sales and payroll costs, weekly and monthly analyses of VAT and monthly analysis of purchases. The first respondent states that Ms. Lulu Pringle was involved in this role from 1999 to 2002. In addition he says that the company employed firms of accountants to carry out annual audits and also to provide general financial advice on a consultancy basis. The respondent contends that there was in place a management team consisting of a manager of Cookes Café, an office administrator and manager of the Rhino Room. He refers to copies of minutes of management meetings. He says he discussed the company’s finances and cash flow with Lulu Pringle on a weekly basis. He states that at all times he tried to ensure that proper procedures were followed by management and staff, and that he met with the company’s accountants, Donegan and Associates, approximately every five to six weeks and discussed the company’s financial situation.
As in the case of Cookes Events Limited, the respondent states that the absence of substantial quantities of records is attributable to the fire which took place on 1st November, 2002, at the Liffey Trust Centre, Sheriff Street, Dublin 1. Although it was possible to reconstruct much of the company’s records from subsequent invoices obtained from suppliers, the respondent accepts that the books and records provided to the liquidators were in some ways insufficient although he contends that this was due to the fire.
The debt due from Cookes Bakery Limited
Regarding the debt due from Cookes Bakery Limited the respondent accepts that the position as set out in the statement of affairs was incorrect and that the liquidator has correctly set out the true position. He says this was due to the error in preparation of the statement of affairs prepared by a self-employed accountant named Cian O’Meadhra, who assisted the company in its preparation in April, 2003. The first respondent contends that this document was prepared in a degree of haste for the creditors meeting. He further states that he believes that arising from a meeting with the liquidator on 29th October, 2003, that it is accepted that the maximum sum owed to the company by Cookes Bakery Limited was approximately €46,000.00.
In affidavits sworn in the within proceedings Ms. Lulu Pringle, the former accounts administrator of Cherby, states that this underestimate occurred as a result of what are stated to be incorrectly entered transactions, simple data entry errors, and an incorrect beginning balance on an accounts software package system. These errors, she states, led to an overestimate of the balance due by Cookes Bakery Limited to Cherby Limited in the statement of affairs of approximately €73,000.00. Additionally Ms. Pringle considers there are a number of additional deductions which should be made to this data including €6,120.00 relating to time spent by her while being paid by Cookes Bakery Limited on matters relating to Cherby Limited’s dealing with the National Museum of Ireland; and €16,376.00 driver’s wages for the transportation of food to and from museum functions. Ms. Pringle contends that while the driver was employed by Cookes Bakery Limited, he spent approximately half his working day on Cherby Limited’s work. Additionally she claims €5,600.00 petty cash payments are due for fuel for this driver. In a further affidavit Ms. Pringle also refers to the aged debtors ledger of Cookes Bakery Limited provided to the liquidator at a meeting on 29th October, 2004, in order to ascertain the company’s position vis-à-vis Cookes Bakery Limited. She states that these reports clearly show the site to which various sales related and also included a separate statement for the old balance outstanding from the company. She states she offered the liquidator copy invoices for all transactions outstanding but that the liquidator accepted that these statements were sufficient.
The liquidator states that the invoices do not go any further to distinguishing between the debts due from the company and those due from Cookes Events Limited.
The leasehold interest
Mr. Cooke suggests that the reason for the misattribution of the ownership in the leasehold in the statement of affairs was due to simple error and haste in the preparation of this statement.
The liquidator points out that Mr. Cooke would have been well aware that the leasehold of the company’s premises was in his own name. In addition, as a director of Cookes Bakery Limited, he states he should have been aware of any counterclaim made by that company. The liquidator therefore, states that he does not find it acceptable that Mr. Cooke allowed a statement of affairs containing these errors to be put to the creditors of the company. He points out that during the year 1997/98 the company made the appropriate bi-monthly returns to the Revenue Commissioners and accordingly the amounts owed were properly calculated and available to the respondent. From the financial information available to the directors it should quickly have become obvious that the liabilities to the Revenue Commissioners were not being met thereafter and steps should have been taken to prevent the mounting of substantial arrears. While accepting that the company entered into an instalment arrangement with the Revenue Commissioners, the company failed to meet the terms of this arrangement fully and liabilities to the Revenue Commissioners continued to accrue. As of the date of liquidation the Revenue Commissioners were owed approximately €175,200.00. There will be no funds available for a dividend.
Moreover, the applicant points out that although the company ceased to trade in March, 2002, it was not put into liquidation until 1st May, 2003. During this time the respondent allowed the wages and salaries of the related company, Cookes Events Company Limited, to be processed through the company. The stated reason for this system was that Cookes Events Company Limited had difficulties in obtaining a VAT/PAYE number from the Revenue Commissioners.
From the incorporation of Cookes Events Company Limited in April, 2002, no returns were made by the company to the Revenue Commissioners. This resulted in the company’s liabilities to the Revenue Commissioners continuing to accrue.
It would appear that on the basis of undertakings provided by the respondent, the Revenue Commissioners did not take any steps to enforce payment of the arrears owing to them. As stated earlier, the premises were not sold and no payments were made on foot of these undertakings.
The leasehold of the prime retail premises at 14 South William Street remains in the name of Mr. John Cooke. The premises remained closed for a considerable period although it is stated on affidavit that Mr. Cooke is now currently involved in a new partnership operating a delicatessen and restaurant from the same premises.
While the directors had access to monthly management accounts, such information was, in the view of the liquidator, incomplete. It would not be sufficient for the directors to have a full understanding of the overall financial situation of the company.
For example the accounts exhibited for June to December, 2001 do not take into account the outstanding amounts due to the Revenue Commissioners. According to the profit and loss accounts, the company was making a net profit of €50,855.00 for the period. The applicant was not in a position to substantiate this information as he is not in possession of any primary books of account. However, he points out that according to the directors’ estimated statement of affairs the company was wound up with a deficit of €474,362.00.
With regard to the general administration of the company the applicant points out that there was no reference in the various minutes of management meetings to the overall financial situation of the company. Such minutes as have been provided are up until 23rd October, 2001 only. However, the company did not go into liquidation until 1st May, 2003. The applicant has not been provided with any board minutes relating to the period 1st November, 2002 to May, 2003, which show the type of financial advice taken by the directors in relation to the affairs of the company which was insolvent as of March, 2002.
With regard to the Cookes Bakery Limited debt, the applicant does not accept that the maximum amount owing to the company in suit was €46,000.00. The documents provided to him at the meeting aforesaid were not sufficient to prove the existence of a counterclaim. This was because the aged debtors’ ledger of Cookes Bakery Limited made no distinction at all between debts allegedly due from the company and debts allegedly due from Cookes Events Company Limited. Additionally, he noted, the majority of the transactions relating to the counterclaim occurred during the period 2002 to 2003, a time when the company had allegedly ceased to trade. The liquidator points out that the respondent was under an obligation to satisfy himself as to the accuracy of information provided at the creditors meeting. He points out that despite several discussions with Mr. Cooke regarding the settlement of the debtor balance outstanding, no monies have yet been received.
Finally, the liquidator points out that leaving aside the books and records of the company being destroyed in the fire, there are large sums of money owing to the Revenue Commissioners with liabilities dating back as far as 1997. While there is a deficit of €474,362.00 noted in the statement of affairs, this deficit will increase to €672,024.00 due to bad debts and the error regarding the ownership of the leasehold.
On behalf of the respondent it is submitted by Mr. Fitzpatrick B.L. that no case as to irresponsibility has been made up to the year 2000. He contends that the entirety of the applicant’s case relates to the period thereafter. He states that the applicant liquidator himself has been hindered in furnishing substantial quantities of information to the court by reason of insufficient information. This is attributable to the fire on 1st/2nd November, 2002. It is submitted that the revenue liabilities accrued at a point prior to 1st November, 2002 and that in order to deal with them Mr. Cooke retained professional advisers, Messrs. Melin & Associates, to which reference has previously been made.
It was further submitted that this matter must be seen in the context of the overall running of the company from the date of its inception, that is a period of thirteen years approximately. The evidence before the court is not sufficient to demonstrate systematic conduct on the part of the respondent sufficient to demonstrate an absence of responsibility. Moreover, there is no evidence that the respondent’s conduct had a bearing on the insolvency.
With regard to the discrepancies in the statement of affairs, the treatment of the leasehold, and the overstatement of the debt from Cookes Bakery Limited, were both attributable to haste. Any effort to mislead the creditors or the liquidator in the statement of affairs is denied. Moreover, it is submitted that the good faith of the respondent is demonstrated by the fact that he gave personal undertakings to the Revenue and other creditors to discharge the liabilities of the company from the proceeds realised from the sale of the leasehold. While not denying that the salaries, PAYE and PRSI of Cookes Events Company Limited were put through Cherby Limited, this was done in order to maintain staff employment levels lest by non-payment of employees the effective operation of the company would be undermined.
Consideration of issues
The legal principles applicable to this case have already been outlined in the judgment furnished by this court on the same day in s. 150 proceedings against the respondent, John Cooke, in the case entitled In the Matter of Cookes Events Company Limited (in Liquidation), Record No. 2004 COS 365.
Not the least remarkable aspect of this application is the extent to which matters have been uncontroverted by the respondent. The extent to which large revenue liabilities were allowed to accrue is not denied. Neither is the failure to take any effective countermeasures to deal with the position. No documentary evidence has been adduced as to the existence of board meetings between November, 2002 and May, 2003. No statutory accounts were produced after the year ended May, 2000. No annual returns were made.
Remarkably the company was allowed to incur liabilities in the name of another company, Cookes Events Company Limited. These liabilities included VAT, PAYE and PRSI. Effectively, Cherby Limited, the company in suit, although an empty shell was used as a mechanism in order to allow the new company, Cookes Events Company Limited, to trade. And no satisfactory explanation has been given as to the discrepancies which occur in the statement of affairs.
The court does not accept the explanation given that the misdescription of the leasehold as being an asset of the company was attributable to haste. Nor can one accept the explanation given as to the discrepancies in the treatment of the indebtedness of Cookes Bakery Limited. The additional details furnished in the affidavit of Ms. Pringle of alleged indebtedness by Cherby Limited to Cookes Bakery Limited clearly demonstrate the extent to which the first named respondent operated through a number of companies, almost interchangeably, in order to achieve his objectives.
No explanation or evidence has been given to the court as to the circumstances in which Mr. Cooke was released from his undertakings.
It is a remarkable fact that another company with which the first named respondent is continued to be associated, is trading in the same premises, even as of the date of swearing of the affidavits.
It also has gone uncontroverted that a substantial number of the transactions to which reference was made earlier took place in the period 2002 to 2003, at a time when the company in suit had already ceased to trade and was insolvent. The expedients which were adopted in order to permit Cookes Events Company Limited to trade demonstrate scant regard for the interests of the creditors of Cherby Limited.
The respondent contends that he put in place appropriate financial management procedures. I do not accept that this is so. As Managing Director he had a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable him properly to discharge his duty as a director. While he may have been entitled to delegate particular functions to others and to trust their competence and integrity, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of delegated functions.
It is clear also that there was a failure to comply with the obligations imposed on this company by the Companies Acts.
Decision
It may be that the respondent’s conduct could be regarded as having been so incompetent as to amount to irresponsibility. There is no doubt that the respondent in his conduct was responsible for the insolvency of the company and also for the deficiency of the assets disclosed at the date of winding up and thereafter. It is clear that the respondent displayed a want of proper standards. Additionally, by reference to the confusion between the affairs on Cookes Bakery Limited and the company in suit, it is clear that the respondent failed in his common law fiduciary to the company also.
I am satisfied that either the respondent knew as to the position of Cherby Limited or, alternatively, he ought to have known as to the matters which have been set out above. In either circumstance failure to act thereon and indeed his other actions whereby he used this insolvent company as a springboard to launch Cookes Events Company Limited, demonstrate that the respondent herein satisfies each of the tests outlined by Shanley J. in La Moselle Clothing Ltd. v. Souhali [1998] 2 ILRM 345 and the additional test laid down by Finlay Geoghegan J. in Kavanagh v. Delaney (re Tralee Beef and Lamb Ltd.) High Court, 20th July, 2004, Unreported, which are outlined in the Cookes Events Limited judgment.
Having regard to the foregoing, the court must conclude that the respondent failed to act responsibly in relation to the conduct of the affairs of the company. Nor is there any other reason why it would not be just and equitable that he should be subject to the restrictions imposed by the section.
In the circumstances therefore, I will grant the declaration sought on the notice of motion.
Signed: MacMenamin J.
Kavanagh v. Cooke & Anor [2005] IEHC 225 (29 June 2005)
URL: http://www.bailii.org/ie/cases/IEHC/2005/H225.html
Cite as: [2006] 1 ILRM 191, [2005] IEHC 225
[New search] [Help]
2005 IEHC 225
THE HIGH COURT
[2004 No. 365 COS]
IN THE MATTER OF COOKE’S EVENTS COMPANY LIMITED (IN LIQUIDATION) AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001
BETWEEN
TOM KAVANAGH
APPLICANT
AND
JOHN COOKE AND DEBBIE BYRNE
RESPONDENTS
Judgment of Mr. Justice John MacMenamin delivered the 29th day of June, 2005
In these proceedings the applicant seeks a declaration that the respondents, being persons to whom Chapter 1 of part VII of the Companies Act 1990 applies, shall not for a period of five years be appointed or act in any way, whether directly or indirectly, as a director or secretary, or be concerned or take part in the promotion of formation of any company unless that company meets the requirements set out in sub-s. 3 (of s. 150 of the Companies Act 1990 (as amended).
The applicant is the liquidator of the above entitled company, having been so appointed on 1st May, 2003. On the same date the company resolved at a general meeting of the members of the company that the company be wound up.
The Business & history of the Company
The company in question carried on the business of a restaurant. It traded as “Grass Roots Café” from the Museum of Modern Art, Dublin Castle, Dublin 2; the National Museum of Ireland, Kildare Street, Dublin 2 and Collins Barracks, Dublin 7. The company was incorporated in April, 2002 to facilitate an outdoor catering business and to tender for the concession contract to run the cafes aforesaid.
In order to place this application in context it is necessary however to examine the background of this company in the context of another company, Cherby Limited (in liquidation) also the subject matter of a similar application relating to the two respondents which was heard on the same day by this court.
Cherby Limited was incorporated on 28th November, 1991 and operated the well known restaurant known as “Cooke’s Café” at 14 South William Street, Dublin 2. It is agreed that this business traded successfully for a number of years. From 1997 a second restaurant known as “The Rhino Room” was operated by the company on the first floor of the premises. From the year 2000 until April, 2002 (when a separate company, Cooke’s Events Company Limited was incorporated), Cherby Limited also operated concession restaurants at the National Museum of Ireland premises at Collins Barracks in Kildare Street and subsequently at the Irish Museum of Modern Art premises at the Royal Hospital Kilmainham as predecessor to Cookes Events Company Ltd.
While the business problems of Cherby Limited do not form part of this application it is sufficient to say that from 1998 onwards it is common case that Cherby Limited was encountering financial difficulties. In 2002 the decision was taken to incorporate this new and separate company to deal with what for brevity will be called the “museum businesses” as described earlier. The catering for the concession at the three sites, at Collins Barracks, Kildare Street and Royal Hospital Kilmainham was carried out at a kitchen located at the Liffey Trust Centre, Sheriff Street, Dublin 1.
At the time that Cherby Limited had entered into the concession contract for the Collins Barracks and Kildare Street premises the National Museum of Ireland had, as Mr. Cooke avers, committed itself to undertaking various improvements and renovations to both premises. He states that in the case of the Kildare Street premises these works were not carried out until 2002. In the case of Collins Barracks, the footfall and customer numbers envisaged by the museum did not materialise. In recognition of this Mr. Cooke states that three months free rent was given at that site.
The first named respondent states that during the period after incorporation a number of other external factors adversely affected the company’s performance. These included an increase in insurance costs, an increase in the national minimum wage and additional costs incurred due to the fact that it was not possible to carry out catering on-site at the Collins Barracks and Kildare Street premises. Consequently Mr. Cooke states it was necessary to locate and fit out a new kitchen facility at the Liffey Trust Enterprise Centre at a cost of approximately €40,000.
The first named respondent John Cooke also states that the company experienced ongoing difficulty and delay in obtaining sums outstanding from the National Museum of Ireland. This had serious cash-flow implications for the company.
In the light of these difficulties the first named respondent states that a review was undertaken as to whether the company should continue to operate the cafés in Collins Barracks and Kildare Street. The view was taken that, because the company had fixed overheads in relation to the kitchen facility at the Liffey Trust Centre, and also in relation to employing a general manager and head chef, it would not have been viable to operate only one café at the Museum of Modern Art. Consequently the company prepared proposals to tender for running in-house canteens or other business premises including An Bord Bia, if the company decided to close the two cafes at the of the National Museum of Ireland premises.
On the 1st November, 2002 a serious fire occurred at La Boulangerie Des Gourmets Bakery at the Liffey Trust site. This fire destroyed the entire site including the company’s catering kitchens, much of its books and records, catering equipment, foodstuffs, uniform, linen, furniture, crockery and glassware used for off-site events as well as promotional material and literature. It is stated that the fire adversely affected the company’s business performance. While the three cafés remained open, they were only able to serve a very limited offering over the following ten day period of drinks, pastries and bought-in sandwiches and cakes. This, it is stated, by the first named respondent resulted in an estimated loss of sales of €10,000 over the ten day period, along with a loss of goodwill amongst regular customers. The first named respondent states that even after the company recovered from the fire its sales were approximately €10,000 a week compared to the €16,000 per week achieved prior to the fire.
The company moved its kitchen facility to premises formerly occupied by Cherby Limited at 14 South William , i.e. the Cooke’s Café site, which premises had by mid-November 2003 been closed for seven months. It took almost two weeks and cost approximately €17,000 to set these premises back in a position to meet health and hygiene, requirements, reconnect utilities and put insurance in place.
The first named respondent states that while the company in suit carried insurance, the settlement from the fire did not materialise until April 2003 and did not cover the company’s total loss of business immediately following the fire or its ongoing loss of business. Furthermore while such insurance covered the company’s equipment it only extended to the book value thereof which was less than its replacement value.
In the circumstances, and following the advice of Jane Cathcart and Associates (a company brought in to assist in the preparation of day to day accounts) and Melin and Associates (also financial advisors to the company) the company’s management team came to the conclusion in April 2003 that the business was, in essence, insolvent.
The first named respondent states that “this was due variously to unfulfilled commitments from the museums with regard to fit out and facilities which adversely affected sales, difficulty in obtaining timely payment of sums outstanding from the National Museum of Ireland which affected cash flow, higher unanticipated costs, and the impact of the November 2002 fire.”
The first named respondent contends that prior to the fire on 1st November, 2002 the company had kept proper books and records. Initially he says Ms. Lulu Pringle who had been Accounts Administrator for Cherby Limited was responsible for maintaining the books and records of the company. He says that she furnished monthly management reports, analysis of revenues costs and expenses, management profit and loss statements, weekly analysis of sales and payroll costs, weekly and monthly analysis of VAT, and monthly analysis of purchases. The first named respondent also states that management accounts were supplied by the company to the museums quarterly, as per the terms of the concession contracts.
In August, 2002 Ms. Pringle became Acting Manager of Cooke’s Bakery Limited another company in which the first named respondent was the major shareholder. She was appointed permanent manager to that company in September 2002. Thereafter, in October 2002, Mr. Cooke states that the company’s book-keeping, including the preparation of payroll, management accounts, VAT, PAYE and PRSI returns was outsourced to Jane Cathcart and Associates who carried out this task from October 2002 until February 2003.
It will be recollected that the fire in question occurred on 1st November, 2002. Mr. Cooke states that this fire occurred shortly before up to date financial documentation and accounts in relation to the company could be furnished to Jane Cathcart. Ms. Cathcart, who carries out this service for a number of other restaurants in the Dublin area, was appointed to carry out this function in September, 2002. Notwithstanding this, the first named respondent states that Ms. Cathcart endeavoured to obtain proper accounting information, prepared sales analyses and bank reconciliations, and provided the directors with monthly profit and loss statements for the months from September, 2002 until February, 2003. She also prepared a profit and loss statement from the period September, 2002 until January, 2003.
In response to points raised by the liquidator, the first named respondent states that the directors, including the first named respondent, had extensive financial information available in order that informed decisions were made in relation to the company. This, it is contended, is evident from a substantial amount of documentation exhibited with the affidavits. However, Mr. Cooke states that the vast bulk of the company’s records maintained up to November, 2002 were destroyed by the fire.
It is further stated that in addition to maintaining proper books and records the company had a management team which met on a monthly basis, made up of the following individuals: John Cooke – Executive Chef and Director, Debbie Byrne – non-executive Director, Rachel Clancy – General Manager, Damien Sheridan – Head Chef and Lulu Pringle – in-house Accounts Administrator until August, 2002.
At these meetings it is stated the company’s accounts were considered and its financial position was reviewed. In addition to the General Manager, each site had a supervisor and assistant supervisor who the first named respondent states oversaw the staffing and day to day running of the cafés.
Prior to the appointment of Jane Cathcart & Associates the company for a number of months had, encountered difficulty in obtaining a VAT/PAYE number from the Revenue Commissioners, despite application having been made. Consequently, the court was informed the salaries and wages for the company in suit were processed through Cherby Limited.
In November, 2002, shortly after the engagement of Ms. Cathcart, the VAT/PAYE number issued. Mr. Cooke states that given that when the VAT/PAYE number was issued it was already week 43 of the tax year, the decision was taken to continue processing the salaries and wages through Cherby Limited to the end of 2002.
From January, 2003 until the company was put into liquidation, salaries and wages were processed through Cooke’s Events Limited. Reference was made to sample copies of the payroll schedules prepared by Jane Cathcart & Associates. Mr. Cooke accepts that the said schedules for 2003 erroneously referred to Cherby Limited. However, he states the PAYE number is that of Cookes Events Limited. He states that “this was due to a system error”.
Mr. Cooke further states that, based on an arrangement which Cherby had operated with the Revenue Commissioners, it was intended that VAT and PAYE/PRSI returns would be made on an annual basis. P.35 forms were prepared by Jane Cathcart & Associates in respect of Cherby Limited and Cooke’s Events Limited for the periods ended 31st December, 2002. However, in Mr. Cooke’s words, “Events overtook the matter and these were never submitted”. However, he emphasises, both VAT and PAYE/PRSI were accounted for at all times.
One of the debts due to the company is owed by Cooke’s Bakery Limited, a company of which the first named respondent is a shareholder and Managing Director. According to the directors’ estimated state of affairs prepared by them at the time of liquidation, Cooke’s Bakery Limited owed the company €52,313.00 with the entire amount expected to realise. While the liquidator negotiated with the first named respondent regarding this issue, it soon became clear that the amount stated in the Statement of Affairs would be disputed by the first named respondent in his capacity as director of Cookes Bakery Ltd.
The first named respondent therefore suggested that there was a full counterclaim. This has not been substantiated to the satisfaction of the liquidator. Indeed the first named respondent has indicated to the liquidator that Cooke’s Bakery Limited was, as of September, 2004, in severe financial difficulty and it was not expected to be in a position to make any settlement to the liquidator. No more up to date information as to Cookes Bakery Limited has been provided to the court. It is accepted by the first named respondent that this debt was inappropriately dealt with in the Statement of Affairs prepared for the directors meeting. The net effect of this, it would appear, is that either no money is due and owing by Cooke’s Bakery Limited to the company in suit or, if there is, there is little or no likelihood of its being recovered or being available to the liquidator.
The position of the second named respondent
It is now necessary to deal with the position of the second named respondent, Ms. Debbie Byrne. She is the wife of the first named respondent. By affidavit sworn in these proceedings she describes her business experience, having worked for four multi-national companies over a period of fifteen years. She was promoted to the position of General Manager of the Irish subsidiary of L’Oreal, a large international cosmetics company. The Irish subsidiary encompasses six business units and has a turnover of €50 million with approximately 60 staff. Her responsibilities as General Manager included profit and loss responsibility for the business, setting business strategy, formulating the annual operating plan and three-year plan, and managing all supply chain, commercial, marketing and financial aspects of the business. As General Manager of the Irish subsidiary of L’Oreal she was a member of the U.K. board of L’Oreal from January, 2000 to July, 2004. She has been nominated and accepted as a member of the Institute of Directors in Ireland and has been accepted on to their “boardroom” panel.
It is important to point out that Ms. Byrne was appointed as a non-executive director only. There was no question of her taking an active role in the day to day management of the business and this was clearly understood, she states, by the first named respondent. Furthermore, Ms. Byrne states that she had no experience of the restaurant business and would have been unable to provide little practical assistance in its daily running.
Ms. Byrne points out that between April and September, 2002 the company had an internal book-keeper, Ms. Lulu Pringle, who provided her with monthly management accounts. Ms. Byrne was not a director of Cherby Limited, nor was she involved in its daily business affairs. She states that accounts were furnished to her by Jane Cathcart & Associates which in turn showed money being lodged to bank accounts, specifically a business account and a VAT account. In those circumstances she assumed, and had no reason to think otherwise, that all appropriate returns were being made to the Revenue Commissioners in respect of VAT.
The applicant liquidator fairly points out that he had understood that Ms. Byrne was the General Manager of the company. While preparing his report pursuant to s. 56 of the Company Law Enforcement Act, 2001, he endeavoured to contact her. However, it was not until Ms. Byrne was served with the proceedings that he became aware that she played a non-executive role in the company. He immediately wrote to the Office of the Director of Corporate Enforcement and so informed them. However, despite this additional information having been furnished this did not cause the Director to alter the decision that the liquidator should be not relieved of bringing proceedings against Ms. Byrne.
It is of course true that pursuant to s. 150 of the Companies Act, 1990, the onus lies upon a non executive director to demonstrate to the court that he/she acted honestly and responsibly in respect of the affairs of the company. However, having regard to the affidavit evidence and the submissions made I was satisfied that no prima facie case had been, or could be made out against Ms. Byrne on the basis of the information available to the court. Consequently I directed that she be dismissed out of the proceedings. Applying the test set out by Finlay Geoghegan J. in Kavanagh v. Delaney 20th July, 2004 (Unreported), there was no evidence that Mrs. Byrne had failed to inform herself about the affairs of the company or guide or monitor its affairs.
Were it to be held that a prima facie case had existed against the second named respondent, I am satisfied that on the basis of the evidence that she would have been in a position to demonstrate that, for herself, she had acted honestly and responsibly with regard to the affairs of the company in accordance with the five tests outlined by Shanley J. in the case of Re La Moselle Clothing [1998] 2 ILRM 345 at p. 350. Furthermore, in the event that I am wrong in any of the above, I would take the view that any evidence in relation to Ms. Byrne would come within the category of a commercial error or misjudgement as identified by the Supreme Court (McGuinness J.) in Re Squash Ireland [2001] 3 I.R. and not as a result of any irresponsible activity on her part. On the basis of the evidence her sole error, if error it was, was in allowing herself to become a director of this company at the time of its incorporation.
The allegations of the liquidator
The picture painted thus far on the basis of Mr. Cooke’s testimony would appear to be that of a company which had been dogged somewhat by misfortune, albeit one which was essentially profitable on a day by day basis. It is accepted that remarkably, the company was trading profitably on a month by month basis up to a point close to the decision to wind up. The profit and loss accounts for December, 2002 to the end of January, 2003 disclose a net income of €20,628.67. The profit and loss account to the end of February, 2003 discloses a net income of €29,312.18.
How then was the company insolvent? It is to this issue, and the linked point as to when the respondent should have been aware thereof that one must now turn.
In essence the liquidator puts the following matters before the court as being issues for consideration as to whether the first named respondent acted honestly and responsibly with regard to the affairs of the company.
Trading history
The company was incorporated on 8th April, 2002. In total it traded for thirteen months. During that period the deficit incurred was €420,000.00.
The debt from Cooke’s Bakery Limited
According to the directors’ estimated Statement of Affairs, Cooke’s Bakery Limited owed the company €52,313.00 with the entire amount expected to realise. The first named respondent, was Managing Director of Cooke’s Bakery Limited. He was in a position of conflict of interest in his capacity as a board member of both companies and especially with regard to his duties as a director of the company in suit as regards the realisation and/or recovery of the debt owed. Moreover, if it is accepted that the chances of recovering the Cooke’s Bakery debt are small to the point of unreality, the consequence thereof is that the total indebtedness incurred by the company of a thirteen-month period is €420,810.00 to which must be added the Cooke’s Bakery debt of €52,313.00.
Revenue liability
During the period of trading the company made no returns whatever to the Revenue Commissioners. Accordingly, from a Revenue Commissioners’ print out of 6th May, 2003, there was no PAYE or PRSI due. However, the liquidator has processed employee claims for company employees with the Department of Enterprise. This process has been outsourced to Jane Cathcart & Associates. Based on their records of 1st January, 2003 to 1st May, 2003 the liquidator submitted a P.35 form to the Revenue Commissioners showing a total of €35,203.00 in PAYE and PRSI deductions which were not paid over to the Revenue Commissioners. Given that the company processed its payroll and VAT through Cherby Limited, the VAT number of Cherby Limited should have recorded all liabilities owed by both Cherby Limited and the company in suit. According to the Revenue Commissioners’ print out, neither company submitted returns nor discharged any monies for the entire period the company was trading. Annual VAT returns and PAYE/PRSI returns were due on 19th February, 2003. These were not filed. No satisfactory explanation has been furnished to the court for this situation.
The accuracy of record keeping
The Liquidator points out that the majority of the company’s financial information is stated to have been destroyed by the fire on 1st November, 2002. This may subsequently have caused difficulties in accurate financial reporting. Nonetheless, the information provided to the respondents by Ms. Cathcart was that the company was trading at a profit between as long ago as September, 2002 and February, 2003. This, as he points out, is in stark contrast to the final position reflected in the directors’ Estimated Statement of Affairs which recorded a deficit of €420,810.00 in the twelve-month period prior to the liquidation. As the applicant points out, with very considerable understatement, “It would appear that the accounts presented to the respondents were not a true reflection of the overall financial position of the company”. He adds that the accounts provided by Ms. Cathcart date from September, 2002 until February, 2003. However, the company did not go into liquidation until 1st May of the latter year.
Control of debtors
There appear to have been difficulties encountered by Cherby Limited in relation to commitments given by the National Museum of Ireland at their various premises from the outset. However, the company was incorporated on 8th April, 2002, almost two years after Cherby Limited entered into the concession contract with the National Museum of Ireland. The first respondent would have been well aware of the difficulties with the museum concession contracts at the time of incorporating the contract and, that steps should have been taken at the outset to ensure that there was adequate capital to deal with the situation. In the interests of this company Mr. Cooke should have acknowledged that control of debtors is a fact of business life and he should have been alert to the necessity of implementing and enforcing a strict credit control system to avoid the type of situations that occurred with the National Museum of Ireland. It would appear that it took the first named respondent some eighteen months to regulate the National Museum of Ireland accounts although this was one of the largest clients of the company.
Administration of the company’s affairs
In addition to the foregoing, the liquidator points out that, even accepting the absence of documentation caused by the fire, there is no documentation in regard to board meetings, even after the fire on 1st November, 2002. This is of particular importance in the light of the matters referred to above and particularly the evidence, as it was subsequently disclosed, regarding the company’s very substantial indebtedness.
In the circumstances serious questions arise regarding the reliability of the information furnished and set out in the accounts.
It is further pointed out on behalf of the liquidator by Mr. Neil Steen B.L., that the difficulties facing this company should have been evident even prior to incorporation in the light of the fact that they took over this business from Cherby Limited The issues and the problems which the company would face were already starkly evident. Even the minutes of the meetings which took place with the National Museum and the Museum of Modern Art demonstrate that the problems in credit control were not the only ones facing the company. Substantial issues were arising on a constant basis regarding the provision of the service by Cooke’s Events Limited. The reasons furnished for the inadequacies in the accounts, even having regard to the fire of 1st November, 2002, were inadequate. Take one example; it was unnecessary that there should be available opening balances in order to furnish profit and loss accounts.
Moreover, there was evidence that Mr. Cooke was in a position of conflict of interest whereby he was failing in his statutory and common law fiduciary duties to this company regarding the manner in which the Cooke’s Bakery Limited debt was listed as an asset, and/or the question as to whether there was a genuine issue regarding the recoverability of the debt or the existence of a counterclaim. Also as, Mr. Steen points out, the management minutes appear to pay little regard to the financial position in which the company found itself.
Mr. Andrew Fitzpatrick B.L. appeared on behalf of Mr. Cooke. He points out there were a number of issues facing the company. These have been outlined earlier. There was the issue of increased costs. The museum had to carry out renovation work in Kildare Street and elsewhere. A number of steps were taken by Mr. Cooke, to remedy the position. It was submitted are not indicative of want of responsibility although there may be evidence of commercial errors of judgment. But, Mr. Fitzpatrick submits, such errors are not evidence of a want of honesty or responsibility. The company must be seen as a going concern, and the conduct of the affairs of the company should not be seen from the point of view of hindsight only. The court must have regard to the increase in delivery costs, staff costs, insurance and national minimum wage as well as the various problems outlined with the museum sites. Moreover, one must have regard to the fact that the National Museum is a State entity and should, by reason of compliance with prompt payments legislation, have discharged its debts within 28 days. The evidence, it is urged, indicates a number of steps taken to ensure that the accounts were properly maintained, including the appointment of Ms. Pringle and thereafter the retention of Jane Cathcart & Associates. Mr. Fitzpatrick also draws attention to the fact that the company was demonstrably trading at a profit on a month by month basis. Insofar as there was an error in relation to the treatment of the Cooke’s Bakery Limited debt, this could not be seen as a want of honesty or responsibility. He points to the affidavit of Ms. Lulu Pringle on this point. Ms. Pringle states that the debt stated to be due from Cooke’s Bakery Limited resulted from the fact that a number of inter-company transactions were not taken into account at the time of the preparation of the Statement of Affairs. She states that reductions should have been made to account for sums properly due to the bakery company for products purchased on a daily basis in respect of the Irish Museum of Modern Art, a debtor balance of approximately €25,000.00, the Kildare Street site debtor balance of approximately €13,000.000, and Collins Barracks debtor balance approximately €3,000.00. In addition to that, she states that there are other inter-company transactions of approximately €3,000.00. As a result, approximately €2,000.00 is in fact due to the bakery by the company.
Consideration of the issues
Dealing with the last issue first, it is difficult to avoid the conclusion that the treatment of the Cooke’s Bakery Limited debt, whatever the veracity of the claim, is clearly indicative of three things.
First, the overall unreliability of the accounts; second, the conflict in Mr. Cooke’s role; and third, the appearance that Mr. Cooke ran each of these companies for his own benefit and without due regard to his duties as a director, to the company itself and to other creditors. They are a paradigm for the administration of the company.
Similar considerations apply to the accrued debts found to be due to the Revenue Commissioners for PAYE, PRSI and VAT. Doubtless there is a degree of validity in the points made for and on behalf of Mr. Cooke. It may be accepted that each of the factors identified above may have had a bearing on the company’s trading position.
But it is not possible to reconcile these contentions with two other factors. The first of these is a statement that the company was trading profitably on a month by month basis up to February, 2003. The second is the undeniable fact that this company, which had traded for a mere twelve to thirteen months, had a total deficit as stated in the directors’ Estimated Statement of Affairs, as €420,810.00.
Even accepting that books and records up to November, 2002 were destroyed, it would appear that during the entire trading period the company had no management or audited accounts prepared. Although there was no statutory requirement for the company to prepare such accounts, the failure to do so showed poor management as the directors could not be clear as to the financial position of the company during the period of trading. As a result it is not now possible to indicate a turnover for the company.
Putting the matter in the most stark terms, having regard to the extent of the indebtedness after thirteen months trading, either the first named respondent actually knew of the position or he ought to have known about it. And even accepting the validity of such steps as he took to ensure that there were profit and loss accounts produced from September, 2002 until February, 2003, no satisfactory explanation has been furnished to the court as to how and in what circumstances such substantial indebtedness accrued. Having regard to the time-span involved in this case, it is extremely difficulty to imagine that such indebtedness could arise by virtue of inadvertence, ignorance or even by the adoption of a policy of commercial tunnel vision.
The fire which occurred on 1st November, 2002 may explain the absence of accounts but it does not explain what occurred. Nor does it explain the absence of any satisfactory explanation for these areas of concern.
Legal principles
It is now necessary to turn to the legal principles applicable in an application of this type.
Section 150(2)(a) of the Companies Act, 1990 identifies the issues as to which the first named respondent must satisfy the court so as to avoid a restriction order being imposed:
“(a) that the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section.”
No allegation has been made on the evidence that the respondent has not acted honestly. Thus the issue for decision is whether or not the respondent has acted “responsibly”.
The appropriate standard to be used in determining whether directors have acted responsibly was considered by the Supreme Court in the case of Re Squash (Ireland) [2001] 3 IR 35 in which McGuinness J. emphasised:
“In the case of all companies which become insolvent it is likely that some 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.”
In deciding whether a director is unfit McGuinness J. quoted a passage from the English case of In Re Lo-Line Motors Limited [1998] B.C.L.C. 698, 703, a decision of Browne-Wilkinson Q.C., which was also quoted by Shanley J. in the case of La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM 345.
“The approach adopted in all the cases to which I have 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 has shown them to e 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 an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
Thus a director complying with his obligations under the provisions of the Companies Acts and acting with a degree of commercial probity during his tenure will not be restricted on the grounds that he has acted irresponsibly. In the case of Re Colm O’Neill Engineering Services Limited (ex tempore judgment, 13th February, 13th February, 2004) Finlay Geoghegan J. stated:
“What is also clear from the decisions to date is, firstly, that simply bad commercial judgment does not and will not be considered by the court to amount to a lack of responsibility by directors. Further, that the courts must be careful in considering applications under this section not to, as was described in one judgment, permit the conducting of witch-hunts against directors and, perhaps more importantly from the court’s perspective, not to view the matter with the inevitable benefit of hindsight which arises in the course of the liquidation. This latter observation is sometimes difficult to observe and (a misprint for “in”) practice as the actions or inactions of the directors which it is being suggested may indicate a lack of responsibility are inevitably considered by a liquidator with the benefit of hindsight and it is, perhaps, difficult for the court to avoid looking at it on occasion from that perspective.”
The primary source for the applicable principles to be considered in determining whether a director acted “honestly and responsibly” are to be found in the decision of the late Shanley J. in the case of La Moselle Clothing Limited v. Soualhi in which he set out the five well known criteria to which the court should have regard:
a) the extent to which a director has complied with the obligations imposed by the Companies Acts;
b) the extent to which the director’s 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; and
e) the extent to which the director displayed “a lack of commercial probity or want of proper standards.
To these tests have been added one additional, identified by Finlay Geoghegan J. in Kavanagh v. Delaney (re Tralee Beef and Lamb Ltd) (High Court, 20th July, 2004) where she supplements Shanley J.’s first test set out at (a) by an additional test, that is the extent to which a director has or has not complied with any obligation imposed on him/her not only by the Companies Acts but also with duties imposed by common law.
In the course of re Costello Doors Limited (Unreported, High Court, 21st July, 1995) Murphy J. stated that the maintenance of proper books and records in such a form as to enable directors to make reasonable commercial decisions, and the employment of appropriate experts went a long way towards proving that a director had acted reasonably. Similarly, in the case of Business Communications v. Baxter (21st July, 1995) Murphy J. opined:
“Ordinarily ‘responsibly’ 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 a reasonable commercial decision and auditor (or liquidators) to understand and follow the transactions in which the company was engaged.”
Application of principles of law
Primarily the responsibility for ensuring that proper systems of accounting are put in place lies with an executive director, in this case the first named respondent. It has been stated that from April to September, 2002 the company had an internal book-keeper. Upon Ms. Pringle’s taking up of a new position Jane Cathcart & Associates were appointed to manage the financial and regulatory aspects of the company’s business, including the management of payroll management accounts and revenue liabilities. But the financial “black holes” described above are unexplained.
It is contended that proper books and records were maintained, that the dissatisfaction expressed by the liquidator with the books and records available to him after his appointment, is attributable to the fact that most of the books and records of the company for the period up to November, 2002 were destroyed in the fire of 1st November. This in turn created knock-on difficulties for Ms. Cathcart in the preparation of management accounts.
With regard to the Revenue Commissioner’s liability it is contended that suitably qualified persons were appointed with responsibility in relation to the tax affairs of the company. Ms. Pringle and Ms. Cathcart had the responsibility for making returns to and payment of any advance due in respect of that PAYE and PRSI to the Revenue Commissioners. The accounts furnished showed money being lodged to two bank accounts, specifically a business account and a VAT account.
Granted all these factors are so, no satisfactory explanation has been given to the court (a) as to how the very substantial indebtedness of the company arose, (b) the evident deficiencies in the accounts and (c) the failure to ensure that proper provision was made for revenue and VAT liabilities.
Moreover, to point to absent accounts in no way discharges the legal onus which devolves from the respondent to demonstrate that he has acted responsibly toward the company.
I am satisfied that the respondent was well aware of the difficulties with the museum concession contract at the time of the incorporation of the contract. Steps should have been taken at the outset to ensure that there was adequate capital to deal with the situation. The respondent should have been alert to the necessity of implementing and enforcing a strict credit control system in order to avoid the type of situation that occurred with the National Museum of Ireland. This position did not come to him out of the blue. It was a position which already subsisted dating from the activities of Cherby Limited At the time of the company’s incorporation Mr. Cooke was aware that the National Museum of Ireland appeared unlikely to fulfil its commitments as to fit out facilities. This is a factor which should be taken into account in the financial planning of the company.
The fact that the company was trading at a profit between September, 2002 and February, 2003 lies in stark contrast to the final position reflected in the directors’ Estimated Statement of Affairs disclosing a minimum deficit of €420,810.00 in the ten month period prior to the liquidation. The only conclusion which can be drawn is that the accounts as presented were not a true reflection of the overall financial position of the company. This is not explained by the absence of records in the fire.
Moreover, the financial position of the company was such, that the extent of the indebtedness must or ought to have been clear to Mr. Cooke as from February, 2003.
Yet it was not until 1st May of that year that the company actually went into liquidation. Annual VAT returns and PRSI returns due on 19th February, 2003 were not filed. The position regarding the Cooke’s Bakery debt, however unclear, is indicative of a clear conflict of interest and a failure on the part of Mr. Cooke to realise his duties towards this, specific company.
Regrettably the court can only conclude that having regard to the foregoing matters, the first named respondent’s conduct was such as can only be regarded as being so incompetent as to amount to irresponsibility. Having regard to the factors identified above, it was for the first named respondent to recognise each of these issues and to act in the interest of the company and for the protection of its creditors. It is impossible to avoid the conclusion that the first named respondent was responsible to a very large degree for the net deficiency in the assets of the company disclosed at the date of winding up and thereby demonstrated a want of proper standards in the conduct of the company. Moreover, it is clear that in at least one instance (the Cooke’s Bakery Limited debt) the director did not comply with the fiduciary duties imposed on him qua director of the company.
The first named respondent had a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable him properly to discharge his duty as a director. While he was entitled to delegate particular functions to those below him and to trust their competence and integrity, the exercise of that power of delegation does not absolve him from the duty to supervise the discharge of such delegated functions. Moreover, issues such as delegation which may have a significant bearing in the defence of the activities of directors in larger enterprises can hardly be seen in the same light in this small company where the managing director either knew, must have known, or ought to have known, any relevant matter regarding the conduct of the company’s affairs and its overall solvency.
Having regard to the foregoing I regret I have no alternative but to grant the relief sought in the notice of motion, that is to direct declaration that John Cooke, being a person to whom Chapter I of Part VII of the Companies Act, 1990 applies shall not for a period of five years be appointed or act in any way, whether directly or indirectly, as a director or secretary or be concerned or take part in the promotion or formation of any company unless that company meets the requirements set out in sub-s.(3) of s. 150 of the Companies Act, 1990 (as Amended).
Kranks Korner Ltd -v- Companies Acts
[2008] IEHC 423 (19 December 2008)
RESPONDENTS
JUDGMENT of Ms. Justice Finlay Geoghegan delivered the 19th day of December 2008
The applicant is the Liquidator of Kranks Korner Limited (in voluntary liquidation) (“the Company”). By special resolution passed on 22nd April, 2004, it was resolved, pursuant to s. 251(1) (b) of the Companies Act, 1963, that the Company be wound up. It was proposed at that meeting that the applicant be appointed as Liquidator. A meeting of creditors of the Company was called and held on 23rd April, 2004. No creditors attended and it was adjourned until 30th April, 2004, and again there were no creditors in attendance. Accordingly, pursuant to s. 267(1) of the Act of 1963, the applicant was confirmed as Liquidator.
The respondents were the directors of the Company at the date of commencement of the winding up. A Statement of Affairs of the Company as of 23rd of April, 2004, was prepared by the respondents. This disclosed an excess of assets over liabilities of €10,594.12.
The Company carried on a restaurant business from premises at 6, Thomas Street, Limerick. The lease to the premises had been sold prior to the commencement of winding up and the Company had ceased to carry on business.
The applicant provided a report to the Director of Corporate Enforcement (“the Director”) pursuant to s. 56 of the Company Law Enforcement Act, 2001 in May 2005. By letter dated 14th October, 2005, he was informed by the office of the Director that, in respect of the reports submitted, he was not relieved of his obligation, pursuant to s. 56 (2) of the Act of 2001, to make an application pursuant to s. 150 of the Companies Act, 1990 seeking the restriction of the directors of the Company. It was pointed out to him that he was therefore obliged to make an application pursuant to s. 150 of the Act of 1990, for the restriction of all the directors of the Company, within five months from the date of the receipt by the office of the report of May 2005, which was stated to have been received on 17th June, 2005.
The applicant did not bring the application pursuant to s. 150 until 25th January, 2007, when he issued a motion seeking a declaration of restriction of the respondents.
Thereafter, a number of affidavits were filed, both by the applicant and the second named respondent, and one affidavit from the first named respondent and from a Mr. Gearóid McGann, solicitor, in support of the respondents.
Those affidavits essentially raised two issues. The first was whether or not the Company was insolvent at the commencement of the winding up, or was, or is, insolvent in the course of the winding up and, secondly, if it was, or is, whether the respondents have satisfied the court that they had acted responsibly as directors in relation to the conduct of the affairs of the Company. On this latter issue there was really only one adverse matter brought to the attention of the court by the applicant, namely, the fact that the directors had permitted the Company to continue in business without insurance from a date that was initially thought to be 1st January, 2003, until the completion of the already contracted for sale of the property on 4th April, 2003.
The respondents following an exchange of affidavits issued a motion returnable for 18th February, 2008, seeking inter alia an order dismissing the application on the grounds that the Company was, and is, solvent and, accordingly, did not meet the requirements of s. 149 of the Companies Act, 1990. In the alternative, they sought an order striking out the application on the grounds that the decision of the Director not to relieve the Liquidator was predicated on an erroneous assertion in the s. 56 report submitted, as personal injuries claims against the Company were then covered by a policy of insurance. On 3rd March, 2008, having read all the affidavits in the substantive application and in support of the motion and, having heard counsel for the applicant in relation to the substantive application without determining the issues on the respondents’ motion, I determined on the facts then before the court, in all the affidavits then sworn, that the court was satisfied that no issue arose on the facts in relation to the honesty of the respondents and that the respondents had satisfied the court that they acted responsibly in relation to the conduct of the affairs of the Company.
By that time, the following material facts had emerged from the affidavits and information obtained principally by the respondents from third parties and, in particular, insurance agents, since the commencement of the application pursuant to section 150:
(i) The insurance of the Company, which at the date of the s. 150 application both parties appear to have believed expired on 1st January, 2003, in fact had been extended to 17th January, 2003. The importance of that extension was that there were two personal injuries claims notified against the company, one alleged to have occurred on 1st January, 2003, and the other on 14th January, 2003. The applicant had taken the view, both at the time of the making of the s. 56 report and the commencement of this application, that such claims were not covered by insurance.
(ii) The respondents had explained to the court, on affidavit, that the reason for which they had continued to trade without insurance after January 2003 was that they had contracted to sell the leasehold interest in the premises with a closing date in October 2002, but through no fault of the respondents the closing date had been deferred. There appears to have been a genuinely held belief that the purchasers were attempting to avoid completing the purchase of the leasehold interest in the premises. The respondents were advised by their solicitors that if they ceased trading it might permit the purchasers to avoid completing the contract to purchase the property. Further, despite what the court is satisfied were strenuous efforts to obtain a renewal of the Company’s insurance, they were unable to do so.
(iii) The respondents had obtained information, and in one instance secured agreement from the insurers, which appeared to exclude the potential liability of the Company for excesses pursuant to the insurance policies in respect of certain of the personal injuries claims still pending against the Company.
Having regard to the view which I formed that, even if s. 149 did apply to the Company, the directors had satisfied the court that they acted honestly and responsibly in relation to the conduct of the affairs of the Company. Hence the application to restrict them, pursuant to s. 150 of the Act of 1990, would be dismissed. I determined therefore it was unnecessary to decide upon the respondents’ motion to have the s. 150 application struck out.
The respondents then sought an order for their costs of the s. 150 application against the applicant. I adjourned the matter to allow counsel prepare short legal submissions on the issue of costs, as such an application raises difficult questions.
I heard submissions from counsel for the applicant and respondents on the issue of costs.
Section 150 of the Act of 1990 does not contain any express provision dealing with the order for costs which may, or should, be made by the court on an unsuccessful application, whereas in this instance, the applicant is a liquidator who made a report to the Director pursuant to s. 56 of the Act of 2001, and was not relieved of his obligation to bring the application and is therefore bound to do so pursuant to s. 56 (2) of the Act of 2001. In Murphy v. Murphy [2003] 4 IR 451, I concluded that in such an application O. 99, r. 1 of the Rules of the Superior Courts is applicable. That conclusion has been followed and applied by other judges of the High Court. It was not suggested by counsel for either party that I should revisit that conclusion.
The relevant provisions of O. 99, r. 1, are that the costs of the proceedings are in the discretion of the court and that, “the costs of every issue of fact or law raised upon a claim or counterclaim, shall, unless otherwise ordered, follow the event” (O.99 r.1 (4)).
Counsel for the respondents submits that I should apply O. 99, r. 1(4) (commonly referred to as the principle that “costs follow the event”) as meaning that the normal rule on a s. 150 application where, as in this instance, the respondents satisfy the court that they acted honestly and responsibly and the court refuses to make a declaration of restriction, as being that the respondents obtain an order for costs against the liquidator.
Counsel for the respondents relies upon the judgment of Peart J. in the matter of USIT Ltd. [2005] IEHC 481. In that decision, Peart J. refused to make declarations of restriction pursuant to s. 150 of the Act of 1990 against two respondent directors and, on the application for costs, approached the exercise of his discretion under O.99, r. 1, on the basis of the above principle that costs should follow the event, unless otherwise ordered, should apply, and found on the facts of the application that there was no special reason for which he should not make an order for costs in favour of the successful respondent directors against the liquidator.
Counsel for the applicant disputes this starting point and relies, in doing so, on the judgment of O’Leary J. in Stafford v. Beggs and Ors. [2006] IEHC 258.
That decision was on an application for costs by the third and fourth named respondents therein, where the Court had formed the view, on an application under s. 150 that they had acted honestly and responsibly and should not be restricted. In considering O. 99, r.1, and the question as to whether an application under s. 150 of the Act of 1990 comes within the type of claim envisaged by O. 99, r.1 (4), O’Leary J. stated:
“This possible interpretation is, in the view of the Court, supported by (but not dependent on) the description (amounting possibly to a qualification) of the issues falling within the rule within O. 99, r. 1(4) as relating to a ‘claim or counterclaim’. Can an application (pursuant to a legal duty) by a liquidator for adjudication by a court on the pre-liquidation (or post liquidation) behaviour of a director be properly called a claim or a counterclaim? The liquidator is merely the presenter of the application not a claimant or party with any interest in the outcome either for himself or on behalf of the creditors.
A comparable situation arises in criminal matters. When an accused in a criminal matter is charged with an offence he is under an obligation to use his/her funds to fight the case. In such cases the awarding of costs is very unusual and limited to cases where the prosecution has misbehaved in some way.
For all the foregoing reasons, the court is of the view that the proper application of O. 99, r. 1 of the Rules of the Superior Courts leads to a conclusion that costs should not be normally awarded to a director who satisfies the court that he/she should not be the subject of a restriction order under section 150.”
I would respectfully prefer the approach of O’Leary J. and agree with him insofar as he has determined that an application by a liquidator pursuant to s. 150(4), which is brought by reason of the obligation imposed on him by s. 56(2) of the Act of 2001 (as distinct from some decision of his own to so pursue the application), is probably not one which comes within what is envisaged in O. 99, r. 1 (4) as a claim or counterclaim for the reasons he states. I agree with the conclusion which follows that the courts should not, in such applications under s. 150, start from a point, where respondent directors, or persons to whom s. 150 applies by reason of the provisions of s. 149 of the Act of 1990, satisfy the courts that they acted honestly and responsibly, that the normal rule is that they be awarded their costs against the applicant liquidator.
However, I would respectfully differ from O’Leary J., if, in the final paragraph of the extract cited, he was intending to suggest that in all applications under s. 150 of the Act of 1990, where a respondent director satisfies the court that he should not be the subject of a declaration of restriction, that costs should not normally be awarded to such a director. Rather, it appears to me, that having regard to the highly unusual manner in which such applications come before the Court, i.e. an involuntary applicant who is legally bound to bring the application (on some occasions against views expressed by him), following submission of a report to the Director under s. 56 (1) of the Act of 2001, that the court should not start from a position where there exists a normal rule which applies to applications, but rather exercise its discretion in each case, having regard to the relevant facts and the statutory scheme.
There is a limited subset of applications pursuant to s. 150, where I have, in a number of ex tempore decisions, followed an approach which would almost amount to the “normal rule” to which O’Leary J. referred. Those were applications where there was no dispute that s. 150 of the Act of 1990 applied to the company in liquidation, and to the respondents as directors of the company in liquidation. Further, that the liquidator had put before the Director all the relevant facts when making his s. 56 report and the respondent directors had been given an opportunity of either commenting on those facts in advance or furnishing the liquidator with the relevant information in response to queries. In such circumstances, a liquidator cannot in any way be considered responsible for the commencement of the application under section 150. On the relevant facts, where the Director takes the view that the liquidator should not be relieved of his obligation to bring the application under s. 150, the liquidator is, as stated by O’Leary J., obliged, pursuant to s. 56 of the Act of 2001, to bring the application. The statutory scheme in such circumstances now requires persons who are, or were, within twelve months of the commencement of the winding up, directors of an insolvent company, to then satisfy the High Court that they acted honestly and responsibly if they are to avoid a declaration of restriction. If, they succeed in so persuading the court, it appears to me that it is an inevitable consequence of the statutory scheme put in place by the Oireachtas that they may have to bear their own legal costs of defending the application which the liquidator has been required to bring. There does not, in those circumstances, appear any justification for making an order for costs against a liquidator which would have to be borne by him, either personally, or if he was entitled to an indemnity out of the assets of the liquidation (and there were funds in the liquidation), effectively by the creditors of the insolvent company.
However, the starting point for the above analysis is both that there is no dispute that s. 150 applies to the company in liquidation and the respondent directors, and that the liquidator has put before the Director, when making the s. 56 report, all the relevant facts, following appropriate enquiries of the respondent directors. On the facts of this application, I have concluded that the court cannot start from such a premise.
The facts of this application are unusual, insofar as, on the date of commencement of the winding up, there existed a Statement of Affairs made by the respondents which showed the Company to be solvent. Nevertheless, the winding up was not, and is not, a members’ voluntary winding up. No declaration of solvency was made. It is a creditors’ voluntary winding up. The fact that it is a creditors’ voluntary winding up does not, however, impose an obligation on a liquidator to make a report to the Director under s. 56 (1) of the Act of 2001. That obligation only applies where the company is insolvent. Section 56 (1) provides:
“(1) A liquidator of an insolvent company shall, within 6 months after his or her appointment or the commencement of this section, whichever is the later, and at intervals as required by the Director thereafter, provide to the Director a report in the prescribed form.”
No issue arose in this application as to whether s. 56 (1) applies to a company which was not insolvent at the date of commencement of the winding up, but which subsequently became insolvent.
The applicant herein, for reasons which have not been explained, appears to have determined in May 2005 that he should make a report to the Director, pursuant to s. 56 (1) of the Act of 2001 notwithstanding the Statement of Affairs prepared by the respondents, showing the Company to have an excess of assets over liabilities. Further he did so without making any contact with the respondents or giving them any opportunity to express a view as to whether the Company was, or was not, insolvent, either at the date of commencement of the winding up or thereafter. It is not clear whether prior to making the report the applicant formed a definitive view that the Company was insolvent. The s. 56 (1) report has not been exhibited in the affidavits. The deponents have referred to extracts of what was stated by the applicant. It appears that he stated that: “the Company was solvent on the date of liquidation, save and except for pending personal injuries litigation”. He also stated, in that part of the form which requires him to indicate whether he was seeking to be relieved of his obligation to bring an application under s. 150 of the Act of 1990 (which he did not seek): “it appears that some of the personal injuries cases will not, or may not, be covered by insurance as a result of failure to renew”.
The applicant was informed by the Director by letter of 14th October, 2005, that he was not relieved of his obligation, pursuant to s. 56 (2) of the Act of 2001, to make an application pursuant to s. 150 of the Act of 1990. Nevertheless, the applicant did not write to the respondents until May 2006, and then only seeking an indemnity in relation to certain personal injuries claims which, it then appeared to him, might not be covered by insurance or subject to an excess. He made no reference to the potential application under section 150. It is of relevance to the manner in which I propose exercising my discretion on the application for costs that, in response to that letter, the respondents, through their solicitors by letter of 13th June 2006, indicated that they could not obtain insurance from 1st January, 2003, and in relation to the schedule of personal injuries claims sent them, stated: “the only claim which was not insured that our clients are aware of, is the claim of M. McCarthy”. They then made reference to the attempts made by the respondents to obtain a renewal of the insurance after 1st January, 2003.
At the time the applicant commenced the application under s. 150, the position of the respondents was that they did not have insurance from 1st January, 2003, and appeared to accept that there was one personal injuries claim which was not covered by insurance.
In his grounding affidavit, the applicant furnished a certificate indicating that the Company was solvent at the date of commencement of the winding up. However, he also exhibited the letter of 13th June 2006 and expressed the view at para. 5 of his affidavit that, by reason of the apparent lack of insurance in relation to certain of the claims: “I am unable to state with confidence that there will be sufficient funds to meet these claims if they are ultimately successful”.
In the initial replying affidavits sworn by the respondents, dated 11th May, 2007, they stated that, to their recollections, they did not have insurance from 1st January, 2003. There were a number of other factual disputes with the applicant. The respondents also set out fully the steps taken by them in relation to attempting to obtain the renewal of the insurance in 2003.
It was only in November 2007 that the respondents ascertained from their former brokers that insurance had, in fact, been extended up to 17th January, 2003. Those facts are set out by the first named respondent in her affidavit of 13th December, 2007. Whilst complaint is made by the respondents that the information discovered by them was information which could have been discovered by the applicant, the Court must also conclude that it is information which could have been discovered by the respondents when they received the letter from the applicant in May 2006, and prior to replying in June 2006 accepting that there was no insurance from 1st January, 2003. If that had been done, it may have been that the s. 150 application might have been avoided by a further report with different facts to the Director or a decision taken that the Company was not insolvent. Whilst, of course, a liquidator should make proper enquiries, it is the directors or former directors of a company who are best placed to ascertain the relevant facts as to what occurred whilst they were in charge of the company. Similarly, it is information which could have been obtained by the directors when first served with the s. 150 application in January 2007, and before they put in their first replying affidavits in May 2007, and inevitably set the full proceedings in train.
Having regard to the above facts, it appears to me that the liquidator failed to make appropriate enquiries before deciding to make the s. 56 report to the Director in May 2005, and failed to give the respondents any opportunity of commenting on what must have been his then determination that this was an insolvent company in respect of which he was obliged to make a report to the Director. The applicant is primarily responsible for taking the step which put in train the ultimate obligation to bring the s. 150 application. However, the respondents also contributed to the fact that the application was brought by failing to make all the relevant enquiries before responding to the letter of May 2006. This failure resulted in their accepting (as it subsequently turned out wrongly) that insurance was not in place from 1st January, 2003 and one personal injuries claim was not covered by insurance. The respondents further contributed to the length of the proceedings by not ascertaining the true position before they filed the initial replying affidavits in May 2007. The applicant was put to the expense of continuing to deal with proceedings which might otherwise have been resolved at an earlier time, by reason of this failure.
In all the circumstances of the unusual facts of this application, it appears to me that I should exercise my discretion under O.99 r. 1, by making no order for costs.
O’Doherty Advertising Limited -v- The Companies Act
[2006] IEHC 258 (14 July 2006)
JUDGMENT of Mr Justice Sean O’Leary delivered on the 14th day of July 2006
This is an application for costs by the third and fourth named respondents which arises consequential to a decision of this Court made in respect of an application under s. 150 of the Companies Act, 1990. The substantive application was brought by the applicant, who is the liquidator of Doherty Advertising Limited (“the Company”) having been so appointed by order of the High Court of 24th September, 2003. On that application the Court decided that the second to fifth named respondents should not be restricted as the
Court was satisfied that they had shown that they had acted responsibly and honestly and that there was no other reason why they should be restricted.
In Visual Impact and Displays Limited (in Liquidation) v Murphy & Others [2003] 4 I.R. 451 Finlay Geoghegan J. decided that the combined effect of the original provisions of s.150 of the Companies Act, 1990 and the amendment of that Act by the insertion of s.150 (4B) as provided by s. 41 of the Company Law Enforcement Act, 2001, did not remove the court’s discretion to award costs in accordance with the normal rule dealing with costs i.e. O. 99, r. 1.
This reasoning was followed by Peart J in In the Matter of USIT Limited and In The Matter of The Companies Acts 1963-2003 [2002 No 25 Cos] and also In the Matter of USIT World PLC and In The Matter of The Companies Acts 1963-2003 [2002 No 38 Cos] (unreported, High Court, Peart J, 16th November,2005).
This Court sees no reason to depart from the aforementioned decisions.
Further, the Court rejects any application that the effect of s. 150 (4B) is to limit the discretion of the court in applications falling outside the terms of that section. Specifically the Court rejects any suggestion that it is obliged, by the enactment of s.150 (4B), to award costs to a director who discharges the onus of proof. If such a departure from normal practice was intended the matter would have been addressed at the time s. 150 (4B) was enacted.
The Court is satisfied that the law remains that O. 99, r. 1 is the basis on which the courts must exercise their discretion.
Order 99, Rule 1 provides as follows:
“Subject to the provisions of the Acts and any other statutes relating to costs and except as otherwise provided by these Rules:
(1) The costs of and incidental to every proceeding in the Superior Courts shall be at the discretion of those Courts respectively.
(2) No party shall be entitled to recover any costs of or incidental to any proceeding from any other party to such proceeding except under an order or as provided by these Rules.
(3) ………
(4) The costs of every issue of fact or law raised upon a claim or counterclaim shall, unless otherwise ordered, follow the event.”
The Court is satisfied that (save for the exceptional circumstances envisaged by the Order) this is the applicable law in the present circumstances. It falls to the Court to apply that law in the context of a s.150 application.
The primary provision of the Order is that costs are at the ‘discretion of the court’. The Order further provides that the normal outcome is costs should ‘follow the event’.
The normal meaning ascribed to the Order is that the ‘successful’ party is awarded his/her costs against the ‘unsuccessful’ party. The outcome is described in the rule as the ‘event’. In the majority of cases before the court there is a ‘losing’ and a ‘winning’ side and the rule is applied in such a way that the unsuccessful party bears the cost of the action. Does this general rule have any application in the present case? It is clear that the directors feel that they have succeeded as they have proved to the satisfaction of the court that they had acted in an honest and responsible fashion. Therefore they submit they are justified in claiming that as they have won (i.e. were successful) they should as a matter of normal practice, get costs. But has anybody ‘lost’ (i.e. been unsuccessful)? Is there any reason why the applicant cannot also maintain that he was equally successful in the sense that he put before the court an application for the court’s determination and the decision of the court (irrespective of the outcome) is the fulfilment by him of his legal duty. When the necessity to make the application, on the instructions of the Director of Corporate Enforcement, is backed by a criminal sanction is the application itself not the ‘event’ in question rather than the adjudication of the court.
This possible interpretation is in the view of the Court supported by (but not dependant on) the description (amounting possibly to a qualification) of the issues falling with the rule within O.99, r.1 (4) as relating to a ‘claim or counterclaim’. Can an application (pursuant to a legal duty) by a liquidator for adjudication by a court on the pre-liquidation (or post liquidation) behaviour of a director be properly called a claim or a counterclaim? The liquidator is merely the presenter of the application not a claimant or party with any interest in the outcome either for himself or on behalf of the creditors.
A comparable situation arises in criminal matters. When an accused in a criminal matter is charged with an offence he is under an obligation to use his/her funds to fight the case. In such cases the awarding of costs is very unusual and limited to cases where the prosecution has misbehaved in some way.
For all the foregoing reasons the court is of the view that the proper application of O. 99. r. 1. of the Rules of the Superior Courts leads to a conclusion that costs should not be normally awarded to a director who satisfies the court that he/she should not be the subject of a restriction order under s. 150.
As is usual in cost matters in exceptional circumstances the normal rule need not be applied.
Is there a reason to depart from the normal rule?
In this case the Court was very critical of the inclusion of an allegation concerning the Dublin Daily matter as a complaint against the third named respondent. Further the Court was critical of the liquidator’s imprecise formulation of the issues to be met by the directors. On the other hand the absence of cash flow projections from November, 2002 to the middle of 2003 represented a real failure by the directors. Further the absence of formal board meetings was a legitimate issue to be raised at a s.150 hearing.
Further, in the view of the Court, in the context of the behaviour of the first and second named respondents (with whom the other directors had the misfortune to share a board room) it was extremely unlikely, even if the liquidator had acted with perfection, that he would have been relieved of his obligation by the Director of Corporate Enforcement to make a s.150 application in respect of each of the directors.
In all the above circumstances the Court will make no order as to costs.
In the Matter of Digital Channel Partners Ltd (in voluntary liquidation)
Tom Kavanagh v Timothy Cummins, Enda Kyne, Graham Penrose, Michael Carroll and Mahmud Hussein
2003 No. 256
High Court
1 This is an application brought by the liquidator under s.150 of the Companies Act 1990 in respect of Digital Channel Partners Ltd in voluntary liquidation and the application which I heard relates to four named respondents: the second to fifth named respondents respectively. Three of these were represented before me and the fifth named respondent has written a letter to the liquidator and I will return to that.
The company in question commenced trading in July 1999 and operated in the E-business sector. In the nature of this business it required significant funding in its start-up phase and undoubtedly it was in start-up phase when it ultimately failed and was put into liquidation on March 19, 2002.
The liquidator in his s.56 report to the Director of Corporate Enforcement dealt with not only the four named respondents who were before this court but also with a fifth named director, Mr Ronan Smith, who at the time of the commencement of the winding up had also been the chief executive officer of the company and had been appointed a director of the company on June 21, 2001. It is relevant to this application that in respect of Mr Smith the liquidator had expressed the view to the Director of Corporate Enforcement that Mr Smith had acted honestly and responsibly in relation to the conduct of the affairs of this company whilst a director and sought to be relieved from his obligation to bring an application under s.150. He was relieved of that obligation.
In relation to the four directors before this court the liquidator did not seek to be relieved and was not relieved. There is no dispute that this is a company to which s.150 applies and that each of the four respondents were directors within 12 months of the commencement of the winding up.
Of the three respondents who were represented before me it appears that I should distinguish in dealing with the facts between the position of the second named respondent, Mr Kyne, and the third and fourth named respondents, Mr Penrose and Mr Carroll respectively. Mr Kyne was not one of the original promotors of this company. It appears from the affidavit sworn by him in the proceedings that he had been employed by the company and was prior to June 2001 the head of human resources. At that time, in June 2001, Mr Kyne states on affidavit that there was a reorganisation in the company partly because of the proposed resignations of Mr Carroll and Mr Penrose and in the course of that reorganisation he became chief operating officer. Mr Smith had previously *39 been nominated as the chief executive officer and Mr Hussein, the fifth named respondent, became the financial controller. Each of the three of them were appointed directors of the company in June 2001.
On behalf of Mr Kyne it is firstly submitted that he sees no basis upon which the liquidator could have or should have distinguished between the position of Mr Kyne and Mr Smith in his assessment of whether Mr Kyne acted honestly and responsibly in the conduct of the affairs of this company as a director. Secondly, it is submitted that Mr Kyne did act honestly and responsibly and in particular that the two matters which are raised by the liquidator were matters effectively which had happened prior to Mr Kyne becoming a director of the company.
It is true to say that as between Mr Kyne and Mr Smith, Mr Kyne was a director of the company for a shorter period than Mr Smith. Mr Kyne resigned as a director and as an executive of the company on October 5, 2001. There appears to have been an error, and the liquidator takes no point in this in a B10 form which referred to November 5, 2001. It is accepted that he resigned on October 5, 2001.
Mr Kyne states in his affidavit that in the period that he was a director between June 2001 and October 2001 he effectively worked hard towards a potential examinership for this company and also for the putting in place of certain contracts relating to the company.
I am satisfied on Mr Kyne’s affidavit that he has discharged the obligation imposed on him by s.150 of the Act of 1990 of satisfying this court that he has acted honestly and responsibly in relation to the affairs of this company and in so far as the matters which are raised by the liquidator are concerned they are matters which substantially predate Mr Kyne’s involvement in so far as they affect the directors. I also find it impossible to see how any distinction could be made between the position of Mr Kyne and Mr Smith. In those circumstances I dismiss the application as against Mr Kyne.
Mr Carroll and Mr Penrose are factually in a different position. They were the original promotors or amongst the original promotors of the company and each had been directors of the company since July 1999. Mr Penrose resigned on June 22, 2001 and Mr Carroll resigned from his directorship on November 5, 2001. He resigned as an employee of the company in June 2001 but did remain as a consultant to the company for the reason, it is stated, of attempting to conclude a potential investment in the company which was under negotiation and in respect of which Mr Carroll was the relevant person who was primarily in contact with a Mr O’Keeffe of the proposed investor.
Having regard to the matters raised by the liquidator it seems to me that I can deal with Mr Carroll and Mr Penrose together. I must also then deal with what might be considered to be additional matters raised by Mr Penrose in respect of Mr Carroll. The first matter raised by the liquidator is a failure by the company both to make certain tax returns and a failure to discharge tax liabilities *40 due to the Revenue Commissioners.
In so far as the failure to make tax returns is concerned, whilst there was some dispute about this I think as a matter of probability the factual position is as stated in paragraph 13 of the second affidavit of the liquidator, Mr Kavanagh. He refers to certain P30s which are PAYE monthly returns, and with the exception of one in 2000 which I am prepared to accept may well have been an oversight, the failure to make returns commences in April 2001. In respect of VAT returns it is for a period commencing on November 1, 2001 that there is a failure to make returns.
In so far as there was a failure to pay tax as due, again there was some dispute but I am satisfied on the affidavit evidence that whatever arrangements had been entered into between the company and the Revenue Commissioners in respect of the actual payment of PAYE it appears to me that having regard to the undisputed averment in paragraph 28 of Mr Penrose’s affidavit that he was shown by Mr Carroll a tax clearance certificate as of January 2001 that at that stage the company was up to date with its tax payment to the Revenue Commissioners. Undoubtedly the company failed to make a significant payment to the Revenue Commissioners which appears to have been due on a P35 return on April 5, 2001, a sum of almost €1.5 million, and thereafter there were also failures to make payments in respect of subsequent periods with the exception of the period of the examinership.
The question is how should this failure be treated for the purposes of an application under s.150. The matters to which I must have regard under s.150 are well established and are as set out by the Supreme Court in Re Squash (Ireland) Ltd [2001] 3 I.R. 35, a decision approving the judgment of the late Shanley J. in La Moselle [1998] 2 I.L.R.M. 345.
There are, I think, two ways of looking at the failures to make tax returns. The failures to make tax returns are clearly in breach of the relevant Taxes Acts. Similarly the failure to make the payments are in breach of the Taxes Acts. The mere fact that a company is in breach for, as in this case, a relatively limited period will not of itself, it seems to me, indicate that the directors of the company have acted either dishonestly or irresponsibly in such a way as to preclude my concluding that overall they acted responsibly and honestly in relation to the conduct of the affairs of this company. Unfortunately and inevitably where companies are under significant financial pressure this may occur.
It appears to me that in relation to tax liabilities there must be something more than a limited failure over a period to indicate that the directors have acted irresponsibly. This has been put in a number of different ways and certainly in so far as there may be evidence that there either has been selective distribution or selective payment of liabilities of a company or indeed a total disregard of obligations to the Revenue or even a decision to effectively seek to use taxation liabilities for the purpose of financing a company, that of itself will normally *41 be indicative of the fact that directors have been acting at least irresponsibly.
I have concluded on the facts of this case that there is no such evidence. I am satisfied that this was a company where the directors had certainly put in place systems for both the making of tax returns and for the payment of tax liabilities and in reaching this conclusion I am significantly influenced by the fact that they were able to obtain a tax clearance certificate as late in the history of this company as January 2001. It is clear on the facts set out in the affidavits that by the time the spring or April of 2001 came that the company was in a very difficult financial position and unless the directors could have achieved the further round of funding which was being negotiated that they were in a very difficult financial situation.
The second matter raised by the liquidator relates to the size of the deficit in this company in what was a relatively short time of trading. There is undoubtedly a very significant deficit in the company. On behalf of the directors it is submitted that the company was effectively dealing with very large figures.
Also, and it seems more particularly on behalf of Mr Carroll, it is submitted that the directors were at all times acting responsibly in seeking to obtain funding for this company and ultimately took the step of seeking to have an examiner appointed in August 2001 when the funding was not available.
On behalf of Mr Penrose there is a similar submission made but his affidavit also seeks to attribute blame to Mr Carroll and to allege irresponsibility as against Mr Carroll in the manner in which the affairs of this company were conducted. It is clear from the affidavits that there was a significant dispute between Mr Carroll and Mr Penrose and it does not seem to me to be necessary that I should resolve those disputes for the purpose of this application.
On balance I have decided that Mr Carroll and Mr Penrose have discharged the onus placed on them of establishing that they acted responsibly as directors of this company and that the size of the deficit does not preclude me from reaching that conclusion. I do so partly and perhaps significantly on the basis of the examinership which was put into place in the autumn of 2001 and the fact that in the examinership there was a scheme approved. Further, if the investment envisaged in the scheme had been put in place it was considered by the examiner, who was a completely independent person, that this company should survive. That seems to me to be indicative of the fact that the company whilst it was in a difficult financial situation was certainly a company which had been managed in a reasonable manner and was capable of surviving if the investment was put in place, alongside of course the scheme with the accepted reduction of claims being made by the creditors. For reasons which do not at all relate to the performance of Mr Carroll and Mr Penrose that investment was not put in place and therefore no blame can be attributed to them for this.
I have concluded that both Mr Carroll and Mr Penrose have discharged the onus placed on them by s.150(1) of establishing that they have acted honestly and responsibly in relation to the conduct of the affairs of this company and I *42 will dismiss the application against them.
In relation to Mr Hussein who is not represented before the court and who has indicated that he would not be appearing I should say that he is not resident in this jurisdiction. He has sent to the liquidator a letter in which he has indicated that he does not consider that he did not act honestly and responsibly.
I am prepared also to conclude on balance that Mr Hussein has discharged the onus and I will dismiss the application as against Mr Hussein.
I exercise my discretion to award costs to Mr Penrose and Mr Carroll. It is quite clear the liquidator had put the relevant matters before the Director of Corporate Enforcement.
Mr Kyne is perhaps in a different position.
The statutory structure of s.56 undoubtedly creates difficulties for liquidators, they are under an obligation to make a report to the Director under s.56 of the Corporate Enforcement Act in respect of each of the directors. There is a prescribed form of the s.56 report in which the views of the liquidator are sought, including at question 22(g) as to whether the person demonstrated to the liquidator that he or she has acted honestly and responsibly in relation to the conduct of the affairs of the company and they are then asked to provide on a separate sheet details of the relevant facts.
In this instance, I am satisfied that the fact that the liquidator was obliged to bring this application as against Mr Kyne stems from the fact that he replied in the negative to question 22(g) in the report to the Director. Further that in the supporting information he did not in any way address the specific role which Mr Kyne played as a director in this company, there is no evidence that he put the matters before Mr Kyne or gave Mr Kyne an opportunity of commenting.
It does seem to me that whilst as I previously indicated this court has a very difficult choice to make on an application for costs having regard to the statutory scheme it appears to me that in exercising the discretion which I do retain under Order 99, rule 1 that on this application as against Mr Kyne it appears to me that costs should follow the event, notwithstanding the statutory scheme. I will make an order for costs to be taxed in default of agreement in favour of Mr Kyne against the applicant Mr Kavanagh.
Ferris -v- Hui & ors
[2016] IEHC 227 (25 April 2016)
JUDGMENT of Mr. Justice Tony O’Connor delivered on the 25th day of April, 2016
The applications
1. At the end of the Hilary Term in March 2016 this Court heard applications pursuant to s.819 of the Companies Act, 2014 (“the 2014 Act”) [previously s.150 of the Companies Act. 1990 (“s. 150”)] for declarations that the respondents shall not be appointed or act in any way as directors or secretaries of a company unless such a company had allotted share capital of not less than €100,000 where it is a private limited company and €500,000 where it is a public company.
Preliminary issue
2. Ms. Corcoran, counsel for the respondents, confined the preliminary objection about the extension of time for the bringing of this application to the effects of the cumulative delays arising which may be gleaned from the following chronological summary:-
3.3.2010 – The applicant liquidator (“the liquidator”) was appointed at a meeting of the creditors to Lacrombs Limited (“the company”).
3.9.2010 – Was the deadline for the liquidator to provide the director of corporate enforcement (“the director”) with a report under s.56(1) of the Company Law Enforcement Act 2001 (“the 2001 Act”) which envisages further reports as the director requires.
11.12.2014 – Was the date of receipt by the director of the liquidator’s 9th report under s.56 of the 2014 Act according to the director’s letter dated 28th of April, 2015. The liquidator referred to the date of submission of this report as being 5th of December, 2014.
13.3.2015 – The director requested documentary evidence to support the information set out in the s.56 report.
28.4.2015 – Was the date of the director’s letter to the liquidator which informed him that he was not relieved from the obligation to make an application under s.150.
22.6.2015 – Was the date of issue of the notice of motion seeking the declarations with an initial return date of the 20th of July, 2015.
Submissions of counsel for the respondents
3. Counsel for the respondents pointed out that even if the 9th report was to be taken as the report to be used for the purpose of s.56(2) of the Company Law Enforcement Act, 2001 (“2001 Act”) (1), the notice of motion for this application ought to have been issued in May, 2015.
4. Counsel then emphasised that the delay in commencing this application and having this application determined was inordinate and inexcusable while causing injustice to the respondents.
5. It was also mentioned that no reference was made in the notice of motion seeking an extension of time in accordance with High Court practice direction HC28 which took effect from the 24th of March, 2003. The applicant’s affidavit sworn on the 16th of June, 2015 did indeed aver that these applications “had to be issued by 5 May, 2015” and that counsel was instructed immediately following receipt of the director’s letter of the 29th of April, 2015. Reference was then made in the applicant’s affidavit to advice from the director’s office that “in practice a reasonable delay in submission” of this type of application has no implications and that follow up letters from the director do not issue “until at least six weeks after the deadline for submitting the application has passed”.
6. The Court was not informed about the content or dates of the nine reports. The only reasons suggested for the approximate five year delay from the date of appointment of the liquidator to the issue of the notice of motion for these applications were:-
(1) The alleged lack of cooperation of the respondents; and
(2) the absence of a complete set of books and records for the company which impeded the liquidator’s investigations.
Background
7. The second named respondent in his replying affidavit sworn on the 25th of November, 2015 explained that his father (the first named respondent) [“the father”] moved with his mother (the second named respondent) [“the mother”] to Dublin in 1969. The father worked in restaurants and then started his own restaurant in Dun Laoghaire in 1972 followed by a restaurant in Stillorgan in 1982. All went well until the landlord of the Stillorgan restaurant informed the father that he was going to seek a 100% increase in the rent for the Stillorgan restaurant.
8. The respondents through the company which had been incorporated in 1991 planned then to move to a purpose built restaurant in January, 2007. Disaster struck in that staff expected from Sichuan in China were caught up with the effects of an earthquake. On top of that the economy in Ireland collapsed which hit the catering industry very hard.
9. More ill fortune hit the respondents. Since the appointment of the liquidator on the 3rd March, 2010, the father was diagnosed with Parkinsons and he is now confined to a wheelchair with severe mobility and speech restrictions.
10. The mother explained in the replying affidavit that she moved to the United Kingdom in 1965 where she trained as a nurse for two years before moving to Ireland. She only became a director of the company in 2004 as the second named respondent (her son) intended to pursue other interests and the law required the company to have two directors. Significantly she referred to the fact that her family invested over €900,000 in the business and that she relied upon the father to prepare and sign the accounts.
11. The second named respondent explained that the father kept hand written records of the company’s transactions and did not maintain the records on any computer software programme for the accounts. The father disposed of his hand written records following the liquidation of the company in the mistaken belief that they were no longer required. Therefore it has not been possible to recreate the records.
The liquidator’s focus
12. The liquidator understandably brings to the attention of the Court:-
(1) the absence and destruction of the records for the company;
(2) the company’s claim for €68,587 from a company with common directors and shareholders as those which the company had.
13. Against this the liquidator acknowledges that the father made lodgements to the company after the 31st of July, 2008 in the region of €500,000 while expressing a view that it is impossible to reconcile the directors’ loan accounts due to the absence of records.
The law
14. Taking into account that no issue of dishonesty is suggested, the relevant law is that the respondents bear the onus to satisfy the Court that their conduct as directors was responsible.
15. In Re: E Host Europe Limited (in voluntary liquidation), Coyle v O’Brien & Ors [2003] 2 I.R. 627, Finlay-Geoghegan J. held that the only effect of an extension granted by the Court is to relieve a liquidator from being considered guilty of an offence. In excusing the three day delay in that case she noted at p. 634 that “in so deciding, I do not wish this to be taken as a signal that the court will extend time where there has been inaction on the part of the liquidator or his solicitor. I am heavily influenced in this application by the fact that this was amongst the first batch of reports, decisions and application pursuant to s. 56 of the Act of 2001. There is a very clear legislative intent that the application should be made within the specified time”.
16. Earlier in the judgment Finlay-Geoghegan J. stated at p. 633 “any entitlement of directors to preclude the application being pursued against them by reason of delay would have to be considered in accordance with the principles referred to by Fennelly J. in his judgment in Duignan v Carway [2001] 4 IR 550.
17. In Duignan, Fennelly J. referred to the often repeated criteria from the judgment of Hamilton C.J. in Primor plc v Stokes Kennedy Crowley [1996] 2 I.R. 459 at p. 475 of the report, when referring to the Court’s jurisdiction to dismiss an application of the sort in that case and in the application before the Court now.
18. As in Duignan, the Court has an obligation to make the declarations sought to protect the public interest. That obligation to restrict the unqualified right to become involved in the formation of companies is weighed against putting a fair hearing at risk
19. Unlike the respondents in Duignan, the father has become more severely restricted in his speech and movement since the appointment of the liquidator over six years ago. Although a respondent may not usually rely on his own actions which could have avoided the injustice, there is no evidence that the father was alerted to the possibility of this application by the liquidator at a time when he was in a much better position to explain his conduct. Moreover, the absence of any detail for the Court about the communications between the director and the liquidator up to the letter dated 28th April, 2015, causes the Court some concern about the director’s reason to delay the perceived commencement of the period for the liquidator to bring this application.
20. The delay in bringing this application has detrimentally affected the father’s right to a fair hearing within a reasonable period of time. Given the father’s condition, the protection of the public interest as sought by the legislature in restricting the unqualified right to be involved in companies is far less demanding than in most other cases.
21. Taking all of the facts into account, the unfairness caused by the delay in commencing this application outweighs the public interest in having the father restricted as sought.
22. Neither the second named respondent nor the mother were party to the destruction of records. No evidence was adduced to suggest that they did anything wrong in allowing the father to maintain and report on the accounts of the company to them and to the auditors of the company in the way that he did. The liquidator has not suggested that it is irresponsible to keep manuscript as opposed to software based accounts.
23. As for the disputed relatively small sum owed by the associated company, the Court notes that this may be the subject of proceedings. In other words the Court is not in a position to resolve the claim due to the conflict of evidence; such evidence needs to be heard so that the dispute can be resolved.
24. It is apparent that the company faced huge changes in circumstances, some of which have caused many other companies to fail. Therefore the Court declines to make the declarations sought.
(1) “a liquidator…shall not earlier than three months nor later than five months (or such later time as the court may allow and advises the director), after the date on which he or she has provided to the director a report under subs.1 apply to the court…”.
O’Boyle -v- McSweeney & ors
[2017] IEHC 826 (16 November 2017)
JUDGMENT of Mr. Justice Tony O’Connor delivered on the 16th day of November, 2017
Introduction
1. The extension of time for a liquidator to apply for declarations pursuant to s. 819 of the Companies Act 2014, arises for consideration as a result of a preliminary application made on behalf of the respondents on 3rd November, 2017, to determine whether the Court could proceed with the hearing of the entire application scheduled for that day.
Dates Relevant to this Application
24.01.2014 The applicant was appointed liquidator of Les Jumelles Limited (“the Company”) by ordinary resolution.
23.01.2015 The final report from the applicant pursuant to s. 56(1) of the Company Law Enforcement Act 2001 (“the Act of 2001”) was received by the Director of Corporate Enforcement (“DCE”).
27.04.2015 The DCE wrote to the applicant to confirm that he was “obliged to make an application pursuant to s. 150 of the Companies Act 1990 (“the Act of 1990”) for the restriction of all directors (including the shadow director, Mr. Tim McSweeney) within five months from” 23rd January, 2015. The period of five months derived from the then applicable s. 56(2) of the Act of 2001.
01.05.2015 Commencement order for Companies Act 2014 (“the Act of 2014”) [S.I. No. 169/2015] was made which set 1st June, 2015, as the date for the coming into operation of the Act of 2014 save for four provisions which are not relevant to this judgment.
26.11.2015 The notice seeking an order pursuant to s. 819 of the Act of 2014 was filed and issued with an initial return date of 7th December, 2015. This notice of motion was issued some six months after the period allowed.
09.11.2016 The Office of the DCE (“ODCE”) replied to a letter from the applicant’s solicitor which had sought “a greater period of time under s. 683(4)(b)” of the Act of 2014 to make the application for the declaration. The ODCE in this letter stated:-
“In accordance with the legislation then applicable, [the applicant] was obliged to make the relevant application not later than five months after the s. 56 report which was submitted i.e. 23rd June, 2015”
The ODCE noted that no explanation was offered for the failure to make the relevant application “on a timely basis” before refusing the time extension sought. The ODCE then added:-
“…the ODCE does not consider that the High Court’s jurisdiction to proceed with the determination of the liquidator’s application is in any way contingent upon the grant of an extension of time by the Director…”
Statutory Provisions
2. S. 56(2) of the Act of 2001 provided that a liquidator of an insolvent company “shall not earlier than 3 months nor later than 5 months (or such later time as the court may allow and advises the [DCE])” [underlining inserted by this Court for emphasis] after “the date on which” he has provided a report to the DCE under s. 56(1), apply to the court for the restriction of directors under s. 150 of the Act of 1990 unless the liquidator has been relieved by the DCE of the obligation to do so.
3. S. 683(4) of the Act of 2014 provided that an application in respect of a director under s. 819(1) of the Act of 2014 “shall be made not later than the expiry of (a) 2 months after the date on which the [DCE] has notified the liquidator that” he is not relieved of the obligation to make the application, or (b) “such greater period of time” as the DCE may allow for the application [underlining inserted by this Court for emphasis].
4. Both s. 56 (3) of the Act of 2001 and s. 683(5) of the Act of 2014 made it an offence for a liquidator not to make such an application under the earlier subs. (2) of those sections.
Coyle v. O’Brien
5. In Re E. Host Europe Limited (in voluntary liquidation) – Coyle v. O’Brien [2003] 2 I.R. 627, the chronological history was as follows:-
29.11.2002 The report of the applicant liquidator was furnished to the DCE.
07.04.2003 The DCE notified the applicant liquidator that he was not relieved from his obligation to seek a declaration.
28.04.2003 Was the last day for the liquidator to issue a notice of motion by virtue of the operation of s. 56(2) of the Act of 2001.
01.05.2003 A notice of motion was issued on behalf of the applicant seeking the declarations.
Regulatory Limitation
6. Finlay Geoghegan J. at p. 631:-
“concluded on balance that the time limitation imposed by s. 56(2) of the Act of 2001 is a regulatory limitation imposed on the liquidator which potentially has for him the consequence of committing the offence specified in s. 56(3) of the Act of 2001 but does not bar his entitlement to bring an application under s. 150 of the Act of 1990…”
7. Finlay Geoghegan J. noted that s. 150 of the Act of 1990 did not originally provide for any specific person to apply for the relevant declarations. s. 41(1)(c) of the Act of 2001 inserted as subsection 4A in s. 150 of the Act of 1990 “[a]n application for a declaration under [s. 150(1) of the Act of 1990] may be made to the court by the [DCE], a liquidator or a receiver.”
8. The learned judge sought the legislature’s intent by reference to the “express words” used by the Oireachtas. The judgment continued:-
“Having given a liquidator a power, unlimited in time to bring s. 150 applications by the amendment in s. 41 of the Act of 2001, it appears to me that if the Oireachtas intended the power given to be limited in time there would have been express words to that effect… Rather it imposes an obligation to exercise the power (unless relieved) and to do so within a specified time with penal consequences for failure to do so.”
Difference between the Acts of 2001 and of 2014?
9. The primary issue before the Court now, while recognizing the operation of the stare decisis doctrine, is to identify whether the legislative intent for the Act of 2014 is different to that of the Act of 2001 as determined by Finlay Geoghegan J.
10. In fact, the same background prevails because s. 820(1) of the Act of 2014 mirrors the relevant enabling powers given by the Act of 2001 to the DCE and a liquidator of an insolvent company. In passing I mention for completeness that the Act of 2014, identifies a receiver as “a receiver of the property of the company”. That clarification makes no difference to the background explained by Finlay Geoghegan J. Therefore, since 2001, a liquidator has had an obligation in addition to the power to make an application.
11. The Court does not favour any suggestion that the legislature by using the words “shall be made not later” in s. 683(4) of the Act of 2014 is peculiarly different to “shall not …later than” in s. 56(2) of the Act of 2001. The use of those words arise in the section dealing with the obligation of a liquidator to bring such applications. Liquidators faced a criminal sanction for failure to comply with s. 56(1) and (2) of the Act of 2001 by virtue of s. 56(3). Similarly s. 683(5) of the Act of 2014 provides:- “A liquidator who fails to comply with subsection (2) shall be guilty of a category 3 offence”.
12. The failure or omission by a liquidator to comply with s. 683(4) of the Act of 2014 is not included in s. 683(5) of the Act of 2014 while failure to comply with the time limits in s. 56(2) of the 2001 Act specifically rendered a liquidator guilty of an offence.
13. One might then ask about the purpose of s. 683(4) of the Act of 2014. On close examination it emerges that “in compliance with subsection (2)” can only refer to the obligation in s. 683(2) of the Act of 2014 which is regulatory in nature for liquidators. It remains for a liquidator who fulfils his/her duty later than the periods allowed for in s. 683(4) of the Act of 2014 to argue that s. 683(5) ought not apply. I am not deciding that issue because it would require much more detailed argument on behalf of parties who were not before the Court for this preliminary application.
14. In short, the imperative arising from s. 683(4) of the Act of 2014 does not avail the respondents because the applicant continues to have the power to bring the application. The legislature has not imposed a time limit on the exercise of that specific power. I do not discern an intention of the legislature from the Act of 2014 to change the law which has existed since 2001 so that directors could avoid an application for a declaration by a liquidator under s. 820(1) of the Act of 2014 as was argued for the respondents. The history and explanation set out by Finlay Geoghegan J. in Coyle v O’Brien remains. The words in s. 820 of the Act of 2014 which allows a liquidator to bring this type of application are clear, precise and unambiguous.
Ferris v Hui
15. During the course of oral submissions, I was referred to my judgment in Ferris v Hui [2016] IEHC 227 which concerned an application to dismiss on the grounds of inordinate and inexcusable delay in making the application pursuant to s. 819 of the Act of 2014. The facts presented at the short hearing on the 3rd November, 2017 do not establish an injustice caused by the delay of the applicant. Therefore, the circumstances do not prompt the Court to weigh the public interest in determining whether the respondents acted responsibly against any unfairness caused to themway. Bluntly there is nothing in that judgment which assists the respondents in this preliminary application.
16. I therefore refuse the application made on behalf of the respondents and I shall hear Counsel now about proceeding with the application including the cross-examination of witnesses which was originally scheduled for the 3rd November, 2017.
Wallace -v- Cassidy & ors
[2016] IEHC 689 (02 December 2016)
JUDGMENT of Mr. Justice David Keane delivered on the 2nd day of December 2016
Introduction
1. This is an application for a disqualification order under s. 160, sub-s. 2 of the Companies Act 1990 (‘the 1990 Act’) against each of the respondents because of the conduct alleged against each as a director of Custom House Capital Limited (‘the company’). In the alternative, the applicant seeks a declaration of restriction against each under s. 150 of the 1990 Act. The company is now in liquidation and the applicant is its official liquidator.
Background
2. The company was incorporated on the 28th July 1997. It commenced trading on the 30th July of that year. Between the 15th January 1998 and the 1st November 2007, it was authorised to conduct business under the Investment Intermediaries Act 1995. From then on, the company was regulated under Regulation 11 of the European Communities (Markets in Financial Instruments) Regulations 2007 (S.I. No. 60 of 2007) (‘the MiFID Regulations’).
3. The company’s principal activity was the provision of financial services, including investment fund management, and the setting up and managing of approved retirement funds, pension funds and personal retirement savings accounts. Investment vehicles established and managed by the company for collective investment by clients included exempt unit trusts, qualifying investor funds established under the laws of Ireland and companies (not being subsidiaries of the company) that were established under the laws of various European states, principally Luxembourg and Denmark, for holding property investments. The company provided property asset management services to such companies.
4. On the late evening of the 15th July 2011, on the ex parte application of the Central Bank of Ireland (‘the Central Bank’) under Regulation 166 (2) of the MiFID Regulations, the High Court (Hogan J.) appointed two senior officials of the Central Bank, George Treacy and Noel Thompson, as inspectors on an ad interim basis to investigate the affairs of the company. A final order to that effect was made on the 20th July 2011; see Re Custom House Capital Ltd. [2011] 3. I.R 323.
5. The inspectors produced their final report (‘the report’) to the High Court on the 19th October 2011. Two days later, after a full inter partes hearing, the Court made an order under Regulation 172 (1) of the MiFID Regulations for the winding up of the company with immediate effect; see Re Custom House Capital Ltd. (No. 2) [2011] IEHC 399. The applicant was appointed as official liquidator and, by operation of s. 33A of the Investor Compensation Act 1998, as amended, as administrator of the company.
6. In making that Order, Hogan J. described the inspectors’ report as ‘comprehensive and most impressive’ before summarising the inspectors’ findings in the following terms:
‘8. The Inspectors’ findings make for grim and disturbing reading. They concluded that in almost every respect there has been systematic abuse of client funds for improper purposes and that this misconduct was pervasive within [the company]. [The company’s] core activities related to the purchase of investment properties, principally in countries such as France, Switzerland and Germany. But many of the investors were unaware that their cash funds were being used for this purpose. In other cases, money was taken from accounts where there were positive cash balances in order to meet the redemption call amounts due on other accounts.
9. In fact, the reports describe a long litany of general misfeasance and wrong-doing, ranging from the systematic, deliberate misuse of funds, gross impropriety, corporate misfeasance and false accounting and trading in a fraudulent manner. Under ordinary circumstances the contents of this report would be regarded as deeply shocking, save that, sadly, our capacity to be shocked by nefarious conduct in the financial world has been diluted by incredible and remarkable events over the last three years both at home and abroad, of which the Madoff scandal is only perhaps the most notorious international example. It was, nevertheless, in its own way telling that Ms. McGrath, counsel for [the company], expressly stated that the company did not dispute the inspectors’ findings and conclusions.’
7. Although it is not material to the application under s. 160, sub-s. 2 of the 1990 Act, the uncontroverted evidence before the Court is that each of the respondents was a director of the company at the date of, or within 12 months prior to, the commencement of its winding up; that, as the applicant certified on the 9th April 2014, the company was then, and has remained at all times since then, unable to pay its debts within the meaning of s. 214 of the Companies Act 1963; and that the Director of Corporate Enforcement has not relieved the applicant of the obligation under s. 56 of the Company Law Enforcement Act 2001 to make an application for a declaration of restriction against each of the respondents. Thus, the necessary proofs are in order to require the Court to make a declaration of restriction against each of the respondents under s. 150, sub-s. 1 of the 1990 Act, unless satisfied that one of the grounds of exemption under s. 150, sub-s 2 of that Act is made out.
8. Based on the evidence available to him, the applicant has chosen to seek s. 160 disqualification orders instead. As required by s. 160, sub-s. 7 of the 1990 Act, the applicant wrote to each of the respondents on the 14th October 2013, giving the requisite ten days’ notice of his intention to bring that application. Notice of the present motion issued on the 11th April 2014.
The respondents
9. Each of the respondents was appointed a director of the company on the 5th April 2001.
10. Mr Harry Cassidy was the chief executive officer of the company. He resigned on the 13th July 2011.
11. Mr John Whyte was an executive director variously described as ‘investment director’ and ‘head of private clients.’ He continued as a director until the company entered liquidation.
12. Mr John Mulholland was a non-executive director and also continued as a director until the company entered liquidation.
The inspector’s report
13. The applicant relies on Regulation 175 of the MiFID Regulations. It provides:
‘A document purporting to be a copy of a report of an inspector appointed under these Regulations shall be admissible in any civil proceedings as evidence-
(a) of the facts set out in the document 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.’
14. The inspectors found that there was a practice in the company of effecting transactions on behalf of clients in a way that those clients could not have envisaged and for which they had provided no mandate or authorisation to the company. In many cases those transactions were not only unauthorised but also improper. The inspectors identified improper transfers of client funds to the value of €56.15 million. Separately, the company invested the assets of clients in a so-called bond fund of its own creation, known as the Mezzanine Bond Fund, without proper authority from all of the relevant clients and without properly considering their interests or the suitability of that investment for them, while furnishing misleading information about the bond to both those clients and the Central Bank. Clients who invested in the Mezzanine Bond Fund were owed €10.4 million (exclusive of interest) when the inspectors produced their report. Thus, the potential losses to the pension holders and investors who were clients of the company then stood at €66.55 million.
15. How did this disgraceful situation come about? The concluding section of the inspectors’ report explains (at p. 195):
‘There was a systematic and deliberate misuse of assets and cash belonging directly or indirectly to clients of [the company]. This misuse was deliberately disguised by [the company] through the use of false accounting entries and the issue of false and misleading statements to clients.
The origin and rationale behind the misuse of client funds would appear to be relatively straightforward. [The company] commenced promoting property investment to its clients around 2004. At first successful, [the company] committed to additional and bigger property projects and, in the view of Mr Cassidy, acquired a reputation in Europe as a good partner for such transactions. Mr Cassidy indicated that this was reflected in developers requiring a smaller initial deposit (down from 10% to 5%) from [the company] when setting up property deals.’
16. The company generated significant commissions from the property investments that it made on behalf of its clients. It typically charged a marketing or placement fee of 5% of the value of a property it acquired, an ongoing management fee (typically 5% of gross rental income of that property), and client account fees in due course.
17. The inspectors’ report continues (at p. 195):
‘However, [the company] committed itself to a number of property projects and placed deposits in advance of securing the required equity from prospective investors. When the property crisis emerged in 2007, [the company] found that expected investment from prospective investors was not forthcoming. As the flow of fresh investment into property projects ceased, in fear of loss of the initial deposit and damage to its reputation, [the company] sought to cover the investment shortfalls through the creation of products such as the Mezzanine Bond and eventually through the misuse of client holdings described in this report.’
18. What were the general failings of the board of directors, including the respondents, and of the senior management of the company, including Mr Cassidy and Mr Whyte? The inspectors’ report describes them in the following way (at pp. 197-8):
‘[The company] is authorised under Regulation 11 of [the MiFID Regulations]. Responsibility for the proper management and control of a MiFID investment firm, and the integrity of its systems, rests with the board of directors and its senior management. Ethical behaviour and transparency in business dealings are key values expected of the board and senior management of such a firm. An investment firm must ensure that particular attention is continually given to corporate governance, oversight arrangements and its internal controls. On a regular basis, an investment firm should evaluate and monitor the adequacy and effectiveness of its policies and procedures, systems, internal control mechanisms and arrangements in place (ensuring they are kept up to date) and take appropriate measures to address any deficiencies that may arise.
The inspectors are satisfied based on the matters described in this report that [the company’s] board of directors and its senior management failed in their duties to clients and allowed the company to operate with inadequate internal controls over a significant period of time. The following significant failures occurred regarding the operation of [the company’s] business activities:
(a) Inadequate resources and attention given to compliance matters;
(b) Facilitating a culture of evasion of internal controls and override of such controls;
(c) Inadequate skills, understanding, and challenge at board level regarding the business operations of [the company];
(d) Inadequate control at board level of all business operations of [the company];
(e) Inadequate internal accounting systems and insufficient resources dedicated to maintaining these systems;
(f) A disregard for the interests of clients and the trust placed by clients in [the company];
(g) A disregard for the property rights of clients whose assets [the company] was managing and inadequate controls over the safeguarding of those assets from loss, damage or misappropriation;
(h) A failure to maintain appropriate standards of corporate governance and a failure to address the dominance and significant influence with which the CEO managed the business;
(i) A lack of ethical and responsible decision making;
(j) Provision of false and misleading information to the Central Bank;
(k) Concealment of information from the Central Bank;
(l) Misrepresentation of client holdings on client statements issued.
The inspectors are satisfied that [the company] deliberately adopted and pursued processes, policies, and procedures that facilitated misconduct of the nature and on the scale described in this report taking place.’
The applicant’s evidence
19. The applicant avers that he has conducted his own investigation, part of which involved a review of the accounts of 10 sample clients of the companies, and that he has found evidence of large scale and deliberate misuse of client funds and breaches of directors’ duties. The applicant presents that evidence under the following heads:
(i) Misrepresentation of client statements;
(ii) Misapplication of client funds;
(iii) Wrongful payments of ‘commissions’;
(iv) Failure to keep proper books of account;
(v) Non-compliance with MiFID;
(vi) Undisclosed profits earned through director roles;
(vii) Deliberate misleading of clients; and
(viii) Failure to co-operate with the liquidator.
i. misrepresentation of client statements
20. Client monies held in a particular pooled client account were improperly transferred from that account without the relevant clients’ consent. The company concealed this by issuing client account statements containing falsified information about client holdings in that account. This deceit was maintained by placing a ‘flag’ or signal on the record of each such client’s account on the client investment database maintained on the company’s computer system. This ‘flag’ required any staff member accessing the database to contact Mr Cassidy or the company’s financial controller before issuing a client account statement. When that occurred, the company would remove the improper transactions from the relevant client account, issue the relevant client account statement, and then reinstate the relevant transactions on the relevant client account to reflect the true position for its own records.
21. The applicant established that this had occurred in the case of each of the 10 sample clients whose accounts he reviewed. For instance, the valuation statement issued to one client on the 31st May 2011 showed the client to have funds of €25,002 in the relevant pooled account, whereas the actual value of the funds credited to that client in that account was €2. Similarly, another client’s account statement issued to him on the 24th March 2011, showed the client to have funds of €85,929 in that account, whereas the true figure was €59,929.
ii. misapplication of client funds
22. Over a period of years prior to the inspectors’ investigation in 2011, monies invested in an identified equity fund, an identified commodity bond and an identified pooled cash account were improperly transferred without the knowledge or authority of the company’s clients. Those monies were used for a variety of purposes, including; the payment of unauthorised commissions; the repayment of monies due to other clients from whose accounts unauthorised transfers had previously been made; and the payment of outlay (such as land tax or property acquisition costs) on behalf of various special purpose companies that the company established as vehicles for its continental property projects. Such companies are known in the jargon of the financial services industry as special purpose vehicles or SPVs.
23. For example, on the 4th March 2011, €3,009,454 was withdrawn from a pooled equity account held with a firm of stockbrokers in Dublin. Even though client mandates required those monies to be used solely to invest in equities, the funds withdrawn were used to meet payments on behalf of two of the company’s property holding SPVs, Holstein Retail S.A (€1,212,468) and Schleswig Retail S.A. (€1,797, 486). In his evidence to the inspectors on the 25th July 2011, Mr Mulholland acknowledged that, from the last quarter of 2010, client monies were taken from equity funds to cover shortfalls in property transactions.
24. As another example, two of the ten sample clients had funds invested in a particular pooled client savings account, in accordance with the mandate or instructions each had provided. On the 23rd July 2009, €35,000 was transferred out of the account of one of those clients and €70,000 out of the account of the other, although neither had provided any such instruction. This occurred after the financial controller of the company had e-mailed Mr Cassidy on the 21st July 2009, seeking directions about what monies were to be used to make the repayments that had been sought by two other clients of the company from whose accounts funds had already been improperly transferred. On the 23rd July 2009, the financial controller e-mailed Mr Cassidy again with confirmation that the client funds already described were among the monies that had been used to repay those other clients.
25. A further example concerns 51 of the company’s clients who invested a total sum of approximately €5.9 million in certain commodity bonds promoted by the company. In November 2009, those bonds were redeemed, realising proceeds of more than €7.3 million. The clients were not told that this had occurred, nor were they repaid. Thus, they could not, and did not, provide instructions concerning the application of the proceeds. The company used over €1.1 million of that sum to repay monies due to other clients who had not invested in those bonds. A further sum of over €700,000 was transferred to various European property funds. In December 2009, the company loaned €2.5 million of those monies on a very short term (6 day) basis to a property development company operating in Abu Dhabi, which needed to show evidence of its ability to access substantial funds in order to secure a contract there.
26. Ultimately, €5.6 million was placed on deposit with a German private bank as collateral for a new loan to the company of €7 million. The loan proceeds were used for the purpose of the company’s property projects. The German bank required the company to furnish a formal resolution of its board, recording the company’s decision to open the relevant account and to pledge the funds that were to be placed in it on fixed term deposit as security for the proposed loan. The board of the company duly provided that resolution, signed by Mr Cassidy, Mr Whyte and Mr Mulholland on the 30th November 2009.
iii. wrongful payment of commissions
27. The property development company operating in Abu Dhabi paid a fee of €25,000 for the short term (6 day) loan of €2. 5 million that it received from the company, as described above. Although the loan was made by the company and the monies that the company improperly used for that purpose were client monies, the fee of €25,000 was paid to Mr Cassidy personally. Mr Cassidy acknowledged that he received that payment when interviewed by the inspectors.
28. The inspectors identified a Luxembourg bank account held jointly in the names of Mr Cassidy and Mr Mulholland. Further investigation revealed that at least 12 payments were made from one or more pooled client accounts either directly or indirectly into that joint account. Any such payment that was accompanied by a reference was described as a ‘commission.’ The applicant has prepared a table summarising ‘commissions’ totalling €2.317 million, of which €2.292 million was paid from pooled client accounts. The liquidator has tracked an unauthorised transfer of €75,000 on the 23rd December 2009 from one of the ten sample client accounts into the bank account in the joint names of Mr Cassidy and Mr Mulholland, and has established that no commissions were due from the client concerned either to the company or to Mr Cassidy or Mr Mulholland.
29. When interviewed by the inspectors, Mr Cassidy admitted knowledge of those payments but expressed surprise that they came from pooled client accounts, rather than the company’s own fees. E-mails have been produced in evidence that show that Mr Cassidy and Mr Whyte were aware of the source, description and destination of at least some of those payments.
iv. failure to keep proper books or records
30. In the course of their investigations, the inspectors became aware of an account referred to within the company as the ‘stockbroker capital account.’ It is not a bank account but, rather, a suspense account. A suspense account is one for book-keeping purposes, used temporarily to carry receipts and disbursements or discrepancies that have not yet been analysed, explained or properly classified. The company used the ‘stockbroker capital account’ as a suspense account to facilitate some of the unauthorised and improper transactions already described. On the date that the company entered liquidation, a balance of €48.2 million stood to the credit of the ‘stockbroker capital account’ in the company’s nominal ledger. Due to the volume of transactions recorded in that account, the applicant has been unable to explain what many of them relate to.
31. The ‘commissions’ paid to Mr Cassidy and Mr Mulholland are not recorded in the company’s books and records. In particular, they were not disclosed in the company’s audited financial statements for the years ended the 31st March 2008 to the 31st March 2010. Both Mr Cassidy and Mr Mulholland signed these statements for the years ended the 31st March 2008 and 2009 in their capacity as directors of the company, whilst Mr Cassidy and Mr Whyte signed the financial statement for the year ended the 31st March 2010.
32. The company did purport to record, as a debt due and owing, management fees of €105,000 which had already been paid to the company. This had the effect of overstating the company’s assets by that amount.
v. non-compliance with MiFID
33. The applicant has exhibited the Financial Regulator Instructions Paper on Client Asset Requirements under the MiFID Regulations, November 2007. The applicant relies on the evidence already described in submitting that the company failed to comply with those requirements in the following respects:
(a) failing to make adequate arrangements to safeguard clients’ ownership rights when holding financial instruments belonging to clients, especially in the event of the firm’s insolvency;
(b) failing to keep such records and accounts as are necessary to enable it at any time and without delay to distinguish assets held for one client from assets held for any other client and from its own assets;
(c) failing to introduce adequate organisational arrangements to minimise the risk of loss or diminution of client assets or of rights in connection with those assets as a result of misuse of the assets, fraud, poor administration, inadequate record-keeping or negligence; and
(d) causing or permitting one client’s assets to be used to fund another client’s transactions or positions.
34. The applicant submits that the findings in the inspector’s report and the results of his own investigations indicate that the directors, including the respondents, facilitated a culture of wholesale breaches of the requirements of MiFID, the direct consequence of which was large scale and catastrophic losses of savings and investments by many clients who reposed their trust in the company.
vi. undisclosed profits of directors
35. Mr Cassidy and Mr Mulholland made undisclosed profits in the form of unauthorised ‘commission’ payments from client funds totalling €2,317,030. The ‘commission’ of €25,000 received by Mr Cassidy in respect of the improper loan of client funds by the company to a property development company operating in Abu Dhabi was also an undisclosed profit. None of those ‘commission’ payments was disclosed in the company’s audited financial statements for the years ended the 31st March 2008 through to the 31st March 2010, although all of those payments were made during one or other of those periods. As already noted, both Mr Cassidy and Mr Mulholland signed the company’s audited financial statements for the years ended the 31st March 2008 and the 31st March 2009, whilst Mr Cassidy and Mr Whyte signed the financial statement for the year ended the 31st March 2010.
vii. deliberately misleading clients
36. On the 13th October 2010, Mr Whyte conducted a meeting on behalf of the company with Ms Tressan Scott, a client of the company, at her home. Against the background of the matters already described, Mr Whyte represented to Ms Scott on behalf of the company that a subordinated loan which she had been prevailed upon to make to it was safe. In doing so, Mr Whyte knew that representation to be untrue, or did not believe in its truth, or was reckless or careless as to whether it was true or false, such that it amounted to fraudulent conduct on the part of the company. That was the finding of this Court (per Finlay Geoghegan J.) in Scott v Wallace [2013] IEHC 559. While Mr Whyte was not a party to that action, he was on notice that the applicant relies on that judgment. In an affidavit that he swore for the purpose of the present application, Mr Whyte denies that he deliberately misled Ms. Scott, in effect suggesting that he was himself misled as to the truth of the representation that he made to her. I will return to that issue later.
viii. failure to co-operate with the liquidator
37. Mr. Cassidy did not co-operate with the applicant as liquidator of the company. Having queried whether there was any statutory obligation upon him to complete a director’s questionnaire, and having been informed that there was not, he declined to do so, even though it was clearly explained to him that this would demonstrate a failure on his part to co-operate with the liquidator in his investigation of the affairs of the company.
38. Although the company’s books and records purport to show that Mr Cassidy has an outstanding director’s loan of €166,000 and although the applicant, as liquidator, has written to Mr Cassidy to demand the repayment of that loan, no response has been received from him.
The basis for the application
39. The applicant seeks a disqualification order against each of the respondents pursuant to the provisions of s. 160, sub-s. 2 (a), (b) and (d) of the 1990 Act.
40. S. 160, sub-s. 2 provides in material part:
‘Where the court is satisfied in any proceedings or as a result of an application under this section that-
(a) A person has been guilty, while …[an] officer…of a company, of any fraud in relation to the company, its members or creditors; or
(b) A person has been guilty, while…[an] officer…of a company, of any breach of his duty as such…officer; or
(c) …
(d) the conduct of any person as…officer…of a company, makes him unfit to be concerned in the management of a company…
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.’
41. The present application was brought before the equivalent provisions of the Companies Act 2014 (‘the 2014 Act’) came into force on the 1st June 2015. S. 842 (a), (b) and (d) of the 2014 Act in substance re-enact s. 160, sub-s. 2 (a), (b) and (d) of the 1990 Act. Under paragraph 7 (4) of Schedule 6 to the 2014 Act, the powers of the court under s. 842 of the 2014 Act are exercisable by reference to matters or things done or omitted to be done under the prior Companies Acts as they are exercisable by reference to things done or omitted to be done under that Act. Paragraph 8(1) of Schedule 6 to the 2014 Act provides that any thing commenced under a provision of the prior Companies Acts, before the repeal by the 2014 Act of that provision, and not completed before that repeal, may be continued and completed under the corresponding provision of the 2014 Act.
The test for disqualification
42. The logical application of the provisions of s. 160, sub-s. 2 of the 1990 Act (or of the provisions of s. 842 of the 2014 Act), involves a two stage enquiry; Dir. of Corp. Enforcement v. Seymour [2012] 1 I.R. 82 at 119-120, following Re Kentford Securities Ltd: Dir. Of Corp. Enforcement v. McCann [2011] 1 IR 585 at 599, and Re Wood Products Ltd; Dir. Of Corp. Enforcement v. McGowan [2008] 4 IR 598 at 607 and, later, at 610.
43. The first stage is whether one or more of the ‘jurisdictional triggers’ has been established or, differently put, whether one or more of the jurisdictional ‘gateways’ has been reached. These ‘triggers’ or ‘gateways’ are the matters specified in paragraphs (a) to (i) of s. 160, sub-s. 2. In this case, they are whether each respondent has been guilty, while an officer of the company, of any fraud in relation to the company, its members or creditors (s. 160, sub-s. 2 (a)), or of any breach of duty as an officer of the company (s. 160, sub-s. 2 (b)), and whether the conduct of each respondent as an officer of the company makes him unfit to be concerned in the management of a company (s. 160, sub-s. 2 (d)). This is a matter of ‘objective forensic enquiry’; Dir. of Corp. Enforcement v. Seymour [2012] 1 I.R. 82 at 119-120, following Re Wood Products Ltd; Dir. Of Corp. Enforcement v. McGowan [2008] 4 IR 598. The applicant bears the onus of establishing conduct, or misconduct, within the parameters of one or more of the gateway provisions; Re CB Concrete Readymix Ltd [2002] 1 IR 372 at 381, affirming Re Newcastle Timber Ltd (In liquidation) [2001] 4 IR 586
44. The second stage is the exercise of the court’s discretion to disqualify or not.
45. In the event that the court should exercise its discretion to disqualify at the second stage, there is, of course, a third stage and that is the determination of the appropriate penalty.
Fraud
46. The first question I must consider in respect of each of the respondents is whether he has been guilty, while a director of the company, of any fraud in relation to the company, its members or creditors.
47. Fraud in civil cases requires no higher degree of proof than that required for the proof of other issues in civil claims, i.e., the allegation(s) must be established on the balance of probabilities; Banco Ambrosiano S.P.A. v Ansbacher & Co. Ltd. [1987] I.L.R.M. 669 at 701. However, as Henchy J. stated in that case (at 702):
‘Proof of fraud is frequently not so much a matter of establishing primary facts as of raising an inference from the facts admitted or proved. The required inference must, of course, not be drawn lightly or without due regard to all of the relevant circumstances, including the consequences of a finding of fraud. But that finding should not be shirked because it is not a conclusion of absolute certainty. If the court is satisfied, on balancing the possible inferences open on the facts, that fraud is the rational and cogent conclusion to be drawn, it should so find.’
48. From the uncontroverted evidence that I have endeavoured to summarise at paragraphs 14 to 38 above, I am quite satisfied, on the balance of probabilities, that the company was run on a basis that permitted widespread, deliberate and systematic defalcation of client funds, in large part to shore up the company’s floundering property business and in part to enable Mr Cassidy and Mr Mulholland to wrongly apply client funds, disguised as ‘commissions’, for their own purposes or benefit.
i. Harry Cassidy
49. I am satisfied that Mr Cassidy controlled and directed the misuse of client funds and the cover-up, whereby false client account statements were produced and furnished to clients. I am also satisfied that Mr Cassidy personally benefitted from the payment to him of wrongful ‘commissions’, in most instances directly from client accounts. Those commissions were unauthorised and unwarranted, and were not disclosed in the company’s financial statements, including the financial statements that Mr Cassidy signed as a director for the years ending the 31st March 2008, 2009 and 2010.
50. I am also satisfied that Mr Cassidy, together with Mr Mulholland and Mr Whyte, signed the board resolution for the back to back loan that the company obtained from a private German bank by improperly pledging misappropriated client funds as collateral, in circumstances where each must have been aware that that was the position.
51. I conclude that Mr Cassidy has been guilty, while a director of the company, of a fraud on the company or on its creditors, or both.
ii. John Whyte
52. Mr Whyte provided a signed voluntary statement to the inspectors and was examined on oath by them, as recorded in their report. From that evidence, it is clear that Mr Whyte was aware that, from 2007, shortfalls in the funds that the company required for its property business transactions were being met by diverting monies out of client accounts. It is also clear that Mr Whyte knew about this very early on, if not from the beginning, because he was at pains in his evidence to emphasise that, ‘over a period of four or five years’, he tried to challenge Mr Cassidy ‘on repeated occasions’ to return monies improperly diverted from a particular client investment cash fund. The relevant extracts from the inspectors’ report are set out in full in the judgment of Finlay Geoghegan J. in Scott v Wallace [2013] IEHC 559.
53. Mr Whyte swore an affidavit on 23rd December 2014 in opposition to the present application. In that affidavit, he avers that Mr Cassidy ‘went ahead with deals in property using client money.’ Later, Mr Whyte acknowledges under oath that whenever Mr Cassidy instructed him to release or transfer client funds for that purpose, he complied with those directions, albeit reluctantly, though he did challenge Mr Cassidy face to face on a number of occasions between 2008 and 2010 concerning when the properties acquired by the company would be sold and the proceeds applied to replenish the client accounts from which those monies had been misappropriated. In short, Mr Whyte acknowledges that, while a director of the company, he was aware of Mr Cassidy’s depredations and, for a number of years, was complicit in them.
54. In his defence, Mr Whyte asserts that Mr Cassidy had a domineering personality. While that might, if established, provide some mitigation for Mr Whyte, it cannot exculpate him. He also contends that he was between Scylla and Charybdis, in that if he exposed Mr Cassidy, a panic might ensue, leading to a run on the company and a greater loss of client deposits. He does not appear to have contemplated the countervailing possibility – the one that came to pass – that his complicity and inaction might permit the misappropriation from client funds of ever larger sums. Again, while this asserted predicament might, if accepted, provide some mitigation for Mr Whyte, it cannot excuse his failure to halt, much less his active complicity in, Mr Cassidy’s fraudulent conduct.
55. Mr Whyte’s response to the evidence that he made a fraudulent representation on behalf of the company to Ms Tressan Scott is even less convincing. He avers that he was entitled to accept, and did accept, the expressed opinion of the company’s board, the company’s finance department, and certain of the company’s professional advisers that the company was solvent, so that, when he represented to Ms. Scott that her subordinated loan to the company was safe, it was not a fraudulent misrepresentation.
56. Mr Whyte does not explain how any such statement could have been reconciled with his own knowledge that ever larger sums of money were being misappropriated from client funds on the direction of Mr Cassidy or his knowledge that Mr Cassidy and Mr Mulholland were being paid substantial unauthorised ‘commissions’ from client funds. One moment, Mr Whyte is asking the Court to accept his averments concerning ‘the daily stresses and strains of anxiety and worry over client monies’ and the fear of a run on the company that he claims to have experienced throughout the period of these events and, the next, he is asserting that when he told Ms. Scott that the monies she had lent to the company, and which she was relying on for her pension, were safe, it could not have been a fraudulent misrepresentation because he had heard other persons express the view that the company was solvent.
57. In making the argument that it was reasonable for him to believe that the company was solvent when he spoke to Ms. Scott, Mr Whyte relies on the ‘statement of affairs’ of the company that each of its remaining three directors was required to swear when the company was ordered to be wound up. Mr Whyte points out that each of the three directors, himself included, averred that the company’s assets exceeded its liabilities in amounts between €471,000 and €846,000, ‘therefore proving the company was solvent.’
58. In making that averment, Mr Whyte ignores the earlier evidence of the applicant that ‘each statement of affairs has substantially – and obviously – incorrectly estimated a surplus in respect of the balance sheet of the company.’ That is because each statement merely footnotes that ‘up to €66 million of client assets has been misallocated into property investments’ by the company, and that the directors ‘are unable to quantify the amount that will be recovered and consequently are also unable to quantify the amount of the deficit that will arise.’ For good measure, the applicant points out that, while the directors estimated that 50% of the €3 million owed to the company by trade debtors would be recoverable, nothing had been recovered by the time the present application was commenced, due to the inaccuracy of the company’s record-keeping and the lack of substantiating documentation.
59. I am quite satisfied on the evidence before me that the company, through Mr Whyte, procured the retention of Ms. Scott’s loan monies by fraudulent conduct. Nothing in the evidence given by Mr Whyte for the purpose of the present application is sufficient to disturb, much less require me to demur from, the equivalent finding of Finlay Geoghegan J. in Scott v Wallace,
60. I am also satisfied that Mr Whyte, together with Mr Cassidy and Mr Mulholland, signed the board resolution for the back to back loan that the company obtained from a private German bank by improperly pledging misappropriated client funds as collateral, in circumstances where each must have been aware that that was the position.
61. An attempt was made on Mr Whyte’s behalf to suggest that, as his responsibilities within the company did not extend to financial management, his conduct should be viewed in the same way that McCracken J. viewed the conduct of one of the respondent directors in Re Gasco Ltd (In liquidation) [2001] IEHC 20, that is to say as that of someone, naïve in the relation to the financial affairs of the company, who was entitled to rely on the actions of other directors who did have responsibility for financial management. I cannot accept that the role or conduct of Mr Whyte in this case is remotely comparable to that of the relevant director in Re Gasco Ltd, where all that was at issue was whether that director had acted responsibly in the conduct of that company’s affairs. Here, I have made extensive findings of dishonesty against Mr Whyte. Mr Whyte may have been excluded from key management decisions in the company, as he contends, but he was not excluded from close involvement in the fraudulent conduct that brought the company down and that caused such devastation to the financial security of its clients.
62. I conclude that Mr Whyte has been guilty, while a director of the company, of a fraud on the company or on its creditors, or both.
iii. John Mulholland
63. To his credit, Mr Mulholland has indicated on affidavit that he is not contesting the evidence against him. The credit due is slightly tarnished by the averment immediately following that concession, when Mr Mulholland enigmatically states that, while there are matters with which he does not agree in the applicant’s evidence, he lacks the financial resources to refute them and, for that reason, does not do so. It is difficult to see what it would cost Mr Mulholland, who was represented for the purpose of the present application by solicitor and both junior and senior counsel, to at least identify the matters concerned; the estimated resources required to refute them; and the extent of the resources actually available to him. In the absence of such information, it is hard to view the relevant averment as anything other than a mealy-mouthed attempt to obtain credit for fully admitting his misconduct, without actually doing so.
64. I am satisfied that Mr Mulholland personally benefitted from the payment to him of wrongful ‘commissions’, in most instances directly from client accounts. Those commissions were unauthorised and unwarranted, and were not disclosed in the company’s financial statements, including the financial statements that Mr Mulholland signed as a director of the company for the years ending the 31st March 2008 and 2009.
65. I am also satisfied that Mr Mulholland, together with Mr Cassidy and Mr Whyte, signed the board resolution for the back to back loan that the company obtained from a private German bank by improperly pledging misappropriated client funds as collateral, in circumstances where each must have been aware that that was the position.
66. I conclude that Mr Mulholland has been guilty, while a director of the company, of a fraud upon the company or upon its creditors, or both.
Breach of duty
67. To his credit, and in this instance without reservation, Mr Mulholland acknowledges that he failed to discharge his ‘corporate governance duties and responsibilities as a director.’
68. By reference to the evidence already described, I am satisfied that each of the respondents, while a director of the company, was guilty of many and repeated breaches of his duty as such. Those breaches of duty include, amongst others:
(a) the fraudulent conduct already identified;
(b) the misappropriation of client funds;
(c) causing or permitting the deliberate falsification of client records;
(d) the failure to keep proper books and accounts;
(e) causing or permitting widespread false accounting;
(f) in the case of Mr Cassidy and Mr Mulholland, the abuse by each of his position as director to make undisclosed personal profits;
(g) the failure to ensure compliance with the MiFID Regulations as part of the necessary corporate governance of a MiFID investment firm; and
(h) in the case of Mr Cassidy, failure to co-operate with the liquidator.
Unfitness to be concerned in the management of a company
69. As a guide or useful pointer, conduct rendering a person unfit to be concerned in the management of a company must display a lack of commercial probity, and while, in an extreme case, gross negligence or total incompetence might suffice, ordinary commercial misjudgement is not sufficient; per Browne-Wilkinson V.C. in Re Lo-Line Motors Ltd [1988] Ch. 477 at 485-6; approved by the Supreme Court (per Fennelly J.) in Dir. Of Corp. Enforcement v Byrne [2010] 1 IR 222 at 256.
70. I conclude that, even if I am mistaken in my view that each of the respondents in this case has been guilty of fraud and of gross breach of duty, each of the respondents has certainly demonstrated a fundamental lack of commercial probity as a director of the company, going far beyond mere negligence, incompetence or commercial misjudgement.
The discretion to disqualify
71. Having formed the view that the jurisdictional gateway has been reached in respect of each of the respondents under s. 160, sub-s. 2 (a), (b) and (d), I must next consider whether there is any reason why, in the exercise of the court’s discretion, a disqualification order should not be made. I am satisfied that there is no such reason in respect of any of the respondents to the present application.
Conclusion
72. In Re Ansbacher; Dir. Of Corp. Enforcement v. Collery [2007] 1 IR 580 at 589, Finlay Geoghegan J. identified the following principles applicable to the determination of an appropriate period of disqualification under s. 160, sub-s. 2 of the 1990 Act:
‘(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 [the gravity of the conduct found proved against the respondent concerned].
(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.’
73. Applying those principles to the facts of this case, I have concluded that the appropriate period of disqualification before taking into account any mitigating factors should be one of fifteen years. The conduct of the respondents, as I have found on the evidence presented, was deeply dishonest; continued over a protracted period of time until, for a variety of reasons, it could no longer be concealed; and was devastating in its impact on those innocent persons who had the grave misfortune to entrust the company with their pensions or savings. This is, undoubtedly, a particularly serious case.
i. Harry Cassidy
74. There is very little to be said in mitigation on behalf of Mr Cassidy. I am satisfied that he was the primary actor or ‘guiding hand’ behind the scheme of fraudulent conduct in which each of the respondents ultimately became embroiled. There is uncontroverted evidence that he has personally benefited from that fraudulent conduct. There is no suggestion that he has made any attempt to address the deficit in client funds. While he did co-operate with the inspectors, he did not co-operate with the applicant and did not appear in answer to the present application. I must assume, in the absence of any evidence to the contrary, that he had an unblemished record in business and as a company director before 2007. The findings I have made and Mr Cassidy’s failure to appear in answer to the present application, prevent me from concluding other than that it is strongly necessary to protect the public against the running of any company by him for a long time to come. It is equally necessary to impose a disqualification designed to have some deterrent effect on other persons otherwise disposed to engage in such fraudulent conduct.
75. Taking these factors into account, I conclude that the appropriate period of disqualification should be reduced by one year. Accordingly, I will make a disqualification order against Mr Cassidy for a period of 14 years. For the reasons outlined earlier in this judgment, I propose to make that order pursuant to s. 842 (a), (b) and (d) of the 2014 Act.
ii. John Whyte
76. While I have found that Mr Whyte participated in fraudulent conduct on behalf of the company, I accept that he was not the original instigator of that fraudulent conduct and that he did not personally profit from it. I accept also that, albeit at the eleventh hour, Mr Whyte did make certain disclosures to the Central Bank and to a third party that were helpful in uncovering the pervasive misconduct within the company. Further, Mr Whyte has co-operated fully with both the inspectors and the applicant, as liquidator of the company. I must accept that, prior to 2007, Mr Whyte also had an unblemished career in business and as a company director. Nevertheless, his misconduct was grave and has had grave consequences for many former clients of the company.
77. Taking these factors into account, I conclude that the appropriate period of disqualification should be reduced by five years. Accordingly, I will make a disqualification order against Mr Whyte for a period of 10 years, pursuant to s. 842 (a), (b) and (d) of the 2014 Act.
iii. John Mulholland
78. Mr Mulholland was a non-executive director of the company. However, I have found that, while Mr Cassidy may have been the primary actor in, or original instigator of, the fraudulent conduct in which the company became engaged, Mr Mulholland also personally benefitted from it. Although Mr Mulholland has expressed embarrassment and distress at the position the company’s clients now find themselves in, as with Mr Cassidy, there is no suggestion that he has made any attempt to address the deficit in client funds. Mr Mulholland did co-operate with the inspectors and, unlike Mr Cassidy, also co-operated with the applicant, as liquidator of the company. He is also entitled to some allowance for the indication he gave at the outset that he would not contest the merits of the application.
79. Mr Mulholland was, until relatively recently, a director of three other companies, at least two of which appear to have operated in the financial services sector. Although, as Mr Mulholland acknowledges, one of those companies experienced some compliance issues of a relatively minor nature with the Central Bank in 2012, those issues appear to have been promptly resolved. Otherwise, I must accept that, apart from the fraudulent conduct, breach of duty and lack of commercial probity which are the subject of the present application, Mr Mulholland has had an otherwise unblemished career in business and as a company director.
80. On Mr Mulholland’s behalf, some emphasis has been laid on the fact that he has resigned as a director of the other three companies in which he was previously involved. It is not entirely clear to me what the purported significance of that step is. In Re NIB Ltd; Dir. Of Corp. Enforcement v D’Arcy [2006] 2 IR 163, the respondent took an approach that Kelly J. identified as a mitigating factor. That approach was to consent to a disqualification order being made against him and, in that context, to tender his resignation with immediate effect from the two companies of which he was then a director, as well as indicating a willingness to give an undertaking in writing that he would not act as a director, promoter, officer, or involve himself in any way in the formation or management of those companies or any other company whatsoever.
81. In this case, Mr Mulholland does not consent to an order of disqualification being made against him and does not indicate any willingness to give an undertaking not to act as a director etc. Rather, he relies on his resignation from the companies concerned, amongst other things, as the basis for asking the Court to exercise its discretion not to make a disqualification order against him.
82. Mr Mulholland submits that the Court should instead apply the discretion conferred under s. 160, sub-s. 9A of the 1990 Act, whereby, in considering the penalty to be imposed under that section, the court may, where it ajudges that disqualification is not justified, make a declaration of restriction under s. 150 of the 1990 Act instead.
83. That submission fails in limine because, for the reasons I have already outlined, I ajudge that disqualification is justified on the uncontroverted evidence presented and that to merely restrict Mr Mulholland as a director instead would be a disproportionately lenient exercise of the Court’s discretion in the face of his grave misconduct.
84. Taking the relevant factors into account, I conclude that the appropriate period of disqualification should be reduced by three years. Accordingly, I will make a disqualification order against Mr Mulholland for a period of 12 years, pursuant to s. 842 (a), (b) and (d) of the 2014 Act.
Xnet Information Services Limited v Companies Act
[2006] IEHC 289 (10 October 2006)
JUDGMENT of O’Neill J. delivered the 10th day of October, 2006.
In these proceedings the applicant seeks an order pursuant to s. 152 of the Companies Act, 1990, granting the applicant relief from the Declaration of Restriction pursuant to s. 150 of the Companies Act 1990, made by order of this Court of the 24th of May, 2004 (Finlay Geoghegan J.).
On the 5th December, 2005, the Director of Corporate Enforcement was joined as a notice party to the proceedings.
The background to this matter is as follows:
The company recited in the title hereof was incorporated in 1995, its two shareholders being the applicant and one Kevin Moore. Until 2000 they were also its directors. The company engaged in the business of computer data storage and carried on this business out of a Victorian house at Haigh Terrace in Dun Laoghaire. The business of the company thrived and by the year 2001 it employed 26 people and had generated a turnover in excess of €4 million. By that time, it had for two years been in the top ten fastest growing companies in its trading sector in Ireland and had won the Deloitte and Touche Award for its achievements in the years ended March, 2000 and March, 2001. It was also numbered amongst the top 100 European Technology Companies and had received a variety of other awards. In the Spring of 2001, the affairs of the company appeared to be in a very good condition. Apart from the foregoing, it had at that time cash reserves in excess of €600,000.00, enough to cover three months operating costs.
The company did have one very pressing difficulty and that was that the premises, it occupied at Haigh Terrace in Dun Laoghaire was inadequate to accommodate the business. An additional difficulty, at that time, was that a Portakabin that had been brought on site to provide additional accommodation was refused planning permission.
To remedy this problem, a decision was taken to move to more suitable premises.
Such a premises was located at Glencormac, Kilmacanogue, Co. Wicklow and there was consensus amongst the directors; who at this stage had grown to four, with the addition of Mr. Howard Roberts and Mr. Nicholas Koumarianos; that these premises would be bought by the applicant and Mr. Moore who would then lease the premises to the company at an appropriate rent, i.e. the going rate per square foot for that kind of premises. This methodology was perceived as the way to get the company into the new premises, but with the minimum disbursement of cash so as not to interfere with its cash flow situation.
No doubt this might have been the way events would have unfolded were it not for the events that led to the resolution to wind up the company on 19th July, 2002, and in particular the events that persuaded this court (Finlay Geoghegan J.) to declare pursuant to s. 150(1) of the Companies Act 1990, that the applicant be not for a period of five years from the date of the order i.e. 24th May, 2004, appointed or act in any way whether directly or indirectly as a director or secretary or be concerned or take part in the promotion or formation of any company unless it met the requirements set out in s. 150(3) of the Act. The following passage from the judgment of Finlay Geoghegan J. delivered on 6th May, 2004 best tells the tale:-
“In summary, the following occurred. Between December 2000 and May 2001 the possibility of the Company moving to new premises was under consideration by the board. The board agreed that an independent advisor, Peter Cagney be appointed. He was retained and did give advice until May of 2001. He ultimately only appears to have given informal advice to the individual directors rather than any formal advice to the board of directors. His advice appears to have been that the price to be paid for the property was high by market standards but that the proposed rent to be paid by the Company for the property was fair.
I am satisfied that the first and second named respondents made the third and fourth named respondents aware that they proposed personally purchasing the property and that it would then be leased by them to the Company. This purchase was completed by the first and second named respondents in May 2001. A lease was entered into with the Company, which does not appear to have been approved by the board of directors though the Affidavits of the third and fourth named respondents make clear that they were aware from a conversation between Mr. Cagney and the third named respondent of the proposed initial rent.
The Company moved to the new premises in June 2001.
I have concluded, on the Affidavits, that the third and fourth named respondents did not become aware of the financing arrangements for the purchase of the premises and for the fit out of the premises until a board meeting of the 18th July 2001. In particular, I have concluded that they were not aware of any loan obtained by the Company in connection with the purchase nor any loan made by the Company to the first and second named respondents.
I have further concluded that the first and second named respondents, in organising the finance for the purchase of the premises at Kilmacanogue in their two names, made the following arrangements without consultation with the third and fourth named respondents, their fellow directors and without approval of the board of directors:
(i) They obtained a loan to the Company from ICC in the sum of €285,691. This was expressed to be a business development loan.
(ii) The Company made a loan to the first and second named respondent of €285,691. This appears to have been to provide the balance of the purchase monies payable by the first and second named respondents.
(iii) The Company made a loan of €177,763 to the first and second named respondents. This appears to have been for the purpose of the deposit on the premises in Kilmacanogue.
(iv) The Company made a loan of €119,355 to the first and second named respondents. This was for the stamp duty payable on the purchase of the premises.
(v) The first and second named respondents purported to sell to the Company and the Company purported to agree to purchase the fixture and fittings in the building for a sum of €152,368.
It appears that when the third and fourth named respondents became aware of the above financial transactions at the board meeting of the 18th July and objected to same, the first and second named respondents indicated that the loans were of a temporary nature only and that it was intended to re-mortgage the premises within a period of six months and to repay to the Company the loans made to the directors. This appears to have been confirmed in a memorandum from the second named defendant to the third named defendant dated 21st August 2001.
In August 2001 when, as is accepted by all the respondents, the Company was in very difficult financial circumstances it appears that the first and second named respondents, without seeking the approval of the board of directors of the Company, procured the increase of the rent payable to them by the Company from IR£125,000 per annum to IR£145,000. This was done following a special resolution of the Company on the 7th August 2001 and a fresh lease entered into between the Company and the first and second named respondents at this rent. This lease does not appear to have been approved by the board of directors or to have been brought prior to its execution to the attention of the third and fourth named respondents.
There is a substantial dispute on the Affidavits as to whether the loans referred to above, which were made by the Company to the first and second named respondents, did or did not contribute to the demise of the Company. The applicant takes the view that they did contribute to the demise. The third and fourth named respondents take a similar view. The first and second named respondents take the opposite view and believe that it was the increased costs associated with the move to the premises in Kilmacanogue rather than the loans made to them which contributed to the demise of the Company.
By reason of the conclusions which I have set out below, it does not appear necessary for me to reach a conclusion on this issue.
The first and second named respondents were unable to obtain refinancing of the premises. They were unable in the Autumn of 2001 to repay the loans to the Company. Cost cutting exercises took place in the Autumn of 2001. The employment of the second named respondent with the Company was terminated in December 2001 in circumstances which are a matter of dispute between him and the Company and the first, third and fourth named respondents. It also gave rise to litigation and an interlocutory application which was determined by this court (O’Sullivan J.). All parties were in agreement that the facts pertaining to that issue were not relevant to the matters which I have to consider on this application.
In January 2002 definitive advice was received that the loans made to the first and second named respondents were illegal. The loans were called, in February 2002 but by then each of the first and second named respondents were unable to repay the loans.
The third named respondent resigned as a director on the 17th April 2002 and it was resolved that the Company be wound up on the 19th July 2002.”
Earlier in her judgment Finlay Geoghegan J. had stated the following:
“It is stated, by the first named respondent that in the financial year beginning April 2001 the Company appeared to be in a healthy financial situation. It is submitted on his behalf and on behalf of the second named respondent that this is the context in which the facts surrounding the move by the Company to the premises in Kilmacanogue must be viewed. This does not appear to be disputed by the liquidator. The significant downturn in the technology sector appears to have occurred in the late Spring and Summer of 2001. The Company had a disastrous period between June and September 2001.”
In her conclusion the learned judge said the following:
“I accept that at the time the financial arrangements were entered into that the directors may well have taken the view, based on reasonable evidence, that the Company had a good prospect of success. I also accept that they may have considered the loan arrangements to have been of a temporary nature. Notwithstanding, I have concluded that I cannot accept that directors of a company, even who do not take specific legal advice, could be regarded as acting responsibly in entering into significant financial transactions which were, in essence, financial transactions between the Company and themselves without either bringing those matters to the attention of the their fellow directors or obtaining formal board approval.
Every director must be deemed to know and appreciate the distinction between the Company as a separate legal person and themselves as individuals. Further, it appears to me that directors must be deemed to be aware of obligations which they have not only to the Company and its shareholders but also to creditors and others dealing with the Company. Further, directors must be assumed to know, at least in a general way, of their obligations under the Companies Act. Section 194 of the Companies Act, 1963 provides:
‘(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 interest at a meeting of the directors of the company’
This obligation to disclose and, thereby, bring to one’s fellow directors a potential conflict of interest may properly be regarded as principles of good governance and sound commercial probity and proper standards in commercial dealings. The board of directors of a company is responsible for managing the affairs of the company. It appears to me that, independently of any specific legislative requirement, a person who is a director of a company must be aware or ought to be aware and understand that if he or she proposes to enter into a contract with the company that that the full board of directors should be made aware of the fact that he or she, a fellow director is interested in the contract and asked to approve the contract.
On the facts of this case the first and second named respondents did not simply fail to declare to the fellow directors an interest in a contract which they proposed entering into with the Company in breach of s. 194 of the Act of 1963. Rather, they took it upon themselves to decide on behalf of the Company both that the contracts should be entered into and to actually execute and complete the contracts between the Company and themselves without seeking approval from their fellow directors. They appear to have done this both in relation to the various financial transactions outlined above (including the loan from ICC to be lent on to themselves) and the increase in rent in August 2001.
The loans also appear to have been in breach of s. 31 of the Companies Act 1990. I accept that the first and second named respondents were not aware at the time of such potential breach. It is unnecessary in the light of the conclusions I have reached to consider whether it was irresponsible not to take legal advice on the loans.
In relation to the matters which I am required to consider in accordance with the decision of the Supreme Court in Squash Ireland Limited, I have formed the view that the first and second named respondents, by entering into these transactions without consulting with their fellow directors and obtaining the full approval of the board of directors for the transactions, have both failed to comply with their obligations under the Companies Acts and have also displayed a lack of commercial probity and want of proper standards in doing this.
In reaching this conclusion I wish to make clear that I am not attributing any bad motive or dishonesty to the first and second named respondents. It is clear from their Affidavits that they were at the time the sole shareholders of the Company. Further, the purchase of the premises by them rather than by the Company appears to have been motivated by a desire to minimise the expense connected with the purchase to be incurred in the Company. Notwithstanding this, they do appear to have shown a considerable disregard for the distinction between the legal person the Company and themselves and a disregard for their obligations as two directors out of four directors of the Company.
Regretfully, it appears to me that this disregard for their obligations as directors of the Company surrounding these transactions is sufficiently serious that, notwithstanding the very considerable achievements of the Company at an earlier period and what appears to have been an otherwise responsible attitude in relation to their position as directors of the Company, I have concluded that I cannot be satisfied that they have at all times acted responsibly in relation to the conduct of the affairs of this Company. Accordingly, under the terms of s.150 of the Act of 1990 I am bound to make the Declaration of Restriction in respect of each of the first and second named respondents.”
The applicant (who was the first named applicant in the earlier proceedings) now seeks relief from the restriction imposed by the Finlay Geoghegan J. pursuant to s. 152 of the Companies Act 1990.
This section provides as follows:
(1) A person to whom section 150 applies may, within not more than one year after a declaration has been made in respect of him under that section, apply to the court for relief, either in whole or in part, from the restrictions referred to in that section or from any order made in relation to him under section 151 and the court may, if it deems it just and equitable to do so, grant such relief on whatever terms and conditions it sees fit.
(2) Where it is intended to make an application for relief under subsection (1) the applicant shall give not less than 14 days’ notice of his intention to the liquidator (if any) of the company the insolvency of which caused him to be subject to this Chapter.
(3) On receipt of a notice under subsection (2), the liquidator shall forthwith notify such creditors and contributories of the company as have been notified to him or become known to him, that he has received such notice.
(4) On the hearing of an application under this section the liquidator or any creditor or contributory of the company, the insolvency of which caused the applicant to be subject to this Chapter may appear and give evidence.
(5) Any liquidator who contravenes subsection (3) shall be guilty of an offence and liable to a fine.”
For the applicant, it was submitted that s. 152 gives the court the broadest of discretions to relieve against the restriction where it was just and equitable to do so. In this regard reliance was placed upon the judgment of Laffoy J. In Re Ferngara Associates Limited: F & R Robinson v. Forrest [1999] 1 IR 426 and also the judgment of Finlay Geoghegan J. in Carolan and Cosgrave v. Fennell [2005] IEHC 340. In particular it was submitted where it was just and equitable to so do, the court had an unfettered discretion to relieve against the entirety of the restriction order.
It was submitted that the factors which the court should have regard to in assessing whether there were just and equitable grounds for relief were, the importance of the applicant’s constitutional right to earn a livelihood; the absence of any finding of dishonesty regarding the applicant’s conduct as a director; the applicant’s conduct since the commencement of the winding up; hardship; s. 150’s role in protecting the public and investors; and the effect, if any, on the deterrent value of the s. 150 restriction.
In regard to the applicants constitutional right to earn his livelihood it was submitted that the courts must vindicate that right and whilst it is not an absolute right any statutory provision which curtailed the right should be closely examined by the courts to ensure that the restriction or curtailment was not, having regard to the legitimate objective of the statutory restriction, either arbitrary or excessive. In this regard reliance was placed on cases of Murphy v. Stewart [1973] I.R. 97; Attorney General v. Paperlink Limited [1984] ILRM 373 and Cox v. Ireland [1992] 2 I.R. 503.
The applicant submitted that the rigidity of the s. 150 restriction was to be contrasted with the very broad discretion given under s. 152 and that whereas all conduct which attracted the s. 150 restriction was treated the same, from the worst dishonesty to the mildest irresponsibility, the exercise of the broad discretion given under s. 152 necessitated a consideration of the gravity of the actual conduct which attracted the restrictions so that a distinction would be drawn between very serious dishonesty, and, as in this case, irresponsibility, in considering whether relief should be given against the restriction.
It was submitted that the applicant’s conduct since the winding up, in that notwithstanding his own impecuniosity, he entered into an agreement with the liquidator to repay certain sums i.e €25,000 in two payments of €10,500 on 6th December, 2004, and €14,500 paid on 12th January, 2006, and that the discharge by the applicant of these sums should be a weighty factor in persuading the court to lift the restriction. In this regard attention was drawn to the fact that because of these payments the liquidator i.e. the respondent was not opposing the relief sought on this application.
It was submitted that the applicant had endured hardship as a result of the restriction, in that being an entrepreneur he has been unable to engage in commercial activity and has been forced to rely upon his wife’s earnings for the support of his family. In addition the collapse of the company resulted in personal losses to the applicant in the region of €150,000.
In regard to the deterrent value of the s.150 restriction, it was submitted that where there was no dishonesty or bad motive found, that the element of deterrence involved in these restrictions in order to protect the public i.e. the creditors and others who would have dealings with the director in question, is much less engaged. The applicant in this case was found to have acted honestly and since the winding up has determinedly paid monies due to the liquidator under the terms of his settlement agreement with the liquidator. In addition the applicant has had to endure the stigma which necessarily attaches to a Restriction Declaration in the commercial world and beyond, a factor which was referred to by Murphy J. in Business Communications Limited v. Baxter (Unreported, High Court 21st July, 1995). Having regard to the length of time, now in excess of two years, that the restriction has applied it was submitted that having regard to the nature of the applicant’s conduct, the deterrent value of a s. 150 restriction in this case would not be undermined if the restriction were lifted at this point in time.
It was submitted by the applicant that little assistance or guidance is to be had from other jurisdictions and in particular Australia or the United Kingdom where the relevant statutory schemes deal with the disqualification of directors rather than restriction as in this jurisdiction. Also provision for relief from disqualification tends to be statutorily restricted, in contrast to the very broad discretion to grant relief under s. 152. Hence it was submitted that it is not necessary nor should it be required that in order to obtain relief that an applicant should have to furnish details of his proposed future business plans. It is submitted whilst the court had a discretion to impose terms and conditions, it was not intended that s. 152 would involve or necessitate the court taking on a supervisory role in relation to the future business activity of an applicant, post granting of relief.
In essence the applicant’s case for relief is that he is an entrepreneur with an expertise in the computer industry; that he has developed ideas which have commercial potential but that he cannot exploit these without forming and being a director of a company. Furthermore that the raising of the €63,000 in order to gain the benefit of the exemption from restriction under s. 150(3) is beyond his capacity to raise money having regard to his circumstances, and that in exploiting the commercial benefit of his ideas if he continues under restriction he will be placed at a gross disadvantage vis-à-vis investors who may be interested in joining him in a commercial enterprise as they will be in a position to extract from him an unfair and disproportionate share of the enterprise because of his restricted status.
The respondent did not oppose this application.
The notice party submitted as follows:
The English and Australian experience with regard to the related, to though obviously not identical question of relief of directors from disqualification is of considerable assistance and guidance. In these jurisdictions the cases establish certain requirements before relief is granted. The first of these is that the applicant demonstrates a need or legitimate interest in having the restriction lifted and as a general rule it would be rare for the disqualification to be lifted in the absence of some need of a company for the services of the applicant in a prohibited capacity.
It was submitted, that it has been recognised that every disqualification and by analogy, restriction, in this jurisdiction will involve hardship of some sort and it must be assumed that parliament in enacting these provisions was mindful of their economic effect and intended that the objective of protection of the public outweighed the punitive effect on the person to whom the restriction applied.
English and Australian courts have attached more weight to the interests of third parties such as the companies which an applicant proposes to be a director of, and their employees, creditors and shareholders.
It was submitted that any court dealing with an application for relief from restriction must be satisfied firstly that the public is adequately protected in respect of the concerns giving rise to the original disqualification or restriction, and secondly that the deterrent value of restriction in general is not thereby undermined.
Given the broad general discretion conferred upon the court, it was not appropriate to trammel the breadth of that discretion by insisting on the kind of two part test that was once stipulated in the United Kingdom and Australian courts.
As the Oireachtas has stipulated a mandatory restriction of five years for the purpose of protecting the public it was submitted the court should be slow to grant relief unless the interest of justice so requires and the purposes of s. 150 as to the protection of the public and the general deterrence with encouragement for appropriate standards would not thereby be undermined.
The court should have regard to the need of the applicant for the relief or his interest in gaining such relief, but greater weight should be attached to third party interests. The capitalisation requirement stipulated in s. 150(3) i.e. €63,000 was in the vast majority of cases less than the amount of working capital required to start up a company and the capitalisation requirement of s. 150(3) requiring as it did an “equity cushion” was a valuable protection of creditors and the court should very carefully evaluate and be very satisfied as to the reasons put forward by an applicant as to why the requirement to put up this capital is unduly onerous for him.
It was submitted that the court should pay particular regard to the reasons for the applicant’s restriction and consider whether the public interest can be adequately protected in the context of a partial or total relief from restriction.
As s. 152(1) authorises the court, if granting relief from restriction to do so “on whatever terms and conditions it sees fit”, the court should carefully consider the imposition of appropriate conditions to protect the public interest, and it was submitted that relief if granted, ought generally to be limited and conditional unless the circumstances of the case clearly warranted otherwise.
Specifically it was submitted that, if the court was disposed to grant relief in this case it should do so upon the following conditions namely:
1. That the applicant should be permitted to be a director of one private company limited by shares, such company to be notified to the notice party;
2. The provisions of s. 150(3) apply to the company with the exception that the figure of €40,000 be required by way of share capital instead of €63,487;
3. That the provisions of s.153 apply to the applicant with the exception that any order of partial relief be registered with the CRO in accordance with s. 153(2);
4. That the provisions of s. 155 apply to the company;
5. That the company have a majority of directors independent of the applicant and his wife or any relative of either of them and that no business be conducted at any meeting of the board of which the applicant and his wife and/or any relative of either constitute a majority;
6. That the company cheques have two signatory’s, at least one of which is of an independent director and that the applicant may not be an approved signatory on the company’s bank account;
7. And finally that the notice party have liberty to apply to vary any conditions and/or revoke the relief in total should the circumstances warrant such application to be on notice to the applicant.
It was submitted that in the present case the applicant had not made out a case for any relief let alone conditional relief from the restriction. It was submitted that as the applicant failed to provide any particulars of the companies or business which he proposed to engage in, he failed to demonstrate any need or interest requiring the lifting of the restrictions totally or partially. The evidence adduced by the applicant is purely personal to him and does not show any need or interest on the part of any third party or parties as would be normal. Whilst the applicant has adduced evidence of straightened personal circumstances, he has not demonstrated by evidence that he cannot earn his living using his entrepreneurial skills otherwise and through a limited company of which he is a director. It was further submitted that he has not demonstrated, having regard to his averments on affidavit, that the enterprise which he is interested in would require working capital well in excess of the €63,487 why it is, that he cannot comply with the requirements of s. 150(3).
It was submitted that the reasons which led to the imposition of the restriction by Finlay Geoghegan J. though not involving any finding of dishonesty were nonetheless extremely serious in that it was demonstrated that there was a serious disregard of the applicant’s obligations under the Companies Acts and an entirely inadequate appreciation of the duties and responsibilities of directors particularly in the very sensitive and important area of dealings in which a director is personally interested.
It was submitted that notwithstanding the applicant’s plea of personal necessity, that in the light of his forgoing conduct the protection of the public could not be ensured if the applicant were relieved in any respect from his current restriction.
DECISION
Approaching the issues that arise on this application one must have regard firstly to what is the fundamental purpose of the restriction declaration provided for in s. 150. In my view it can only have one legitimate purpose and that is to protect the public from the dishonesty and/or the responsibility of persons who in the discharge of their duties as directors of companies have acted dishonestly or irresponsibly.
A very unusual feature of s. 152(1) is that an applicant for relief must apply within “not more than one year after a declaration has been made in respect of him”.
The necessary implication of such provision is that the Oireachteas envisaged that applications for relief would be made within a short time of the Declaration of Restriction being made. From this I infer that the duration or term of a restriction is not to be viewed in a manner similar to say a jail sentence, i.e. that the person restricted must be required to, as it were serve out or endure the full term of five years unless there are good grounds for remission.
In my view when one takes into account the relatively low capitalisation threshold provided for in s. 150(3) and the above mentioned time provision, it would seem that it was intended that the Oireachteas was intent on the relatively speedy rehabilitation of directors in respect of whom declarations of restriction were made. Hence in my view the very broad discretion given to the courts in s. 152(1) is to be understood in that context, but also bearing in mind the fundamental purpose of the s.150 restriction namely the protection of the public as mentioned above.
It must be borne in mind that given the low capitalisation threshold in s. 150(3), the public may be, in practical terms, relatively unprotected from restricted directors who happen to have access to modest levels of wealth. As a matter of basic fairness therefore and to ensure equality of treatment of persons in similar circumstances as required by Article 40.1 of the Constitution, this statutory provision cannot be applied in such a way as to work an invidious discrimination against impecunious persons.
How then in the light of all this does one apply these provisions so as to ensure the protection of the public?
The first matter in my view which the court must have regard to are the reasons which led to the restriction in the first place. A court asked to lift the restriction either wholly or partially under s. 152 must be satisfied that the risk to third parties, be they creditors, other directors or shareholders of another company, being damaged, by either the dishonesty or irresponsibility of the applicant in the future is of such a low order as to leave the court satisfied that the restriction can be, safely, either, wholly or partially lifted.
There will be applicants whose conduct be it either dishonesty or irresponsibility was of such an appalling nature, that no court could be satisfied that it was safe to expose the public to these persons by removing the restriction at any time.
At the other end of the scale, there are circumstances such as those illustrated in the Re Ferngara Limited F & R Robinson v. Forrest case where it was apparent to the court that it was inappropriate to keep the restriction in place any longer.
It has to be stressed that the overriding principle in all of these applications is that the applicant should not be granted relief either, in whole or in part unless the court is satisfied that the public will not be harmed either by the total removal of the restriction or by its partial removal in conjunction with appropriate conditions.
Next in my view, the court should have regard to the “need” or “interest” that an applicant has for having the restriction removed.
In this regard there cannot be any particular prescriptive test. This is for two reasons. Firstly, there is the very broad discretion given in s. 152(1) which ought not to be cut down by judicial interpretation. Secondly, one has to have regard to the fact that a restricted director with ample funds is not in any way subject to any such requirement, to demonstrate a need for or interest in the removal of the restriction. An applicant must demonstrate some “need” or “interest” which requires the removal of the restriction in whole or in part. It would not be sufficient for an applicant, to seek the remedy simply to restore his reputation, where he had no plan or intention to re-engage in trade through the medium of a limited company. Hence in my view whilst the court should have regard to the “need” and/or “interest” these, on their own, should not be decisive factors in the determination of the application.
In this context it is clear that an applicant must satisfy the court that the capitalisation threshold in s. 150(3) is having regard to his impecuniosity an insurmountable obstacle to him. Where a court is satisfied having considered the reasons for the restriction, that the risk to the public is still there, but is low or with conditions would be low, in my view the appropriate course to follow is to reduce the capitalisation threshold to a level which is attainable to the applicant in question.
The court must in my view also have regard to a number of other factors. These are the deterrent effect of the restriction order i.e. the deterring of directors from dishonest or irresponsible conduct and thereby the promotion of high standards of corporate governance. This of course, is integrally connected with the fundamental objective of this part of the Act, namely the protection of the public from dishonest and irresponsible directors.
The courts must also have regard to the conduct of the applicant since the winding up. This is an important factor where a director has been restricted for irresponsible conduct, in enabling the court to evaluate whether at the time the application is heard there remains a risk of the public being damaged by future irresponsible conduct on the part of that individual if his restriction is removed.
The court should also have regard to the hardship suffered by an applicant. Again in this context it must be borne in mind that the restricted director with ample means, who can readily avail of the exemption under s. 150(3) will not suffer hardship.
Nonetheless hardship is in very many cases the inevitable consequence of a declaration of a restriction and is a consequence which it must be assumed was contemplated by parliament. Whilst it is a factor to be taken into account and given due weight, it is not one which could outweigh the paramount consideration which is the protection of the public.
This brings me to a consideration in the light of the above of the facts as revealed in the evidence in this case.
The factors laid out in the judgment of Finlay Geoghegan J. which led to the Declaration of Restriction are in my view, serious matters. They are clearly not at the worst end of the scale of turpitude, but also, they are not at the other end either. In conjunction with these factors it has to be borne in mind as was noted by Finlay Geoghegan J. in her judgment that the applicant had behaved responsibly in relation to the affairs of this company throughout the greater part of its life. Indeed the evidence in both applications suggests that the applicant and his fellow shareholder and director Mr. Moore had been very successful in bringing the company from very modest beginnings to great success by April of 2001. In assessing the risk now to the public of removing the restriction wholly or in part, it would be wrong and unrealistic for those years of responsible conduct to be ignored.
Also into the balance must go the applicant’s conduct since the winding up. The evidence establishes that since then, he has entered into an agreement with the respondent to repay monies due by him to the company and he has honoured that agreement in spite of his very straightened financial circumstances.
There is no doubt that the applicant has been given a very expensive lesson by his experience of the collapse of the company and the conclusions reached by Finlay Geoghegan J. concerning his irresponsibility as set out in her judgment and I would be satisfied that the applicant has absorbed guidance and instruction from these.
In the light of the foregoing in my opinion the risk to the public of a repeat of irresponsible behaviour by the applicant in the discharge of his duties as a director of a company is very low.
That brings me then to consider whether the deterrent effect of a s. 150 restriction in general would be undermined by the removal in whole or in part of the restriction on this applicant.
The applicant has been subject to the restriction now, since May 2004. Thus for that time he has been unable to engage in trade through the medium of a limited liability company. That in itself is in my opinion a very significant deterrent. Secondly he has had to live with the stigma associated with the declaration under s. 150 for the period in question since the making of the declaration. This stigma arises from knowledge of the declaration in the business community and in my view the removal of the restriction at that stage will not end the stigma effect of the original declaration. No doubt in time as the applicant is rehabilitated in commercial life the stigma effect will wane. As was noted by Murphy J. in the Baxter case, the stigma is a crucial if not the decisive aspect of the deterrent effect of a Declaration of Restriction.
As noted earlier regard should be had to factors such as “need” or “interest” of the applicant in the removal of the restriction and also to hardship suffered.
I accept that the applicant is a person with experience and expertise in the computer sector and that whilst it might be possible for him to obtain employment or to have his services engaged in a manner which is not affected by the restriction, he is entitled, if he has ideas which have commercial potential, to exploit these ideas using his own entrepreneurial skills. Needless to say in order to do that, in the ordinary course, the medium of a limited liability company would be used. I accept that in attempting to exploit commercial benefit from his ideas the applicant would be significantly disadvantaged by the Declaration of Restriction for the plain and obvious reason that in dealing with other investors his corporate disadvantage would put him in a position whereby he would probably be compelled to concede to others a disproportionate and perhaps an unfair share in the ownership in the exploitation of his ideas. In my view such a consequence is wholly unnecessary for the purposes of the protection of the public, and indeed has no relation to it, and were it, to happen, would be an unjust and inequitable consequence of the restriction.
In general, the court should not elevate the “need” or “interest” factors to the level of an obstacle to the granting of relief, to an applicant who otherwise merited relief.
In this case in any event, I am satisfied on the evidence that the applicant has demonstrated a “need” for the relief, to enable him to engage his entrepreneurial skill and experience in developing his ideas through the medium of a limited liability company without being subject to the risk of unfair exploitation by other investors on account of his restricted status.
There is no doubt in my view, on the evidence, that the applicant has suffered great financial hardship both as a result of the collapse of the company and the Declaration of Restriction. That is a factor which weighs to a certain extent in the balance in favour of some removal of the restriction.
I have come to the conclusion that the factors which led to the Declaration of the Restriction though very serious in themselves, when taken in conjunction with his prior responsible behaviour in relation to the company and his conduct since the winding up leads to a conclusion that there is very little risk to the public of being exposed to any damage or injury if the applicant is permitted to act as a director of a company again. I am also of the view that the deterrent effect of a s. 150 restriction will not be significantly undermined by such removal. I take the view however that the factors that led to the Declaration of Restriction in themselves, were of a serious nature. That and the low level of risk which may exist to the public by removal and any possible undermining of the deterrent effect of a s. 150 declaration justify a partial removal rather than a total removal of the restriction.
As indicated earlier, in my view, the correct approach to be adopted is to have regard to the applicant’s real impecuniosity and his inability, which on the evidence I accept, to acquire the capital necessary to comply with the capitalisation threshold in s. 150(3), by simply reducing the amount required to comply with s. 150(3) to a sum which the applicant even in his present straightened circumstances must in all probability be able to raise if he is at all serious about giving commercial effect to his plan. In my view that sum is €7,500.
In this way the applicant will be enabled to engage in trade in the computer sector as he plans to do, whilst at the same time all other aspects of the Declaration of Restriction will remain in place until their statutory expiration. In addition to the foregoing I would impose the following condition. The first is that the applicant notify the notice party of the name of any company of which he becomes a director or secretary or in which he takes up any position which is the subject matter of the declaration of restriction. I will also give liberty to the Notice Party, to apply to this Court on Notice to the applicant, to vary any of the conditions attached to the granting of relief and/or to revoke the relief in toto should the circumstances warrant it.
Also I will direct that particulars of the relief now granted, be furnished to the Registrar and entered by him on the register pursuant to s. 153(2).
I do not think it is appropriate to impose conditions as contended for by the notice party in relation to independent directors or the voting restrictions recommended, as these, in my view, would in the circumstances of the applicant be of such an embarrassing and burdensome nature as to probably defeat any prospect of launching a successful company.