Restriction of Directors
Cases
In the Matter of: USIT World plc (in liquidation)
[2005] IEHC 285
Mr Justice Michael Peart:
“……. in the present case especially, I find the link between the conduct of the directors and the collapse of the companies in question to be one which requires the most careful scrutiny. It follows in my view that the burden on a director seeking to satisfy the Court as to his/her behaviour in relation to conduct in the affairs of the company for the purposes of escaping from an order under the section, includes if necessary, establishing that where there are matters about which they can be rightly the subject of criticism, there is in reality no causal link between those culpable matters and the insolvency. This would certainly apply in my view in relation to irresponsibility, since irresponsibility can be a matter of degree. Where honesty is at issue and the Court has not been satisfied that the director has acted honestly, that dishonesty is more fundamental and goes to the core of a person’s integrity. I say that even though the section draws no distinction between honesty and responsibility. But it is significant that both words have been used in the section.
Dishonesty implies something akin to improper dealing with money or other assets belonging to the company, or some form of fraudulent trading. In an extreme case this would involve a director depleting the assets of the company directly for his own benefit, rather than settling his creditors, thereby leading to the collapse of the company; or obtaining funds from others with a fraudulent intent. Clearly such a director who is prepared to steal or deal with the company’s or another’s assets in such a fashion, or behave in any other way in which dishonesty is manifest will have demonstrated that the trust invested in him in exchange for the privileges attaching to limited liability through the mechanism of a limited liability company has been abused to the extent that he should be restricted within the terms of the section from being a director. Such dishonesty will of course also amount to irresponsibility.
But irresponsibility is a different concept. While dishonesty will always amount to irresponsibility the converse is not true.
In the present case no dishonesty has even been alleged by the liquidator against any director, and the Court is satisfied that none of the respondents has acted dishonestly..”
Squash (Ireland) Ltd. , Re
[2001] IESC 200; [2001] 3 IR
McGuinness J
“11. In a number of judgments in the High Court both Murphy J. and the late Shanley J., have drawn attention to matters which are to be considered in deciding whether directors have acted responsibly. Features are mentioned such as having proper books of account, and whether the directors have sought proper professional advice, and whether they have abided by it. The situation is very well set out by the late Shanley J. in a passage which was opened to the court by counsel for the appellants in the case of La Moselle Clothing Ltd. v. Soualhi [1998] 2 ILRM 345 at p. 352 of that judgment the learned Shanley J. said:-
“In the case of In re Lo-Line Motors Ltd. [1988] B.C.L.C 698, Browne-Wilkinson V.C. said at p. 703:
‘What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors amid other’s … Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
12. The conduct referred to by Brown Wilkinson V.C. is similar to the conduct identified by Murphy J., namely, that a director broadly complying with his obligations under the provisions of the Companies Acts and acting with a degree of commercial probity during his tenure as a director of the company will not be restricted on the grounds that he has acted irresponsibly.
13. 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 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.”
14. I find this passage of considerable assistance in the instant case and applying the standards set out by Shanley J. to the facts I would say firstly that in speaking of his tenure as a director of the company I would agree with Shanley J. that the court should look at the entire tenure of the director and not simply at the few months in the run up to the liquidation. It appears from the history of the company that the appellants have always acted responsibly and honestly and have put the interests of the company in the forefront of their minds, even insofar as losing their own money in an effort to assist the continuation of the company.”
Mitek Holdings Ltd & The Companies Acts
[2010] IESC 31
Supreme Court Fennelly J.
“62. Finlay Geoghegan J, in Tralee Beef and Lamb, made restriction orders pursuant to section 150 in respect of a number of non-executive directors of the company.
63. An appeal was taken to this Court by one of the persons in respect of whom a restriction order had been made. Hardiman J delivered the unanimous judgment of this Court. He pointed out that it was undisputed that the company was, at that time of the commencement of the winding-up, unable to pay its debts. He noted the very large excess of liabilities over assets disclosed at that date. The appellant, a chartered accountant and partner in a well-known firm, had been nominated as a director solely to represent the interests of participants in a business expansion scheme. He was not expected to play any active part in the management of the company.
64. It was an important feature of the case that the liquidator of the company had unsuccessfully petitioned the Director of Corporate Enforcement to be relieved of his statutory obligation to apply for a restriction order. Hardiman J was particularly concerned that the Director of Corporate Enforcement had given no reasons for his decision and had not attended or sought to be heard either in the High Court or in this Court, a result which Hardiman J described as “unfortunate.” The result was, of course, that the liquidator accepted that he had formed the view that the appellant in that case “ had acted honestly and responsibly in relation to the affairs of the company…”
65. Hardiman J commented at page 354: “ this lends an air of unreality to the circumstances of the present case: the applicant has positively concluded that the fourth respondent [the appellant] did act in an honest and responsible manner in relation to the company.”
66. Hardiman J noted that the section had been interpreted as placing the burden of proof on the respondent director to show that he had acted “ responsibly and honestly in relation to the company.” While expressing some doubt as to the compatibility of such a provision with fundamental fairness and constitutional justice. he also noted a passage from Keane, on Company Law, the authoritative Irish work to the effect that “the burden of proof rests on the director to satisfy the court that the order should not be made…” In any event, the appellants have not, on this appeal, invited the Court to depart from its established jurisprudence to the same effect.
67. Hardiman J. in his review of the applicable case-law, cited La Moselle and Re Squash Ireland, before citing the passage from the High Court judgment under appeal in that case, where she referred to “amplification” of the criteria set out by Shanley J. At p[age 357, he described the passage as “central to the result arrived at” and said that the “judgment of the High Court judge [had] discussed common law duties of directors at great length,” describing this amplification of the criteria as the “engine of the finding” against the appellant. It seems to me that the decisive passage in the judgement is the following at page 358:
“ Having regard to the need to respect the [appellant’s] Constitutional rights, not only to fair procedures to his good name and the associated right to earn a living by the practice of his profession, I do not consider that it was appropriate to “amplify” the criteria for restricting a director after the hearing. Furthermore, I do not consider that the findings against the [appellant] which were in fact made could have been made without such amplification.”
68. It is apparent from this passage that Hardiman J was predominantly concerned to emphasise the need to observe fair procedures insofar as the appellant was concerned. He was at pains ( page 357) to emphasise that he was “in agreement with these propositions of law enunciated by the High Court Judge,” especially as they were endorsed by a citation from Keane, Company Law (3rd Ed. Dublin, 2000). This discussion might, therefore, be “of the greatest use in future cases under the relevant sections.”
69. I have found it necessary to discuss the decision in Tralee Beef and Lamb because of the special reliance placed upon it by the appellants. There is a crucial procedural difference between the two cases. At the time of the High Court decision in Tralee Beef and Lamb, it had been assumed, rightly or wrongly, that the criteria adopted by Shanley J in La Moselle, understood as being limited to compliance with obligations to observe the provisions of the Companies Acts, applied unmodified. Hardiman J was concerned that an unheralded departure from or amplification of these criteria would be unfair to respondent directors. Clearly, the present case is distinguishable. The High Court judgment of Finlay Geoghegan J in Tralee Beef and Lamb had been delivered before, even if only the day before, the hearing in the present case and it was referred to in the course of argument at the hearing.
70. The passage from the third edition of Keane on Company Law in Ireland, is repeated in the Fourth Edition (Tottel publishing, Dublin 2007) at page 374. It is that:
“The director’s owe a duty to the company to exercise skill and diligence in the discharge of their functions.”
71. The learned author says that this general principle has been broken down in a succession of cases into a number of sub-propositions, “most of them tending to limit or modify the extent of the duty owed by directors.” He cites the leading case of City Equitable Fire Insurance Ltd [1925] Ch 407, where Romer J reviewed the authorities regarding the standard of care expected of directors. Firstly, he said at page 427:
“In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company’s business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. In discharging the duties of his position thus ascertained a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence. To the question of what is the particular degree of skill and diligence required of him, the authorities do not, I think, give any very clear answer.”
72. Romer J proceeded to identify “one or two other general propositions that seem to be warranted by the reported cases.” They were as follows and are discussed in the ensuing passages in Keane:
1. “A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician…………………..It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment….
2. A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so.
3. In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.”
73. It seems to me that these passages and much of the supporting citations reflect the more relaxed standards of business in another age. City Equitable concerned an action on negligence on behalf of the company against the directors, where huge losses had been suffered as a result of the fraudulent behaviour of a managing director. It is certainly of assistance to consider the scope of the duties of a director, but section 150 is not concerned with the breach of duties to the company alone. It is broader.
74. It is always appropriate to keep in the forefront of one’s mind the terms of the applicable statutory provision. The question to be considered, in a case such as the present, where no question of honesty arises, is whether the director against whom an application for a restriction order is made “has acted responsibly in relation to the conduct of the affairs of the company.” The context is, of necessity, a company which is unable to pay its debts. The court should, in the words of Shanley J “look at the entire tenure of the director and not simply at the few months in the run up to the liquidation.”
75. The respondent has referred the Court to a passage from the judgment of Clarke J in In Re Swanpool Ltd. McLaughlin v Lannen [2006] 2 ILRM 217 at page 224, as follows:
“One of the most important obligations of any director is to ensure that when a company is facing an insolvency situation, its assets are dealt with in accordance with law. For the reasons identified by McCracken J. in Gasco the actions taken at such a time must be subject to particular scrutiny. While understanding the pressures, which may have been on the directors it does have to be noted that all directors in insolvent circumstances are likely to be subjected to significant pressure. It is their job to resist such pressure and to ensure that the company’s assets are properly dealt with. Any significant failure in that regard has to be taken as demonstrating a level of irresponsibility sufficient to warrant making an order under the section.”
76. Earlier in the same judgment, Clarke J had made remarks which rightly emphasied the need, above all, to consider the responsibility of directors in their context. He thought that, in broad terms there were three types of situation with which the court is typically concerned:
1. “Issues involving compliance by the company with its formal obligations under the Companies Acts including keeping books and records, making returns, holding meetings and the like;
2. The commercial management of the company most particularly at the period when the company was insolvent or heading in that direction; and
3. Compliance by the directors with the obligations identified in Frederick Inns [ reported at [1994] 1 I.L.R.M. 387] 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 want to find it but the went.”
77. In my view, this is a particularly useful classification of the principal settings for consideration of the responsibility of directors in a modern business. It concentrates correctly on the essential question raised by section 150 in a case, such as the present, where no issue of honesty arises. It does not concern itself with formal definitions of the scope of directors’ duties which predominantly concerned the obligations owed by directors to the company itself. The concern of the legislation is wider. The further passage the judgment of Clarke J, like that already cited from Murphy J in Business Communications, demonstrates that directors should also be aware of the interests of persons dealing with the company.
78. Clarke J went on to make a number of comments which further demonstrate the need to take account, in every case, of context. He said:
“ The considerations that will apply will necessarily be different depending on the sort of issues that the court is considering. In the first category it is of course particularly important to have regard to the entire history of the involvement of the directors concerned with the company. For the very reasons identified by Murphy J in Costello Doors [High Court unreported 21st July 1995] it would be difficult to make a finding of irresponsibility where there is a relatively short-term failure to comply with formal obligations in the light of an historical compliance with such obligations over a much longer period. On the other hand a failure to comply with formal obligations which might be said to have contributed either to the insolvency or to the knowledge of parties dealing with the company of the likelihood of that insolvency will necessarily be regarded more seriously.”
These passages from the judgment of Clarke J rightly concentrate on the need to identify the issues which are important in the particular case.
79. I would not be disposed to limit the matters to which regard should be had or to substitute standardised judicial criteria for the general words of the statute. The judgments of Murphy J, Shanley J, McGuinness and Clarke J show that compliance with statutory requirements may be relevant. On the other hand, whether in that respect or in respect of common law duties, it is not every criticism that enables one, in the words of McGuinness J, “to categorise conduct as irresponsible.” In one sense, it is obvious that a director must behave responsibly. In order to discharge his duties, he must, in the first instance, inform himself about the business and affairs of the company and about his own duties as a director. Circumstances will inform the nature and extent of these duties. Even non-executive directors of companies must be increasingly conscious in the times we live in that they cannot be mere ciphers or purveyors of votes at the whim of management. There was a time when even such a distinguished text as Gower (The Principles of Modern Company Law 3rd Ed. Stevens, London 1969 page 549) could state: “ public opinion has come to recognise that directorships are little more than sinecures, requiring, at the most, attendance at occasional board meetings.” The Act of 1990 itself evinces public concern that directorships involve real responsibility and that persons who do not conform at least to some generally acceptable minimum standards either should not, in the public interest, be permitted or should be restricted in regard to future holding of directorships.
80. There will usually be a real difference between the duties of executive and non-executive directors. The latter will usually be dependant 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. Tralee Beef and Lamb was a notable example of a non-executive director with little role or influence in the company. As, in the present case, the inter-relationships of companies in a group may affect the extent of a director’s responsibilities. In the light of these considerations, I turn to the present case.”
O’Ferral v. Coughlan & Ors
[2004] IEHC 410 [2004] 4 IR 266, [2004] IEHC 410
Ms. Justice Finlay Geoghegan
“Section 150 of the Act of 1990 imposes a mandatory obligation on the High Court to make a declaration of restriction unless the Court is satisfied “as to any of the matters specified in sub-s. (2)”. The relevant matters to this application are “that the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company . . .”.
An application such as this brought by a liquidator under s.150(4) pursuant to his obligation under s.56 of the Act of 2001 is not a normal inter partes adversarial application. The onus of establishing that he/she acted honestly and responsibly rests on the director. The practice direction of the President of the High Court in relation to voluntary windings up requires a liquidator to put before the court those matters which he considers the court should take into account in determining whether the director has acted honestly and responsibly. That practice is also followed in windings up by the court. Whilst in practical terms a director may primarily seek to address the matters raised by the liquidator, the director is not relieved of the general onus established by s.150 of the Act of 1990.
The matters to which the court should have regard in determining the responsibility of a director for the purposes of s.150(2)(a) as set out by Shanley J. in La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM 345 and as approved by the Supreme Court in Re Squash (Ireland) Limited [2001] 3 IR 35 are:
“(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963-1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the director’s responsibility for the insolvency of the company.
(d) The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.
(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.
In a judgment given in the matter of Tralee Beef and Lamb Limited (In Liquidation), Unreported, High Court, Finlay Geoghegan J., 20th July, 2004, I concluded that the court should under para. (a) above also have regard to the duties imposed on a director at common law. Further, in that case I agreed with the general formulation of the duty of an individual director as stated by Jonathan Parker J. in Re Barings plc. and Ors. (No.5); Secretary of State for Trade and Industry v Baker and Ors [1999] 1 BCLC 433 in the following terms:
“Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.”
I also agreed with three general propositions derived by Jonathan Parker J. in the same judgment from earlier authorities in relation to duties of directors in the following terms:-
(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 form 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.”
This summary was approved of by the Court of Appeal in Re Barings plc
(No. 5); Secretary of State for Trade and Industry v. Baker [2000] 1 BCLC 523 at p. 536.
The purpose of the English disqualification legislation and the required responsibility of an individual director was addressed by Lord Woolf M.R. in Re Westmid Packaging Services Limited [1998] 2 BCLC 646 where at p. 652 he stated:
“Mr. Davis started from the proposition that (as Nicholls V-C said in Secretary of State for Trade and Industry v Ettinger; Re Swift 736 Ltd. [1993] BCLC 896 at 899), Parliament’s purpose in enacting [The Company Directors Disqualification Act, 1986 and its predecessors starting with s. 28 of the Companies Act, 1976] was to raise standards in the conduct and responsibility expected of those who manage companies incorporated with the privilege of limited liability. That parliamentary purpose, and its importance, are further emphasised by the mandatory minimum period introduced by s. 6 of the present Act. Mr. Davis also submitted, correctly, that the collegiate or collective responsibility of the board of directors of a company is of fundamental importance to corporate governance under English company law. That collegiate or collective responsibility must however be based on individual responsibility. 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.
A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but total abrogation of responsibility is not. A board of directors must not permit one individual to dominate them and use them, as Mr. Griffiths plainly did in this case. . .”.
The same analysis may be applied to the purpose of Chapter 1 of Part VII of the Companies Act, 1990, and the minimum individual duty which must be discharged if the court is to be satisfied that a director has acted responsibly in relation to the conduct of the affairs of a company.
A further point which arises in this application is whether there are any additional or differing matters to be considered by the court in considering whether a person who is a director of a wholly owned subsidiary has discharged the onus of establishing that he has acted responsibly in relation to the conduct of the affairs of the Company.
Finally of particular relevance to the applications as against Mr. Coughlan and Mr. Lede is the determination by the Supreme Court in Re Squash Ireland Limited that the court should look at the entire tenure of the director and not simply at the twelve months in the run up to the liquidation.”
Dublin Sports Cafe Limited (In Voluntary Liquidation) v Companies Act
[2005] IEHC 458
Peart J.
“Equally the fact that he was a non-executive director is neither her nor there. He was a director and as such shares the responsibility to ensure that all is in order, and I venture to suggest that in a company where there are but two directors, the obligation on the non-executive director is even higher than a non-executive director of a much larger company who may have certain identifiable and particular responsibilities within the company, but who may rely on other directors to carry out their particular functions, even though he would be remiss not to be concerned and satisfied as a member of the Board of directors that all the affairs of the company were being properly attended to”.
Leahy -v- Doyle & anor
[2016] IEHC 177
Keane J.
“33. I turn now to consider whether each of the respondents acted responsibly in relation to the conduct of the affairs of each company. I propose to do so in light of those considerations which seem to me most apposite from the list of relevant factors identified by Shanley J. in Re La Moselle Clothing Ltd and Rosegreen Ltd [1998] 2 ILRM 345 (at 352).
34. In the case of both companies, significant issues of lack of commercial probity and want of proper standards plainly arise. Each company failed to pay the taxes due from it to the Revenue Commissioners over a protracted period of time. Gingersnap incurred a liability of €212,611 to the Revenue Commissioners between April 2011 and the commencement of the company’s winding up in March 2013. Scappa accrued a liability of some €154,865.00 to the Revenue Commissioners over a period of some years.
35. In my view, this was not in either case the sort of limited failure to make tax returns and failure to pay tax liabilities over a limited period that was envisaged by Finlay Geoghegan J. in Re Digital Channel Partners Limited [2004] 2 ILRM 35 (at 40) as not, in itself, sufficient to demonstrate irresponsibility. Rather, it was very much closer to what was described in that case as “a decision to effectively seek to use taxation liabilities for the purpose of financing a company, that of itself will normally be indicative of the fact that the directors have been acting at least irresponsibly.” It will be recalled that the respondents have acknowledged in respect of the monies deducted by each company from its employees’ wages for PAYE/PRSI and charged by each company to its customers for VAT that Gingersnap used those monies to cover its “running expenses” and Scappa used them “to keep other companies in the group afloat.”
36. While I fully accept that the failure of each of the two companies in that regard was not as egregious as that considered by McCracken J. in Re Verit Hotel and Leisure (Ireland) Ltd: Duignan v Carway et al (23rd January 2002, unreported, HC), I am satisfied nevertheless that it amounted in each case to a conscious and deliberate decision to use the monies due to the Revenue Commissioners to keep each company going over an extended period of time, amounting to a level of irresponsibility sufficient in itself to justify the making of a restriction order.
37. In addition, the fact that Gingersnap was permitted to trade without the necessary liquor licence for a period of approximately 21 months also demonstrates, in my view, a lack of commercial probity and want of proper standards on the part of each of the respondents as directors of that company.
38. I am also satisfied that each of the respondents bears a significant responsibility for the net deficiency in the assets of each company at the date of the commencement of its winding up in that I find as a fact that each respondent permitted each company to trade for some years while insolvent and, as already stated, to use monies properly due to the Revenue Commissioners for that purpose.
39. While I fully accept, as McGuinness J. pointed out in Re Squash (Ireland) Ltd [2001] 3 IR 35, that when considering whether a director has acted responsibly the director’s entire tenure should be taken into account, it seems to me that neither the respondents’ personal financial exposure on foot of guarantees they provided in respect of Gingersnap’s borrowing; nor the decision of each to forego a salary as director of Gingersnap from 2010 onwards; nor the employment that the businesses concerned provided prior to becoming insolvent; nor the compliance of each company with its taxation and regulatory obligations at some point in the past is capable of displacing the finding of irresponsibility that I have been obliged to make in respect of each respondent as director of each company by reference to the specific issues that have been identified and addressed above.
40. I should add that, even if I were to accept the first respondent’s unsupported assertion that the continued employment of the entire staff of two separate public houses is unequivocally dependent upon his not being made the subject of a declaration of restriction under s. 150 of the 1990 Act, there would still be nothing I could do in the face of the findings that I have made that he has acted irresponsibly in relation to the conduct of the affairs of two separate companies. That is because, as has already been noted, there is no discretion vested in the Court to refrain from making the appropriate declaration in that event.
41. Finally, I have given careful consideration to the particular position of the second respondent as a non-executive director of each company. It seems to me that, even on the most narrow view of the common law duties owed to a company by a non-executive director, the lack of oversight in this case in respect of the lengthy period during which each company was permitted to trade while insolvent and the lack of commercial probity and want of proper standards involved in permitting the persistent and continuing diversion of fiduciary taxes to fund the companies’ trading and, in the case of Scappa, to fund the trading of other companies in the same group, amounts to a breach of those duties and is, in consequence, irresponsible conduct.
Conclusion
42. For the reasons I have set out, I will make the declaration sought in each case against each respondent.”
Doherty -v- Donohoe & Ors
[2014] IEHC 187
Barrett J.
“4. The general thrust of the above case-law suggests that where a director, acting in good faith, seeks comprehensive professional advice of suitably qualified advisors and in good faith acts in accordance with such advice as is tendered, that will generally suffice to prevent such director from later being the subject of a s. 150 or like order. Perhaps the only caveat to this broad principle is that where the courts are dealing with a director who is professionally qualified or who directs a large or quoted enterprise, more exacting standards of behaviour will typically be applied than those which fall to be applied in the instant case where the court is dealing with enterprising but professionally unqualified individuals who doubtless are competent in their own field of endeavour but who are not expert in matters of law, tax or accounting. For these last directors the above case-law suggests that it suffices that they seek to do what is right, that they entrust their legal, tax and accounting affairs to the care of suitably qualified professionals, and that they seek to conform fully with such advices as are tendered to them. Were the contrary to apply the result would be absurd. A director of a small enterprise who, as here, was unskilled in law, tax or accounting and who enlisted suitable professional assistance to ensure that his or her enterprise acted in compliance with applicable law and regulation would nonetheless suffer very serious sanction in the event of non-compliance. Were a director to suffer so, a question would surely arise as to whether there was any advantage to engaging professional advisors if the law was effectively going to set the value of their advices at nought. Moreover, the person who sought such advice would be placed in an impossible situation in which, despite a lack of knowledge of applicable law and regulation, he or she would have to contemplate and raise queries regarding every possible breach of laws or regulations about which he or she knew little or nothing. When a person engages a solicitor to transfer a piece of property to another, the solicitor is not given an exemption from liability in negligence if such person does not raise detailed legal queries in relation to the substance of the transfer deed. When a person consults a doctor, the law does not establish an exemption from liability in negligence for such doctor if his or her patient does not test the correctness of any such diagnosis as the doctor may proffer. When, as here, a director of a small company requests of suitably qualified professionals that they complete a certain transaction with the clear intention that the transaction be done in compliance with applicable law and regulation then, it seems to follow from the above case-law, that when a want of compliance is later identified such director ought not to be the subject of a s. 150 or like order, at least absent other circumstances which suggest him or her to be somehow blameworthy. In this case there are no such other circumstances arising.”
Access Cleaning Services Limited & Companies Acts:
[2014] IEHC 317
Barrett J.
“Late/non-payment of taxes
7. It seems to apply almost without failing in respect of any insolvent company that there will have been late or non-payment of taxes and such is the case here. Is such a failure to be treated invariably as evidence of dishonesty or irresponsibility? In Duignan v. Carway (Unreported, High Court, 23rd January, 2002), McCracken J. was confronted with a company that appeared to have traded on monies that were due to the RevenueCommissioners. Per McCracken J:
“[I]t is clear that at least from the beginning of 1993 this Company was being kept alive by the fact that it was in effect trading on monies due to the Revenue, and allowing huge arrears to build up, together with the attendant interest. Quite astonishingly…[counsel] attempted to justify this situation by arguing that if a company is temporarily short of funds, it may be justified in not paying the Revenue and in effect taking a loan on interest to keep the company going. P.A.Y.E. and P.R.S.I. are monies which a company pays to the Revenue on behalf of its employees, and constitutes its employees tax and its employees social insurance. To try to justify trading by using what is in effect its employees money without their knowledge or consent, is to me a quite bizarre and totally irresponsible attitude. This appears to have been a policy of the Board of Directors, and this is not something which can be attributed to any one particular director. On this ground alone I have no doubt that the directors must be restricted under Section 150.”
8. Neither of the directors in this case has sought to justify the non-payment of Access Cleaning’s revenue liabilities in the manner described above. Nor were the revenue arrears arising, though not insignificant, ever of a scale that they could, to use the phraseology of McCracken J. in Duignan, be described as “huge arrears”. Moreover it is notable in this case that, however belatedly, a genuine attempt was made to address the issue of revenue liabilities at a time when the company had begun to return to profit, when an injection of fresh capital appears to have been imminent, and when the company apparently had a healthy order and ledger book, a combination of factors that would have strengthened its capacity to meet the very revenue liabilities that it was seeking to settle. Every effort was made to turn the company from loss-making to profit-making and these succeeded. If the actions of the directors of Access Cleaning were reproachable, and they most certainly were, they do not appear to the court to be as flagrant as the actions of the directors in the Duignan case, they do not appear ever to have been justified by reference to the type of logic that McCracken J. in his judgment describes as “bizarre and totally irresponsible”, and they do not appear to entail the dishonesty or irresponsibility necessary to place the directors in breach of section 150.
9. In In the Matter of Digital Channel Partners Ltd. (in voluntary liquidation) [2004] 2 I.L.R.M. 35, Finlay Geoghegan J., at 40ff., made the following useful observation in the context of a consideration of a company’s failure to make tax returns and to pay taxes:
“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 be indicative of the fact that directors have been acting at least irresponsibly.”
10. Taxes due should be paid. Yet in her judgment, Finlay Geoghegan J. appears to adopt a less condemnatory view to the non-payment of tax liabilities than was evinced by McCracken J. in Duignan. She countenances that there are situations where the non-payment of taxes may not of itself preclude a finding that a director has acted responsibly and honestly. She looks for other circumstances to justify such a finding, such as a total disregard of revenue obligations or a positive decision to seek effectively to use tax liabilities for the purpose of financing a company. In the present case, there was not a total disregard of revenue obligations by Access Cleaning:those obligations appear to have been met to around end-2009 and, belatedly but voluntarily, Mr. Martin Gill sought to put an instalment agreement in place with the Revenue Commissioners whereby the company would discharge its accrued revenue liabilities over time at a time when it appears that Access Cleaning was, or was close to being, in a position to pay such instalments. Moreover, rather than there being a conscious decision, if there was indeed a decision, to use revenue liabilities to finance Access Cleaning, Mr. Martin Gill had invested a substantial sum of money into Access Cleaning and was looking to raise another, all of which suggests that there was a deep level of personal commitment to keeping the company in operation from entirely legitimate sources of capital. It is worth noting too that Finlay Geoghegan J. at no point suggests that there are no mitigating factors which might allay the need for a section 150 order, even in the circumstances she describes as otherwise justifying a finding that a director acted irresponsibly and dishonestly, factors such as an eventual, voluntary effort to meet the tax obligations arising and a sustained effort to fund a company from entirely legitimate sources of capital, all of which factors are present here. Again, the behaviour of ……. appears to the court to be highly reproachable in this regard, yet not to be dishonest or irresponsible.”
Robinson v. Forrest
[1999] IEHC 103; [1999] 1 IR 426; [1999] 2 ILRM 169
Ms. Justice Laffoy
“9. The seminal authority on Section 150 is the decision of Murphy J. in
Business Communications Limited -v- Baxter & Anor. , in which judgment was delivered on 21st July, 1995. In his judgment Murphy J. pointed to two significant features of subsection (1) of Section 150; first, it is mandatory and the court has no discretion unless the person against whom an order is sought establishes that the case falls within one or other of the three exceptions set out in subsection (2) of Section 150; and, secondly, the period of the restriction is a fixed period of five years and, in the first instance at any rate, the court has no discretion to impose a lesser restriction. Murphy J. expressed some concern about the duration of the period of restraint and in general the lack of flexibility in Section 150. Nonetheless, he highlighted a distinction between a disqualification order under Section 160 of the Act of 1990 and a restriction order under Section 150. The former is comprehensive in its effect in that the person against whom it is made may not be appointed or act as an auditor, director or other officer, receiver, liquidator or examiner or be in any way concerned or take part in the promotion, formation or management of any company, however much the paid up capital thereof, whereas the latter order does not extend to participation in a company which meets the requirements set out in subsection (3) of Section 150. In relation to this distinction, Murphy J. commented as follows:-
“Financially and commercially this is clearly a well founded distinction. It is hardly unreasonable to require a person who was a director of a failed company in respect of which he had committed no misconduct but for which he neglected to exercise an appropriate degree of responsibility from resuming such an office in another company, again with the privilege of limited liability except on condition that a stipulated and not excessive sum was provided for the paid-up capital thereof. The figure of £20,000 must represent a very modest sum as the capital for any commercial enterprise and a very limited obstacle to anyone wishing to engage in trade through the medium of a limited liability company. Indeed, it might not be unreasonable to suggest that every limited liability company should be required to have paid-up capital of at least that amount. It would seem that the more serious penalty which the restraining order imposes is the stigma which attaches as a result of the making of the order and its filing in the Companies Office.”
Xnet Information Services Limited v Companies Act
[2006] IEHC 289
O’Neill J.
“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.”
La Moselle Clothing Ltd (in Liquidation) and Rosegem Ltd (in Liquidation) v Djamel Soualhi
1994 No. 304 Cos & 1996 No. 68 Cos
High Court
11 May 1998
[1998] 2 I.L.R.M. 345
(Shanley J)
SHANLEY J
delivered his judgment on 11 May 1998 saying: This is an application by the liquidator of La Moselle Ltd (hereinafter referred to as ‘La Moselle’) and Rosegem Ltd (hereinafter referred to as ‘Rosegem’) pursuant to s. 150 of the Companies Act 1990 for a declaration from this Court restricting the respondent for a period of five years from acting as a director of any company (other than one that meets the requirements of s. 150(3) of the Companies Act 1990).
S. 150 of the Companies Act 1990 provides:
(1) The court shall, unless it is satisfied as to any of the matters specified in subs. (2), declare that a person to whom this Chapter 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 it meets the requirements set out in subs. (3); and, in subsequent provisions of this Part, the expression ‘a person to whom s. 150 applies’ shall be construed as a reference to a person in respect of whom such a declaration has been made.
(2) The matters referred to in subs. (1) are—
(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, or
(b) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a financial institution in connection with the giving of credit facilities to the company by such institution, provided that the institution in question has not obtained from any director of the company a personal or individual guarantee of repayment to it of the loans or other forms of credit advanced to the company, or
(c) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a venture capital company in connection with the purchase of, or subscription for, shares by it in the first mentioned company.
(3) The requirements specified in subs. (1) are that—
(a) the nominal value of the allotted share capital of the company shall—
(i) in the case of a public limited company, be at least £100,000.
(ii) in the case of any other company, be at least £20,000. *349
(b) each allotted share to an aggregate amount not less than the amount referred to in subparagraph (i) or (ii) or paragraph (a) as the case may be, shall be fully paid up, including the whole of any premium thereon, and
(c) each such allotted share and the whole of any premium thereon shall be paid for in cash.
(4) Where a court makes a declaration under subs. (1), a prescribed officer of the court shall cause the registrar of companies to be furnished with prescribed particulars of the declaration in such form and manner as may be prescribed.
(5) In this section—
‘financial institution’ means—
(a) a licensed bank, within the meaning of s. 25, or
(b) a company, the ordinary business of which includes the making of loans or the giving of guarantees in connection with loans and
‘venture capital company’ means a company prescribed by the minister the principal ordinary business of which is the making of share investments.
The insolvent companies to which the restriction provisions of s. 150 apply are those companies referred to in ss. 149 and 154 of the 1990 Act (being the sections comprised in Chapter 1 of Part VII of that Act).
S. 149 provides as follows:
(1) This Chapter applies to any company if:
(a) at the date of the commencement of its winding up it is proved to the court, or
(b) at any time during the course of its winding up the liquidator of the company certifies, or it is otherwise proved, to the court,
it is unable to pay its debts (within the meaning of s. 214 of the Principal Act).
(2) This Chapter applies to any person who was a director of a company to which this section applies at the date of, or within twelve months prior to, the commencement of its winding up.
(3) This Chapter shall not apply to a company which commences to be wound up before the commencement of this section.
(4) In this Chapter ‘company’ includes a company to which s. 351 of the Principal Act applies.
(5) This Chapter applies to shadow directors as it applies to directors.
S. 149 of the Companies Act 1990 was commenced on 1 August 1991.
*350
S. 154 of the 1990 Act provides:
Where a receiver of the property of a company is appointed, the provisions of this Chapter shall, with the necessary modifications, apply as if the references therein to the liquidator and to winding up were construed as references to the receiver and to receivership.
It is clear from ss. 149 and 154 of the Companies Act 1990, that the insolvent companies to which s. 150 applies are not just companies wound up by the court but also insolvent companies wound up voluntarily and those over whose assets a receiver has been appointed. In Business Communications Ltd v. Baxter High Court 1994 No. 54 Cos, 21 July 1995, Murphy J observed (at p. 5 of his judgment) that, while the provisions of s. 150(1) are mandatory in their language, the Act does not in fact impose on any particular party the obligation of bringing before the court an application for the restriction of a director of a company to which ss. 149 and 154 apply. He noted that:
In windings up by the court this lacuna has been overcome by the court on the further consideration of the order for liquidation directing the official liquidator to bring the appropriate application on notice to persons appearing to be the directors thereof.
In the case of voluntary liquidations the court does not have either the responsibility or the machinery for giving comparable directions. It may be that voluntary liquidators and receivers are not sufficiently conscious of the provisions of Chapter 1 of Part VII of the 1990 Act or else they do not see it as their function to bring relevant cases before the court. Perhaps it will be necessary for the legislature to consider the provision of a particular sanction to ensure that the many cases which have obviously arisen since August 1991, are duly pursued. If not, there would be an apparent injustice to the directors of insolvent companies wound up by the court as against those wound up voluntarily.
The court’s directions in windings up by the court have resulted in s. 150 applications being pursued in almost all such cases; however, it must be said that only a handful of cases of insolvent companies in receivership or voluntarily wound up, have come before the courts on an application under s. 150 of the Companies Act 1990. Having regard to the large volume of insolvent companies which are wound up voluntarily, the injustice envisaged by Murphy J still remains unredressed, whereby directors of such companies are permitted to avoid the sanction of s. 150 of the Companies Act 1990, by the fortuitous circumstance of a voluntary winding up, or indeed a receivership.
Quite apart from the injustice that results from the failure to restrict directors whose conduct merits restriction, there is also the factor that the primary purpose of the s. 150 restriction is the protection of the public from persons *351 who, by their conduct, have shown themselves unfit to hold the office of, and discharge the duties of, a director of a company and, in consequence, represent a danger to potential investors and traders dealing with such companies. Where far more insolvent companies are wound up voluntarily than are wound up by the court, it is clear that the purpose of s. 150 cannot be fully achieved in the absence of a statutory obligation cast on the liquidators (of insolvent companies wound up voluntarily) and on receivers of insolvent companies to bring before the courts applications under s. 150 of the 1990 Act where the conditions stipulated by s. 149 of that Act are met.
As appears clear from s. 150, the court is obliged to restrict a director unless he brings himself within one of the three exceptions set out in subs. (2). In the present case I am only concerned with the first such exception. As is clear from the wording of subs. (2)(a), there are three hurdles that a director has to surmount:
(a) He must establish that he has acted honestly in relation to the affairs of the company.
(b) He must establish that he has acted responsibly in relation to the affairs of the company.
(c) He must satisfy the court that there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by the section.
In considering the meaning of the word ‘responsibly’Murphy J said in Business Communications Ltd v. Baxter, supra:
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 must 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 auditors [or liquidators] to understand and follow the transactions in which the company was engaged.
As Murphy J noted, the simple fact that a business fails is not evidence of a lack of responsibility nor indeed is it evidence of dishonesty. But there may well be circumstances where a business will fail due to a lack of business probity or indeed sheer incompetence (without actual dishonesty or non-compliance with the principal features of the Companies Acts) such as to amount to such a want of responsibility as to permit a restriction under s. 150(1) of the Companies Act 1990.
In England and Wales there is no directly comparable legislation to the restrictive provisions of s. 150. However, s. 300 of the Companies Act 1985 in England and Wales does provide for the disqualification of directors where their conduct makes them ‘unfit to be concerned in the management of a company’.
In the case of In re Lo-Line Motors Ltd [1988] BCLC 698, Browne-Wilkinson VC said at p. 703:
What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors and others …. Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence, disqualification could be appropriate.
The conduct referred to by Browne-Wilkinson VC is similar to the conduct identified by Murphy J, namely, that a director, broadly complying with his obligations under the provisions of the Companies Acts and acting with a degree of commercial probity during his tenure as a director of the company, will not be restricted on the grounds that he has acted irresponsibly.
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 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.
These criteria necessarily overlap: for example a failure to keep proper books of account may directly contribute to the company becoming insolvent and may be caused by the incompetence of a director. But not all situations of a want of responsibility will result from a breach of obligations imposed by the Companies Acts; for example, a director’s inability to see the ‘writing on the wall’ ( e.g. an inability to see from a perusal of the company’s management accounts that the company was trading while insolvent) may result from sheer incompetence and justify a restriction (see Continental Assurance Co. of London plc v. Burrows [1997] 1 BCLC 48 where an inability to read and understand the statutory accounts of a company was considered a ground for disqualification of a director). Equally, a director who takes excessive sums from the company by way of *353 drawings for salary without regard to the financial state of health of the company may be said to have acted without commercial probity although he did not necessarily fail to comply with his obligations under the Companies Acts 1963–1990.
Apart from satisfying the court that he as a director acted honestly and responsibly, the director must also satisfy the court that there are no other reasons why it would be just and equitable to restrict him from acting as a director of a company. It is to be noted that acting honestly and responsibly relates to ‘the conduct of the affairs of the company’ and arguably such bears no relation to any period after the commencement of a winding up or receivership of the particular company where the person may not be involved any further in the conduct of the affairs of the company. That the director must satisfy the court that there is no other reason why it would be just and equitable to restrict the director, allows the court to take into account, in my view, any relevant conduct of the director after the commencement of the winding up or the receivership (for example, any failure to co-operate with the liquidator or receiver) in deciding whether or not to make an order under s. 150(1) of the Companies Act 1990.
The facts
La Moselle was incorporated on 3 April 1984; Rosegem was incorporated on 13 November 1987. Both companies had their registered offices at 15 Castle Market, Dublin 2.99 of the 100 issued shares in La Moselle were owned by Mr Soualhi who also was the beneficial owner of the shares in Rosegem. He was also a director of both of these companies. La Moselle was a wholesaler of ladies and children’s clothing which was mostly sourced in Portugal. Of the retailers to whom La Moselle sold its clothing, some 65% of it was sold to retail companies owned and controlled by Mr Soualhi. Rosegem was such a company. It operated a retail shop at the GPO Arcade in Dublin, where it rented premises from a subsidiary of An Post. In the clothing and fashion industry there are two seasons: first, there is the spring and summer season stretching from March to August; then there is the autumn and winter season stretching from September through to February. La Moselle financed the purchases of its clothing by entering into an agreement with a company called Cambridge Confirming Ltd, a finance house (hereinafter referred to as ‘CCL’), who from 1989 onwards agreed to discharge the liabilities of La Moselle at each month end to La Moselle’s suppliers, providing La Moselle’s liabilities to CCL were discharged at each year end. Initially, the arrangement between La Moselle and CCL was that CCL would allow La Moselle a facility of up to £250,000 per season. In June 1993, with rumours of difficulties in CCL, that facility was reduced by agreement between Mr Soualhi and CCL to £165,000 per season. This according to Mr Soualhi adversely affected his business and he had to close down two of his shops in Galway and Limerick. These were shops operated by two com *354 panies owned and controlled by Mr Soualhi: The first of the companies was called Cougar Styles Ltd and the second of the companies was called Ballyclover Ltd.
The June 1993 agreement which Mr Soualhi entered into with CCL, apart from reducing the facilities provided to La Moselle, also made provision for the clearing by La Moselle of all its liabilities to CCL by 15 October 1993. One of the terms of the agreement involved CCL issuing a cheque for £20,000 to La Moselle on 1 August 1993 and La Moselle in turn issuing a cheque payable to CCL for £50,000 on 31 July 1993. The La Moselle cheque was stopped by Mr Soualhi. He says it was stopped because CCL had refused to honour its agreement to pay to La Moselle the sum of £20,000. A further La Moselle cheque payable to CCL dated 31 August 1993 was also stopped by Mr Soualhi. La Moselle did not clear its indebtedness to CCL by 15 October 1993, in accordance with its June agreement. Although it entered into a further agreement with CCL for the purposes of clearing up its indebtedness to that company, it failed to do so and on 17 November 1994, CCL presented a petition in respect of the sum then due to them of £219,688. On foot of that petition a winding up order was made on 6 March 1995. La Moselle in fact had ceased trading in November 1994. Rosegem itself had ceased to trade in September 1994, at which date it was indebted to La Moselle in the sum of £169,602.
The statement of affairs of Mr Soualhi in relation to La Moselle was sworn on 20 April 1995; it disclosed gross assets of £695,075 with gross liabilities of £487,891, leaving a surplus of £207,184. The gross assets included a claim for damages for breach of contract against CCL valued at £650,000. The statement of affairs of Rosegem which was sworn by Mr Soualhi on 23 May 1996 disclosed no assets and a deficiency of £48,479.26 made up, as to £26,991 unsecured creditors and £21,437 preferential creditors. What is noteworthy about the statement of affairs of each of these companies is that there were no trade creditors.
There are audited accounts for La Moselle for the year ending 31 August 1992. There are management accounts for that company for the years ending 31 August 1993, 31 August 1994, and 31 August 1995. A perusal of the profit and loss accounts of La Moselle for the years 1993, 1994 and 1995 show losses for each of those years of £85,746, £19,156, and £238,054, respectively. For Rosegem management accounts exist for the years 1991 to 1994 and show losses on the profit and loss account of £87,400 for the year 1991, £14,970 for the year 1992, £9,957 for the year 1993 and £25,545 for the year 1994. Viewing each of these companies on a net worth basis, La Moselle’s position in 1993 disclosed a net deficiency of £181,572, in 1994 a deficiency of £200,728 and in 1995 a deficiency of £440,819. For Rosegem the position in 1991 was that there was a net deficiency of £38,310; for 1992, there was a net worth of £49,500; in 1993 there was a net deficiency of £63,237 and in 1994 there was a net deficiency of *355 £88,782. The liquidator has forcefully expressed his opinion that La Moselle continued to trade and to supply Rosegem at a time when Mr Soualhi clearly knew that La Moselle and Rosegem were both insolvent companies. In particular, he suggests that La Moselle so traded from September 1992 to November 1994, when Mr Soualhi knew that it was insolvent and that even when it ceased to trade in November 1994 no efforts were made by Mr Soualhi to wind up the company. Apart from this aspect of matters the liquidator also draws the court’s attention to a number of other matters which he says establish that Mr Soualhi acted irresponsibly, if not dishonestly. The other matters to which he draws attention are:
(a) No effort was made by Mr Soualhi to stop trading or to wind up Rosegem when it was clear that it had become insolvent.
(b) The unsecured creditors of La Moselle did not include any trade suppliers of clothing. Mr Soualhi so organised his affairs that he was able to secure the payment of all suppliers of clothing to him at the expense of the Revenue and other creditors such as Dublin Corporation and his landlords.
(c) La Moselle wrote off debts to the other companies that were owned and controlled by Mr Soualhi of some £476,717.
(d) Extreme difficulty was encountered by the liquidator and his staff in obtaining the books and records of La Moselle and Rosegem. The liquidator points to paragraphs 8 and 9 in Mr Soualhi’s affidavit of discovery in relation to Rosegem. This affidavit was sworn by Mr Soualhi on 1 August 1997 and discloses, says the liquidator, Mr Soualhi’s cavalier attitude to the books and records of Rosegem.
Paragraph 8 of that affidavit states as follows:
(8) I say and believe that up until the time the company ceased to trade it operated from premises as Unit 6, GPO Arcade, Henry Street, Dublin 1. I say that when the company ceased trading I caused the offices to be shut down and all possessions, documents and equipment belonging to the company or otherwise were removed from the offices and/or thrown out.
(9) I say and believe that any documents relating to the company which were removed from the said offices (if any) were brought to another premises at 15 Castle Market, Dublin 2 from which I regularly operated. I say that I subsequently moved from these premises in December 1994 and further caused another clear-out of documentation, equipment and possessions to 3 Ely Place, Dublin 2 where I operated from until the end of September 1995. Since that date I caused a further clear-out of documentation, equipment and possessions to an office premises at Stephen’s Court, Dublin 2.
(e) The credit card statements relating to Mr Soualhi disclosed that payments to credit card companies were made by La Moselle between 1991 and *356 1994 in the amount of £99,447.99, of which £35,259.96 represents payments by La Moselle to restaurants and night-clubs. These payments are described as ‘motor and travel expenses’ in the management accounts of the company.
(f) Mr Soualhi drew £39,034 from Rosegem between 1992 and 1994 at a time when, according to the liquidator, he must have known that the company was clearly insolvent and these drawings were made without provision for tax. Equally, in relation to La Moselle in the same period, Mr Soualhi drew £29,950 without any provision for tax being made. While Mr Guilfoyle, as liquidator, maintains this to be the position it should be noted that Mr Soualhi’s accountant, Mr Maxwell, gave evidence that the sums in question which were drawn by Mr Soualhi and those sums in respect of which the credit card payments were made, were sums which were properly accounted for in the management accounts of the company and in relation to which any liability for tax had been discharged.
(g) The liquidator did an analysis of the cash flow of all the related companies of Mr Soualhi for the year ending 31 August 1992. This analysis disclosed a negative cash flow of some £21,000. In the same period the liquidator points to the fact that Mr Soualhi paid himself a salary (according to his accountant) of some £106,800. The liquidator views such drawings in all the circumstances as being highly irresponsible on the part of Mr Soualhi.
(h) As at 31 July 1993, the evidence established that La Moselle had a current account and two deposit accounts at Bank of Ireland, Westland Row, Dublin. Mr Soualhi contended during the course of the case that he only stopped La Moselle’s cheque for £50,000 (drawn on La Moselle’s current account at Bank of Ireland, Westland Row) because CCL had itself dishonoured its cheque payable to La Moselle for £20,000. An analysis of the current and deposit accounts of La Moselle at Westland Row disclose, according to the liquidator, that there were no funds to meet a cheque for £50,000 at the time it was presented for payment or indeed thereafter.
Against this series of allegations Mr Soualhi says:
(1) He did not wish to wind up La Moselle because he believed he had a bona fide cause of action against CCL and that he wished to sue CCL. He gave evidence that he had sought the advice of his solicitors as to whether or not he had a cause of action against CCL. He also gave evidence of the fact that his solicitors had informed the liquidator of his contention that he had a claim for damages for breach of contract against CCL.
(2) Mr Soualhi was adamant that he had not preferred trade creditors over other creditors such as the Revenue Commissioners. While he was so adamant, it must be said that no credible explanation was given for the total absence of any trade creditors from the list of unsecured creditors in the statement of affairs of La Moselle.
(3) Both Mr Soualhi and his accountant, Mr Maxwell, contended that they *357 had given full co-operation to the liquidator and his staff in answering any queries they had and in terms of providing any books and records of either company which had been sought by the liquidator. Mr Maxwell expressed his annoyance to the court in relation to queries made of him by the staff of the liquidator: he said that most of these queries were made at a time when court hearings were imminent and never allowed him a reasonable time within which to respond to the queries.
(4) As to the credit card payments, Mr Soualhi maintained that each and every one of such payments (including the restaurant and night-club payments) were payments made for the benefit of La Moselle or its related companies in that they represented entertainment of clients of La Moselle or those companies.
(5) Mr Soualhi was adamant that La Moselle could easily have ensured (as it had done on a previous occasion) that funds were in the current account of La Moselle at Bank of Ireland, Westland Row to meet the cheque for £50,000 which was payable to CCL and dated 31 July 1993.
(6) Mr Soualhi stated that the statement of affairs which he had sworn in relation to Rosegem was true and accurate. He indicated that the statement of affairs did not disclose a liability to Rosegem’s landlords, Arcade Property Co. Ltd, of arrears of rent and service charge in the sum of £44,475.92. That sum, said Mr Soualhi, had been forgiven by the landlord in exchange for a surrender of the lease to the premises which they had rented: To that end he produced to the court two letters (these letters comprise exhibit DS3 to an affidavit sworn by Mr Soualhi on 2 May 1997) and they are dated 3 October 1994 and 26 September 1994. The latter of which letters stated:
This is to confirm that the handing over of the leasehold interest with all the fixtures and fittings was in full and final settlement of all debts past and present and future as already discussed and agreed with you.
He did not refer to or produce letters from An Post’s solicitors dated 29 September 1994 and 13 October 1994, the latter of which stated:
Dear Sir,
Further to my letter of 29 September 1994, and your reply thereto dated 3 October 1994, in connection with the above unit.
I have been instructed by Mr Eamon Harrington that the keys to Unit 6 have been handed over by you.
I must now refer to the second paragraph of your letter of 3 October 1994, and it appears that you have misunderstood the last paragraph of my letter of 29 September 1994 in which I informed you that your liabilities to our client at the end *358 of August 1994 stands at £66,358 which remains until the said sum has been paid.
Yours faithfully
Alan Gasker,
Solicitor,
An Post.
Judgment was in fact obtained by Arcade Property Co. Ltd again Rosegem on 15 November 1993. In his affidavit of 8 October 1997, Mr Soualhi says (at paragraph 3):
The judgment was obtained against Rosegem by default, the company having been taken by surprise as no letter or warning or receipt of proceedings was ever received by the company.
On 7 September 1993, the solicitor for An Post wrote to Mr Soualhi claiming payment of £44,475.92 and threatening proceedings to recover that sum and also stated in the letter that ‘proceedings will be issued against your company without further notice’.
Conclusions
(i) I do not regard Mr Soualhi as a reliable witness. In particular, I do not accept the explanations advanced by him for stopping the cheque payable to CCL on 31 July 1993: The most likely explanation is that there were no funds to meet that cheque which would have been dishonoured on presentation if it had not in fact been stopped. Equally, I am also satisfied that Mr Soualhi was less than frank in his explanation of Rosegem’s relationship with its landlord, Arcade Property Co. Ltd. I am satisfied that contrary to what Mr Soualhi says, he was aware of correspondence from Rosegem’s landlord threatening proceedings, that he was aware of the proceedings, and that his surrender of the premises to the landlord was not in fact in consideration of the landlord waiving arrears of rent. It follows from this last matter that I do not accept as accurate or reliable the statement of affairs of Mr Soualhi sworn on 29 April 1996 in relation to Rosegem.
(ii) I accept the liquidator’s view that La Moselle continued to trade and to supply Rosegem when Mr Soualhi well knew that both those companies were insolvent. I believe that state of affairs continued in relation to both companies from September 1992 until September and November 1994 when Rosegem and La Moselle ceased trading respectively. During this lengthy period of in excess of two years, Mr Soualhi was assiduous in ensuring that his trade creditors were paid. I also accept the liquidator’s view that upon an examination of the accounts of La Moselle and its associated companies, that La Moselle forgave *359 debts of those companies which between 1992 and 1994 amounted in total to the sum of £476,717 without any apparent reason or justification.
(iii) In circumstances where both Rosegem and La Moselle were insolvent in 1993 and 1994, Mr Soualhi was nonetheless maintaining a very busy and indeed expensive lifestyle, all of which according to himself was business related. His credit card statements (paid for by his companies) disclosed that in 1994 alone (when he surely knew that Rosegem and La Moselle were insolvent) he managed to travel to Bangkok, Ho Chi Minh City, Hanoi, Hong Kong, Seoul, Taiwan, San Francisco, Shanghai, Boston, Jamaica, Paris, New York, London and San Tropez. Whilst as I have indicated Mr Soualhi claimed that this travel was business related, I had no evidence other than his oral evidence that this was in fact the case. There was no evidence of any sales or purchases resulting from any one of these trips and even if one did allow that the trips were for business purposes, the travel and associated costs show a want of commercial probity on Mr Soualhi’s part, having regard to the overall parlous financial position of La Moselle and Rosegem.
(iv) Apart from the credit card payments between 1992 and 1994; Mr Soualhi drew £29,950 from La Moselle in this period; he further drew £39,034 from Rosegem in this period; in the year ending 31 August 1992, — when the cash flow of his five companies was a negative one of £21,000 — he drew £106,800 from these companies. Having regard to the financial condition of these companies (which included Rosegem and La Moselle) I do not regard the drawings made by Mr Soualhi as being the actions of a responsible director.
(v) Finally, the cavalier approach of Mr Soualhi to the books and records of Rosegem, as detailed in his affidavit of discovery of 1 August 1997, are the actions of a person who does not realise that the protection afforded to limited liability carries with it certain obligations which he clearly failed to discharge in not ensuring the safety of all the books and records of Rosegem, despite the fact that it had ceased trading.
In conclusion, I have no doubt whatsoever that Mr Soualhi traded at a time when he knew that Rosegem and La Moselle were insolvent. I am quite satisfied that he used monies due to the Collector General and CCL to finance his trading activities and his travel. I have little doubt that he was aware that Rosegem and La Moselle could not trade and at the same time discharge their liabilities to the Collector General and CCL. Such conduct was, in my view, improper conduct and if it was not to be described as actually dishonest it was certainly irresponsible. Accordingly, I propose to make an order declaring that Mr Soualhi 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 it meets the requirements set out in s. 150(3) of the Companies Act 1990.
Adalbert Ltd v Companies Acts 2014
(Approved) [2020] IEHC 194 (23 April 2020)
JUDGMENT of Mr. Justice Quinn delivered on the 23rd day of April 2020.
1. In these proceedings the applicant seeks a declaration that the respondent, being a person to whom Chapter 3 Part 14 of the Companies Act 2014 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 of a company or be concerned to take part in the formation or promotion of a company unless that company meets the requirements set out in subsection 3 of section 819 of the Companies Act 2014.
2. On 18 June, 2018, the applicant was appointed liquidator of the Company by order of the High Court on foot of a petition presented by the Collector General of the Revenue Commissioners.
3. This application is grounded on an affidavit of the applicant sworn 14 May, 2019. The respondent delivered a replying affidavit on 8 November, 2019, and two further affidavits were exchanged between the parties namely a second affidavit of the applicant on 8 January, 2020, and a second affidavit of the respondent sworn on 17 February, 2020.
4. The trade of the Company was the operation of a coffee shop from a premises known as No. 1 at Howth Market, Harbour Road, Howth, County Dublin. This appears to have been a semi-permanent stall at the meeting point of Harbour Road, Howth and Howth Pier.
5. In the spectrum of gravity of cases to come before this Court pursuant to s.819 of the 2014 Act this case is at the lower end, in terms both of the scale of the Company’s trade and its indebtedness, and in terms of the conduct of the sole director. Nonetheless I have come to the conclusion that the respondent has not demonstrated that he acted responsibly in relation to the conduct of the affairs of the Company or that when requested to do so by the liquidator he co-operated as far as could reasonably be expected in relation to the conduct of the winding up of the Company. Therefore, I shall make a declaration pursuant to s.819(1) of the Act.
6. I shall firstly outline the history of the Company and then consider the matters which the applicant has identified as being of concern in his assessment of the respondent’s conduct, and consider the responses made by the respondent in respect of these issues.
Incorporation and directors
7. The Company was incorporated on 23 April, 2014. There is some dispute as to when the precisely it commenced trading. It ceased trading in May 2017 in the circumstances referred to below.
8. The respondent was at no time a shareholder in the company. He said that the business operated by the Company was owned by his former girlfriend, Olivia Marjoram. Ms. Marjoram was a director of the Company from its incorporation on 23 April, 2014, to 19 December, 2014. The respondent was appointed a director on 23 September, 2016. During the intervening period, two other persons namely a Conor Fogarty and a Tommy Martin were directors. Mr. Martin resigned on 19 November, 2015. Mr. Fogarty resigned on 23 September, 2016, when the respondent was appointed a director.
Lease of the property
9. There is significant lack of clarity as to the precise nature of the Company’s interest in the premises from which it traded. This is important because the respondent says that the sudden repossession of the property was the cause of the insolvency.
10. The Company occupied the premises pursuant to a lease granted by the landlord, Mr. Gregory Rickard. The applicant has exhibited two versions of the lease, one provided to him by the respondent and one provided to him by Mr. Rickard.
11. The version provided to the applicant by Mr. Rickard shows the tenant to be the respondent, described as “ Darragh Heagney t/a…”. This lease is undated, but expressed to be for a term of three years from “ July 2013”. The rent payable was €15,000 per annum to be paid by monthly standing order. This version of the lease is not signed by Mr. Rickard. It is signed by the respondent as tenant. It also has appended to it an executed form of Guarantee, also signed by the respondent as the guarantor.
12. The second version of the lease, being the one produced by the respondent, is dated 18 October 2013. It shows the tenant to be “Darragh Heagney, 48, St. Peters Terrace, Howth, Dublin 14”. On this version of the lease the term is clearly stated to be for a three year period from 1 September, 2013. This version has been signed by Mr. Rickard and by the respondent as tenant. Immediately beside the respondent’s signature there has been inserted the word “ promoter” although apparently not in the handwriting of the respondent.
13. The respondent says that in 2012 Ms. Marjoram wanted to open a cake and coffee shop in Howth, having expertise and experience as a pastry chef. The respondent said that he had no direct interest in such a business. He had lived all his life in Howth and he was well placed to know if a suitable premises might become available. At some time during 2013 he became aware of the availability of this premises and in October 2013 he signed the lease, thereby securing one of the units at Howth Pier he says for the benefit of Ms. Marjoram.
14. The Company was not incorporated until 23 April, 2014, so the Company itself was not the contracted tenant. No suggestion has been made that any corporate act was subsequently taken by the Company to formally ratify a tenancy or lease.
15. It is common case that from a time shortly after the incorporation of the Company it conducted the business previously conducted by Ms. Marjoram from the premises, until the landlord re-entered the property in May 2017.
Re-entry by the landlord
16. The three-year term of the lease expired on 31 August, 2016. The respondent said that after he was appointed a director on 23 September, 2016, following the resignation of Mr. Fogarty, he, the respondent, then for the first time took over the running of the business. He said that he immediately opened negotiations with the landlord seeking an extension or renewal of the lease. He says that these efforts were ultimately unsuccessful and in May 2017 the landlord effected a re-entry of the premises and thereupon the business and trade of the Company ceased.
17. The respondent says that up to the day when the landlord re-entered the premises, the Company had been trading well. He exhibited an excel sheet which he said recorded the trading receipts and payments for the full year 2016. The excel spreadsheet appears to be an attachment to an e-mail of 10 February, 2017, received by the respondent from a Mr. Gerry Malone, who it is said was an accountant.
18. This spreadsheet showed cash inflows for the full year 2016 of €41,330.16 and outflows of €33,7041, leaving a “ concluding cash balance” of €7,588.70 as of 31 December, 2016.
19. The respondent says that when the landlord took possession of the property in May he did so abruptly and changed the locks. He describes the entry as having been “by allegedly peaceful means”. The respondent says that the effect of this event was that overnight the Company went from trading consistently and earning an income to being unable to trade or earn any income.
20. The applicant’s evidence is that the landlord had served a notice to terminate in March 2017, arising from the cessation of rental payments in December 2016.
21. The uncertainty in relation to the status of the lease, even on the part of the respondent, is further illustrated by the fact that in the post-liquidation correspondence between the applicant and the respondent, the respondent indicated in an e-mail as late as 7 November, 2018, that he was waiting for certain information from his solicitor, Mr. Denis McSweeney, to enable him to respond to a number of queries. In particular, he indicated that Mr. McSweeney needed to “ get some documents out of storage to prove that Adalbert was the tenant and get the lease”.
22. In fact, the lease produced was the one granted to the respondent and contains no evidence of the Company itself having been a tenant. Ultimately, on 19 December, 2018, Mr. Alan Sheehan, a trainee solicitor at Messrs. Denis McSweeney Solicitors, emailed the applicant enclosing what he described as “attached personal guarantee of Darragh Heaney together with supporting documentation highlighting the company to be formed” and stating that in the lease agreement Mr. Heaney is described as “ promoter”. Again, none of this advanced or clarified the question of the status of the Company vis-à-vis the premises.
23. The respondent says that following the re-entry by the landlord he instructed Mr. McSweeney to communicate with the landlord to seek the return of certain items at the premises. On 22 May, 2017, Messrs. McSweeney wrote to the landlord’s solicitor, Marcus Lynch, on this subject. In this letter Mr. McSweeney states as follows:
“Our client: Daragh Heagney
Your client: Gregory Rickard
Unit1, 3A Howth Road, Co Dublin
We are instructed to make an application to court at the earliest opportunity to compel your client to release to our client all items which remain in the unit in question. It would be preferable if this could be done on an agreed basis but if your client is unwilling to allow our client to remove his fixtures, fittings and equipment without a court order he will be left with no choice but to make an application to court and to seek the costs of so doing.
With this in mind we understand that our client spent a considerable amount of money on the fit out of the unit and we again request that you afford our client immediate access to remove the fixtures and fittings and all equipment that was on the premises.
We further understand that there was full stock in the fridge and freezer units together with some cash which was on the premises at the time our client was locked out of his premises.
We urgently await hearing from you.
Yours faithfully”
24. The applicant draws attention to the fact that in this letter Messrs. McSweeney’s client is described as “Darragh Heagney” being the respondent and not the Company. Secondly, he points out that this can only be a reference to assets owned by Mr. Heagney and to expenditure incurred by Mr. Heagney himself.
25. It appears that on 9 June, 2017, the landlord indicated a willingness to provide access to the respondent to retrieve the assets. The respondent says that he obtained a rental van and attended at the premises to find only some equipment there which was badly damaged and no stock, cash or books or records. Instead of taking the damaged goods he adopted the position that the landlord ought to be fixed with liability for the loss of those assets incurred by the Company. Rather than removing the damaged goods he contacted the landlord with a view to pursuing the landlord for damages. In this regard he exhibits a further letter written by Messrs. McSweeney to the landlord dated 21 June, 2018:
“ Our client: Darragh Heagney [emphasis added]
Your client: Gregory Rickard
Dear Sirs,
We refer to previous correspondence in this matter.
You may be aware that our client was unable to procure his belongings including a cash register, till and books and records of the company at the time that your client re-entered the premises.
He made a number of attempts to get the goods from a Mr. Mark Dunne to no avail.
Our client has now to provide a Statement of Affairs in relation to Adalbert Limited and we would be grateful if you would please arrange for the company records to be made available to our client as a matter of extreme urgency.
Our client is under court appointed time pressure in relation to this issue.”
26. No replying correspondence from Messrs. Marcus Lynch was exhibited. A notable feature of the letter of 21 June, 2018, is that it was written three days after the appointment of the applicant, and no evidence is proffered by the respondent as to what action, if any, he took between 9 June, 2017, and the appointment of the applicant on 18 June, 2018 on the petition of the Collector General.
27. The applicant says that the landlord informed him that after he repossessed the premises he wrote on numerous occasions requesting the respondent to collect the relevant assets and books and records. The landlord informed the applicant that no response was received over an extended period of time and that ultimately the landlord disposed of the relevant assets and books and records due to mounting storage costs.
28. None of this correspondence is exhibited and therefore there is a dearth of evidence as to what exactly transpired between May 2017 and the appointment of the applicant in June 2018. The court is left therefore with the respondent’s failure to account for what, if any, efforts he made after May and June 2017 to retrieve the assets and books and records of the company.
29. Although the letter from Mr. McSweeney dated 21 June, 2018 refers to “ previous correspondence”, no such correspondence is specified or exhibited. This leads to the conclusion that it was not until after the appointment of the applicant that the respondent took any further steps as against the landlord. Even then his only action was to write to the landlord seeking information to enable him to comply with his obligation to file a statement of affairs.
30. Nor does the respondent say what measures were considered or even taken by him as the sole director to determine whether the Company should continue its business or whether and how it would implement an orderly winding up. Instead it was left ultimately to the Revenue Commissioners to petition the High Court for an order for the winding up of the Company.
Preliminary objection
31. The respondent objects to the contents of the applicant’s certificate pursuant to section 570 of the Companies Act 2014 which states as follows;
“From an examination of the books and records of Adalbert Limited, I am satisfied that the Company was unable to pay its debts within the meaning of section 570 of the Companies Act 2014 as of November 2016.”
The respondent says that the Company was not unable to pay its debts as of November 2016 and therefore, does not fall within the category of Companies set out in section 570 and not a Company to which the provisions of Part 14 Chapter 3 of the Act apply.
32. The applicant says firstly that the Company was placed in liquidation on foot of a petition presented by the Revenue Commissioners for unpaid taxes. He says that he has been advised that the High Court has therefore already been satisfied that the Company was unable to pay its taxes, and that this point by the respondent is a collateral attack on that order. The applicant also says that there is nothing irregular about the certificate exhibited by him and that the evidence demonstrates that the Company was unable to pay its debts as they fell due by “in or about November 2016”. In this regard he cites the facts that the Company had ceased paying rent for the premises it occupied and the fact that the Company was by then already in arrears with payments to the Revenue Commissioners.
33. I shall return later to the question of when the Company had become unable to pay its debts. Although it is unclear to the court why the applicant chose to make his certificate “ as of November 2016” it seems to me that the fact that the Company is a Company to which s.819 applies is clearly established by the making of the winding up order on foot of the petition for unpaid taxes.
34. I now turn to the aspects of concern which have been identified by the applicant and the responses thereto.
Failure to file a statement of affairs as directed by Court Order.
35. The applicant refers to the order for the winding up of the Company made on 18 June, 2018, in which the respondent was directed to file a statement of affairs within 21 days. The applicant says that no statement of affairs has ever been filed in the High Court by the respondent.
36. The applicant exhibits a statement of affairs sworn by the respondent on 14 December, 2018, which was sent to him by the respondent’s solicitors, Denis McSweeney solicitors on 20 December, 2018. It appears from the exhibited statement of affairs that the respondent at least attempted to complete a statement of affairs in the prescribed form, although it was never filed in the prescribed form.
37. Apart from the lateness of this document, the applicant identified a number of issues arising from its contents, and wrote to the respondent on 16 January, 2019, raising these queries. Although certain further correspondence ensued between the applicant and Messrs. Denis McSweeney, no reply was received to the substantive questions raised by the applicant as to the contents of the statement of affairs. The issues identified by the applicant and referred to in these proceedings were as follows:
(1) The assets were described as including “ leasehold property” at an estimated realisable value of €35,000. In circumstances where the Company was never the contracted tenant of the property, and where a lease which had been granted to the respondent expired on 31 August, 2016, it is clear that the landlord was never under any obligation to extend or renew the lease, either to the Company or to the respondent. Therefore there was no basis for attributing a value of €35,000 to the “leasehold property”.
(2) The assets were described as including “ furniture, fittings, utensils etc.” at a value of €27,850 “ see list attached”. No such list or inventory was attached.
(3) The statement of affairs identified a quantum of unsecured creditors at a sum of €6,501 “ as per list E”. No list of such creditors was provided.
38. The statement of affairs included a figure of €25,111.44 as the amount due to preferential creditors. No listing of preferential creditors was provided. It is fair to note that in many cases the principle preferential creditor is the Revenue Commissioners, who in this case made a claim in the liquidation in a sum of €22,843.38. Therefore, the amount quoted in the statement of affairs for preferential creditors cannot be described as grossly inaccurate. It merely lacks a breakdown
39. In summary therefore it seems clear that the respondent was six months late in delivering the statement of affairs to the applicant, the contents of the statement of affairs were deficient for the reasons identified above, and the respondent failed to reply to the applicant’s queries in relation to the statement of affairs.
Failure to file statutory returns and accounts.
40. The applicant says that in breach of the provisions of s.343 of the Companies Act 2014, the Company failed to file annual returns for the years ended 23 April, 2017, and 23 April, 2018.
41. The applicant also complains that the only set of financial statements ever filed by the Company were abridged financial statements to the year ended 31 January, 2015, and that those accounts indicated that the Company had not commenced trading as of that date, thereby contradicting the averment made by the respondent to the effect that the Company commenced to trade immediately following its incorporation in April 2014.
42. As to the matter of annual returns at the Companies Registration Office (the “CRO”), the respondent says that among the first things he attended to following his appointment as a director on 23 September, 2016, was to arrange the filing of an up to date annual return. This is a valid point, because the evidence is that on 9 November, 2016 the Company, in fact, filed an annual return, together with a request to change the Company’s annual return date to 23 April. However, the applicant says that this left the Company still in breach of the requirement to file annual returns for the years ended 23 April, 2017, and 23 April, 2108.
43. The fact that the Company ceased to trade in May 2017 would not justify the failure to make such returns for period ended 23 April, 2017. Equally, the non-trading status of the Company from May 2017 onwards would not justify a failure to make any form of return for the year to 23 April, 2018, albeit that the liquidation of the Company occurred a very short time thereafter. In the circumstances of this case, I do not regard this as an egregious failure on the part of the respondent.
44. The absence of financial statements is a more serious matter. The return filed by the Company under the stewardship of the respondent on 9 November, 2016, did not include financial statements and this meant that the only set of financial statements ever filed by the Company was in respect of the year ended 31 January, 2015, being financial statements which recorded no trading activity whatsoever and clearly the Company was in breach of this requirement and continued to be in breach from the date of the respondent’s appointment onwards.
Liability to Revenue Commissioners
45. The applicant refers to the claims submitted by the Revenue Commissioners for sums totalling €22,843.38.
46. Clearly the Revenue Commissioners considered this amount to be sufficiently serious to warrant the presentation of a petition for the winding up of the Company and the appointment of the applicant as liquidator. The respondent says very little in response to the applicant’s concerns in relation to this matter. However, it is appropriate to note that only a limited proportion of these amounts fell due after the appointment of the respondent as a director.
47. In respect of VAT, the total amount claimed by Revenue was €8,684.44. This is based on VAT returns up to 29 February, 2016, and VAT estimates to 30 April, 2017. Based on the estimates provided, out of the sum of €8,684.44 only €1,720 in respect of VAT appears to be accrued after the date of the respondent’s appointment.
48. In respect of PAYE/PRSI, the total amount claimed by Revenue is €14,158.94. Of this an amount of €10,712.83 related to the period ended 31 December 2016 and a sum of €3,446.11 was based on an estimate in respect of the year ended 31 December 2017. If one were to apportion the 2016 PAYE/PRSI to the period after the appointment of the respondent as a director, then a sum of only €2,678.21 would have been due in respect of that period.
49. In respect of the balance of €3,446.11 for the year 2017, obviously that is an estimate for the full year and does not of itself take account of the cessation of trade in May 2017.
50. The respondent cannot absolve himself from responsibility in respect of the entire arrears of taxes due and there is an absence of any evidence by the respondent as to what efforts he made to resolve matters with Revenue. However, I consider it material that the vast majority of the taxes which were due at the time of the appointment of the applicant were attributable to periods before the appointment of the respondent as a director. In all the circumstances of this case, I would not regard this factor as sufficient in and of itself to justify the making of a restriction order. In this regard I am informed by the judgment of Finlay Geoghegan J. in Digital Channel Partners Ltd (in voluntary liquidation) and Others v Cummins and Others [2004] 2 ILRM 35.
Failure to file Revenue returns
51. The applicant identifies the following Revenue returns as outstanding and says that despite requests made to the respondent he has not dealt with such returns: –
(1) All VAT returns from 1 March, 2017, (sic) to the date of the appointment of the liquidator. That reference is an error and, in fact, the VAT returns were overdue from 1 March, 2016, onwards;
(2) All P.30’s for 2017;
(3) P.35 for 2017 and 2018; and
(4) Corporation Tax Returns for the years ended 2016, 2017 and 2018.
52. The applicant makes the point that since the respondent’s appointment as a director only one Revenue return has ever been made namely the Form P.35 for the year 2016, which was filed in January 2017.
53. The respondent in his replying affidavits states that he accepts responsibility for the failure to file the relevant returns after the period of his appointment. The only further point he makes on the subject is that the liquidator has cited the Company’s failure to make a number of additional filings relating to dates prior to his appointment as a director.
54. In circumstances where the respondent was a director from 26 September, 2016, to the date of the appointment of the applicant on 18 June, 2018, it is not in my view sufficient for the respondent to simply allocate blame for these failures to his predecessors, where he had more than sufficient time within which to rectify the outstanding returns.
Failure to maintain proper books and records
55. The applicant says that he did not receive books and records of the Company. He says that the respondent claimed that the landlord seized these when he took possession of the property.
56. There is a dispute on the evidence as to what efforts were actually made by the respondent to retrieve the books and records. Central to the applicant’s complaints in this regard is that the respondent offered no evidence that the Company had in fact prepared management accounts or operated any method of accounting that would allow management to determine the financial position of the Company at any given time, as required pursuant to s.282 of the Companies Act 2014.
57. Apart from insisting that the landlord had seized all relevant books and records, the respondent makes the case that such books and records as existed were more than sufficient to determine the financial position of the Company at any one time. In this regard he attaches importance to the fact that the Company was such a “ small operation” in support of the position that it was not difficult to determine the financial position of the Company at any point in time.
58. It seems to me that the fact that the Company was small in the scale of its operations is not an answer to the failure to either provide books and records to the applicant or to offer any description as to what books and records actually existed even before the landlord took possession. On the contrary, the respondent’s reliance on the fact that the operations of the Company were so small in scale reveals if anything a disregard on his part for the statutory obligation to maintain such books and records.
Trading whilst insolvent
59. The Company ceased trading in May 2017 when the landlord repossessed the property. There is no evidence before the Court as to what quantum of liabilities was incurred between that date and the presentation of the petition on 9 May 2018. The amounts incurred in that period were likely to have been small even in the context of the scale of this case.
60. The applicant says that the Company became unable to pay its debts in or about November 2016 at the latest. This appears to be the time when the Company ceased paying rent. The respondent suggested that the non-payment of rent was tactical, in the context of negotiations with the landlord, and therefore not evidence of inability to pay debts. That would not constitute a valid basis for non-payment and clearly there was no evidence of waiver of rent.
61. As regards liabilities to Revenue, the applicant says that the Company had fallen into arrears earlier than November 2016 having made its last payment of VAT in September 2015. As I have identified in the discussion of Revenue liabilities at paragraphs 45 – 50 above, the amounts accrued after the date of the respondent’s appointment as a director are limited. This does not relieve the respondent from the obligation to take steps to regularise the Company’s position with Revenue.
62. Clearly the applicant did not consider the conduct of the director as regards continuing to trade as so egregious as to warrant proceedings for personal liability for reckless trading within the meaning of section 610 of the Act. However, it is also clear that by November 2016 the Company had accrued arrears of taxes – a fact not controverted by the respondent – and was no longer able to pay rent for the premises it occupied. Notwithstanding these clear indicators of insolvency the respondent caused or permitted the Company to continue trading until the landlord intervened in May 2017. He himself says that once this occurred the Company was deprived of its only revenues, and yet still no steps were taken to regularise the position with Revenue or other creditors until the Collector General petitioned a further year later.
Previous company failures and previous restriction
63. The applicant refers to the fact that the respondent has been a director of thirteen companies (including the Company). He says that eight of those companies had been struck off the Register of Companies for failure to file annual returns and financial statements and that three of the companies had been wound up pursuant to petitions by the Revenue Commissioners on foot of unpaid taxes.
64. In respect of one of these companies, namely Balmain Limited, the respondent was the subject of a restriction order for five years, made in January 2011, the term of that restriction expiring in January 2016. The respondent was appointed a director of the Company on 23 September, 2016. The applicant says that a question has been raised by the Director of Corporate Enforcement (the “ODCE”) as to whether while still under a restriction order in the Balmain case, the respondent acted as a shadow director of the Company, in breach of that restriction order. The applicant says that in the absence of books and records and bank statements for the Company, he has been unable to investigate this query from the ODCE. He comments that the question arises in the context of the respondent having signed the lease of the property at Howth in 2014. He does not expand on this issue, although he says that the respondent’s explanation is unsatisfactory. The respondent explains his involvement in the lease as limited to assisting his girlfriend with finding a property from which to operate her business, based on his knowledge of the locality.
65. It is understandable that a measure of suspicion would arise in connection with the respondent’s engagement in securing the lease of the property from which the Company traded, and the position is complicated by the fact that the Company was not a party to the executed lease. However the applicant has fairly stated that there is not before the Court sufficient evidence to reach any conclusion as to whether a breach of the previous restriction order occurred.
Cooperation with the liquidator
66. The applicant says that the respondent failed to co-operate with him in the performance of his duties as liquidator. He refers to three particular issues in this regard as follows:
(a) The failure to file a statement of affairs, and that the version ultimately delivered to the applicant in December 2018 was deficient. I have considered this in paragraphs 35 – 39 above and concluded that the statement of affairs delivered was deficient.
(b) The failure to provide books and records of the Company, other than the lease. In paragraphs 55 – 58 above I have considered this issue and it is clear that the respondent has not complied with the statutory obligations concerning books and records. Not only were they not produced to the applicant, but the respondent has not identified what such books and records were ever maintained.
(c) The applicant refers to the extensive correspondence between him and the respondent after the appointment of the applicant and says that the respondent failed to provide the information requested of him concerning the affairs of the Company.
67. The respondent met the applicant on 9 July, 2018, and claims that he provided all the information he then had in his possession. He says that in subsequent numerous exchanges he provided more information. This claim is not borne out by the evidence of the correspondence exchanged.
68. On 22 June, 2018, the applicant wrote to the respondent. He enclosed a copy of the order appointing him and explained the statutory requirements to provide all information concerning the affairs of the Company. He also enclosed a form of questionnaire for completion by the respondent and requested a meeting. The questionnaire was not retuned completed until 19 December, 2018.
69. The requested meeting took place on 9 July, 2018, and on 10 July, 2018, the applicant wrote again to the respondent identifying the further matters requiring attention and further information required. He referred to the requirement to file a statement of affairs, and to the outstanding CRO and Revenue returns. He then identified the following further information required:
(a) Copies of all books and records of the Company,
(b) Listing of employees including contact details,
(c) Listing of all creditors or potential creditors,
(d) Full listing of all assets and their current location,
(e) Contact details for the majority shareholder Olivia Marjoram, and
(f) Any other details relevant.
70. In the letter of 10 July, 2018, the applicant drew to the attention of the respondent his view that the circumstances of non-compliance with Revenue and CRO requirements “…suggest that this is a situation where a restriction order against the director is a requirement…”. Therefore, the respondent knew the importance of complying with the applicant’s requests.
71. The applicant received certain acknowledgments, but when the requested information was not provided he sent reminders on 3 August 2018, 16 August 2018, 3 September 2018, 18 September 2018, 27 September 2018, and 11 October 2018. During this period the respondent made a number of promises of responses. It was not until 22 November, 2018, that there was provided even the most basic of the outstanding information, being the names and addresses of two staff members. At this stage the respondent said it would take a further three months to obtain information from the accountants and he said also that he was awaiting information from his solicitor Denis McSweeney.
72. On 19 December, 2018, Messrs McSweeney sent the completed questionnaire back and a copy of the lease. Further letters were exchanged but the applicant says that this protracted correspondence, and the deficiencies in the statement of affairs and in other information all illustrate a failure of the respondent to co-operate with him as liquidator. I have come to the conclusion that the respondent indeed failed in this regard for the following reasons:
(a) At the time when the applicant required co operation in relation to the identification and realisation of assets the necessary information required was not provided,
(b) The statement of affairs was never filed and when it was delivered to the applicant five months late it was deficient in content,
(c) The liquidator’s questionnaire was returned 6 months after it had been requested, and
(d) Books and records of the Company were never provided to the liquidator, if indeed they had existed.
Relevant Legal Principles
73. In Re Shemburn Limited (in liquidation) [2017] IEHC 475 Haughton J. considered the relevant legal tests and summarised them by reference to the judgments of Shanley J. in Re La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM, Finlay Geoghegan J. in Re Tralee Beef and Lamb Limited [2004] IEHC 139 in which she cited with approval the relevant passages from the judgment of Parker J. in Re Barings plc et al (No 5) Secretary of State for Trade and Industry v Baker et al (No 5) [1999] 1 BCLC 433, and the judgment of Mr. Justice Clarke in Re Swanpool Limited [2005] IEHC 341.
74. The seminal description of the relevant tests by Shanley J. in Re La Moselle is pertinent to this case where he said the following: –
“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.”
75. Haughton J. continued as follows: –
“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” (citing Finlay Geoghegan J. in O’Neill Engineering Services (ex tempore, 13 February 2004)
76. Haughton J. continued: –
“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.”
77. In the case of Re Shemburn Limited, Haughton J noted the delay following the liquidation of a connected company of some twenty-two months and found that this was irresponsible on the part of the respondent in that case as an executive director. The Court also found in that case that a second director who had been a non-executive director did not act responsibly in failing to take appropriate action to have the company wound up in a timely fashion.
78. In this case when the respondent was appointed a director of the Company on 23 September, 2016, the Company was already in arrears with Revenue both as to returns and payments, and as regards filing of statutory returns of the CRO. The lease of the property which the Company had availed of for the purpose of its trading activities had expired and its landlord was under no obligation to extend or renew the lease in favour of any party, whether that be the Company or otherwise.
79. The respondent attaches the principal responsibility for the insolvency and the ultimate liquidation of the Company to the “ overnight” loss of use of the premises and fixes responsibility for this on the landlord. He has not contradicted the assertion made by the liquidator that, in fact, the landlord gave two months’ notice of termination, having already granted indulgence from 31 August, 2016, and ultimately only re-entering more than eight months later in May 2017.
80. When the respondent’s endeavours to persuade the landlord to extend or renew a lease of the property failed and a full eight months had lapsed after the expiry of the lease no evidence has been advanced by the respondent as to what exactly he did in relation to the regularisation of the Company’s affairs at a time when on his own account it had become clear that the Company was unable to continue to trade. Nor is a satisfactory explanation given as to why no steps were taken by the respondent to either secure agreement with Revenue and other creditors such as may have avoided insolvent liquidation or warranted delaying the initiation of a liquidation. In fact, no such steps were ever taken by the respondent and it fell to the Revenue to petition as a creditor for the winding up of the Company which it did more than a year after the landlord had re-entered.
Conclusion
81. I have determined that the respondent:
(a) Failed to comply with his obligation to make a satisfactory statement of affairs,
(b) Failed to cause financial statements to be completed and returned for any period of the Company’s existence,
(c) Failed to file returns to Revenue,
(d) Failed to maintain proper books and records of the affairs of the Company,
(e) Failed to take steps to implement a winding up of the Company for a period of at least a year after it had become insolvent,
(f) Failed to co-operate with the liquidator as far as could reasonably be expected in relation to the conduct of the winding up.
82. Taking all of these matters into account, I am not persuaded that the respondent has acted responsibly in relation to the affairs of the Company or that he has, when requested to do so by the applicant co-operated as far as could reasonably be expected in relation to the conduct of the winding up of the Company. Accordingly, I shall make a declaration pursuant to s.819 of the Companies Act 2014 that the respondent shall not for a period of five years be appointed to act in any way directly or indirectly as a director or secretary of a company or be concerned in or take part in the formation or promotion of a company unless that company meet the requirement set out in subsection 3 of s.819.
Leahy -v- Doherty & ors
2016] IEHC 588 (21 October 2016)
JUDGMENT of Mr. Justice David Keane delivered on the 21st of October 2016
Introduction
1. This judgment concerns an application for a declaration of restriction against each of the respondents, pursuant to s. 150 of the Companies Act 1990 (‘the 1990 Act’).
Background
2. Doherty Brothers Timber Company Limited (‘the company’) was incorporated on the 22nd November 1993. It carried on the business of timber merchants and builders providers. At a general meeting held on the 4th May 2011, the members of the company resolved to wind it up voluntarily, being satisfied that it could not continue in business by reason of its liabilities. The members passed a further resolution at that meeting appointing the applicant as liquidator.
3. Each of the three respondents was a director of the company at the date of the commencement of its winding up. The first and second named respondents were directors of the company throughout its existence; the third named defendant became one on the 28th August 2006.
4. On the 14th May 2013, the applicant certified that, both then and on the date of the commencement of its winding up, the company was unable to pay its debts within the meaning of s. 214 of the Companies Act 1963.
5. Between the 2nd November 2011 and the 31st October 2012, the applicant submitted four reports to the Office of the Director of Corporate Enforcement (‘ODCE’). By letter dated the 31st January 2013, the ODCE informed the applicant that he was not relieved of his obligation as liquidator of the company to bring a restriction application against each of the respondents.
6. The present application is brought by motion issued on the 15th May 2013, originally made returnable for the 24th June of that year. After an extensive exchange of affidavits, the application was heard on the 26th and 27th November 2015 and judgment was reserved.
7. Although one of the reliefs sought in the applicant’s notice of motion was an order, if necessary, pursuant to s. 56(2) of the Company Law Enforcement Act 2001(‘the 2001 Act’), extending time for bringing an application under s. 150 of the 1990 Act, the applicant confirmed through Counsel at the commencement of the hearing that, while the substantive application was proceeding, the relevant extension of time was no longer being pursued.
The legal issue
8. The respondents do not dispute that the company was unable to pay its debts at the commencement of its winding up. Nor do they deny that they were each a director of the company at the material time or that the Director of Corporate Enforcement has not relieved the applicant of the obligation to bring the present application.
9. It follows that the Court is obliged to make a declaration of restriction under s. 150 of the 1990 Act (now s. 819 of the 2014 Act) in respect of each of the respondents unless satisfied that the conduct of either or both comes within the circumstances set out in sub-s. (2) of that section.
10. The specific issue that arises under s. 150(2) of the 1990 Act is whether each of the respondents acted honestly and, more particularly, responsibly in relation to the conduct of the company’s affairs.
The evidence
11. The company traded for a period of approximately eighteen years between 1993, shortly after its incorporation, and March 2011, shortly before the decision was taken to place it in liquidation.
12. The essential details of the company’s trading history are not in dispute. The company traded profitably until 2008. In that year it had a turnover of €8 million and a staff of approximately 25 full time employees. As a timber merchant and builders’ supplier, trading from a premises at Ashbourne, County Meath, it dealt extensively with builders operating in the greater Leinster area. After the dramatic collapse of the construction sector at about that time, the company made a loss of approximately €100,000 in 2009. In response, it quickly reduced its overheads by half and then progressively reduced them still further until they stood at approximately 15% of their original figure. The company incurred a number of bad debts, standing at more than €1.5 million at the commencement of its winding up. The combination of circumstances just described gave rise to cash flow problems for the company, which in turn damaged its reputation with its own suppliers.
13. The respondents did not hide from these difficulties. Instead, they took suitably drastic action; the company sold four of its five forklift trucks; stopped all expense, bonus and pension payments to directors; brought all cleaning and delivery services in house to save on the external supply of those services; replaced its fleet of company cars with cheaper models; and reduced the size of the premises it was leasing.
14. The respondents believed that, through these measures and the anticipated bottoming out of the downturn in the construction industry, the company would be able to continue to trade, albeit at a more modest level. However, severe weather in December 2010 further hampered activity in the construction sector, which, in turn, further adversely affected the company’s trade. The respondents sought professional advice in early 2011. Upon consideration of that advice and after consultation with the company’s bankers, the respondents resolved to liquidate the company.
15. The scale of the difficulties that the company encountered are vividly illustrated by the decline in its turnover from €11.9 million in 2006/2007 to €1.8 million in 2010/2011, a fall of over 85%. The company’s financial statements disclose that it made profits of €251,237 in 2007; €9,664 in 2008; and a loss of €119,771 in 2009. The applicant estimates that the company made further losses of approximately €153,792 in the year to the 28th February 2010 and €238,730 in the year to the same date in 2011.
16. At the commencement of the winding up, the company had realisable assets of €27,792, preferential creditors amounting to €210,424 and unsecured creditors amounting to €1,706,645, giving rise to an estimated total deficiency of €1,889,531 before the costs of the liquidation are taken into account.
17. The company has a liability to the Revenue Commissioners of some €189,843, comprising €84,728 in unpaid VAT and €105,115 in respect of unpaid PAYE/PRSI. The company ceased to file VAT returns after the period November/December 2010 and ceased to pay its VAT liabilities with effect from the end of the period January/February 2010. The company filed all PAYE/PRSI returns up to March 2011 and, having paid €6,000 per month in respect of its PAYE/PRSI liabilities to the end of June 2010, ceased to make any such payments after that date.
18. The company filed its annual return in the Companies Registration Office until 2009. Its last return was submitted in November 2009 and included the company’s accounts for the year ending on the 28th February 2009. The company failed to submit its return for 2010 or its accounts for the year ending the 28th February 2010 by the required deadline in December 2010.
The factual issue
19. While the applicant very properly drew attention to the company’s failure to make the appropriate Companies Registration Office and tax returns during the final phase of its existence, and its failure to make the appropriate tax payments during that period, he did not press the argument that this was sufficient to preclude the respondents from establishing that they acted honestly or responsibly in the conduct of the company’s affairs, having regard to the particular circumstances in which those failures occurred.
20. In adopting that course, no doubt he had in mind the frequently quoted passage from the judgment of Finlay Geoghegan J. in Digital Channel Partners [2004] 2 ILRM 35 at 40 to the effect that the mere fact that a company is in breach of its obligations in that regard for a relatively limited period will not, of itself, indicate dishonesty or irresponsibility on the part of its directors, without something more.
21. The specific factual issue that the applicant did raise, refined in the course of argument, is whether each of the respondents can satisfy the court that he acted responsibly as a director in relation to the conduct of the company’s affairs in permitting the company to continue to operate between the Spring or Summer of 2010, at which point the applicant contends the company was clearly insolvent, and March 2011, when the company ceased trading.
The applicant’s position
22. The applicant invites the Court to have regard to the three types of situation that a court is typically required to consider in s. 150 applications, as those situations were described by Clarke J. in Re Swanpool Ltd; McLaughlin v Lannen [2006] 2 ILRM 217 at 223. The applicant submits that the issue he has raised falls to be considered within the rubric of the second type of situation contemplated, in that it relates to ‘the commercial management of the company most particularly at the period when the company was insolvent or heading in that direction.’ In making that submission, the applicant acknowledges, as Clarke J. pointed out, that mere commercial misjudgement would not be enough in that context, it would be necessary to establish ‘gross mismanagement.’ This, in turn, echoes the conclusion of McGuinness J. in the Supreme Court appeal in Re Squash (Ireland) Ltd [2001] 3 IR 35 that ‘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.’
23. Undeterred, the applicant invokes the following well-known dictum of MacMenamin J. in Re MDN Rochford Construction Limited; Fennell v Rochford & Anor [2009] IEHC 397 (at para. 50):
“While each case must be judged on its facts, there comes a point where optimism becomes hubris, and where belief that a company can trade out of its difficulties is simply wilful self-delusion. Commercial acumen is necessary. Hope must be matched by verification and objectivity. The absence of all of these necessary characteristics constitutes irresponsibility.’
24. For the purpose of completeness, I should say that it was at one stage of the application mooted that there may also be an issue coming within the third type of situation described by Clarke J. in Re Swanpool, namely, one where there was a question of ‘compliance by the directors with the obligations identified [by the Supreme Court] in [Re Frederick Inns Ltd [1994] 1 ILRM 387] 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.’
25. There appears to have been a suggestion that the respondents caused the company to acquire goods on credit from its suppliers during the final phase of its trading life in order to allow it to effect sales for the ulterior purpose of enabling the preferential repayment of the company’s invoice finance facility with Bank of Ireland, in circumstances where that facility was the subject of a personal guarantee from the first and second named respondents. That allegation or assertion was trenchantly denied by the respondents who contend that they were unable to obtain any significant fresh or additional credit from most of their suppliers during the relevant period in view of both the prevailing economic situation and the company’s own financial circumstances during the period in question. Despite considerable forensic efforts on the part of the applicant, including the preparation or recreation of an extensive aged debtor analysis and a consideration of the company’s stock levels over the period at issue as disclosed in its accounts, the evidence before the Court falls far short of permitting any conclusion to be drawn that the respondents engaged in, or caused the company to engage in, any such conduct.
The respondents’ position on the issue raised
26. The respondents deny that they were irresponsible in causing the company to continue to trade between the Spring or Summer of 2010 and March 2011 or that they failed to have appropriate regard to the position of the company’s creditors during that period. They point to the uncontroverted evidence that the company addressed the losses it incurred in both 2009 and 2010 by making drastic cost reductions; that, until November 2010, the company was engaged in meaningful discussions with its bankers and with its invoice finance provider to secure the credit facilities necessary to keep the company afloat; and that the company had retained the services of a professional consultant throughout that year to assist it towards that end.
27. The respondents rely on the dictum of the Supreme Court (per McGuinness J.) in Re Squash (Ireland) Ltd that, in considering whether a director has acted responsibly, the Court should have regard to the entire tenure of the director and not merely the months in the run up to the liquidation. In this case, the evidence is that, under the stewardship of the respondents, the company had a perfect revenue record for over sixteen years.
Conclusion on the issue raised
28. Having considered carefully the evidence presented in this case and the arguments advanced by the parties, I have come to the conclusion that, having due regard to the entire tenure the respondents as directors of the company and to the uncontroverted evidence of their engagement with professional advisers and financial institutions throughout the period at issue, albeit subject to some disagreement about the precise nature and extent of that engagement, the respondents have satisfied me that, although they undoubtedly made commercial errors and misjudgements in the twilight period of the company’s existence, they have acted responsibly in relation to the conduct of the company’s affairs.
Other matters
29. It would be wrong to conclude without expressly recording the Court’s rejection of certain criticisms that the respondents made of the applicant’s conduct of the liquidation in general and of his presentation of the present application in particular.
30. The respondents devoted a considerable, one might easily say disproportionate, amount of their evidence on affidavit to criticism of the applicant for his perceived failure to provide them with what they consider to be the information and material necessary to defend the present application. In particular, they point to the failure of the liquidator to retrieve the company’s computer servers from the information technology company to which the third named respondent had returned them at around the time the company entered liquidation. They criticise the liquidator for failing to exercise his powers under s. 244A of the Companies Act 1963, as amended, to retrieve the information stored on those servers (presumably, as a ‘document’ or ‘book of account’) from that company. They further criticise the liquidator for failing to locate certain back-up disks containing the relevant information, which they say were left at the company’s premises.
31. However, I find the third named respondent’s explanation for his apparent solicitude in moving with such alacrity to assist that other company in removing its servers from the company’s premises at the commencement of the liquidation to be incomplete and unconvincing. I question why no steps were taken to retrieve the company’s information from those servers and to secure it before doing so. I think it is reasonable to wonder why nothing is said concerning any practical assistance offered to the liquidator to locate the back-up disks, which the directors say were left in the company’s premises. The respondents’ deprecation of the applicant’s asserted failure to exercise his powers to retrieve the information on the servers from that other company takes no account of the applicant’s evidence that, upon making inquiry, he was informed that the servers concerned had already been scrapped or stripped for parts.
32. As the foregoing observations suggest, I take the view that the relevant controversy raises much more obvious questions about the respondents’ conduct after the commencement of the liquidation than it does about that of the applicant. That conduct might have warranted consideration of whether a declaration of restriction is appropriate on the ‘just and equitable’ ground in respect of the respondents failure to co-operate with the applicant as liquidator, had the applicant chosen to press the matter; see, for example, the judgment of Shanley J. in La Moselle Clothing Ltd and Rosegem Ltd v Soualhi [1998] 2 ILRM 345 at 353.
33. Nor do I accept the respondents’ submission that the decision of Barrett J. in Re Gleneagle Woodcrafts Ltd; Hughes v Caffrey & Anor [2014] IEHC 366 casts an additional onus on the applicant, as liquidator, to provide them with information in the manner for which they contend. It is clear that, in the context of a s. 150 application, the liquidator’s role is more obviously that of information provider to the Court than that of adversarial litigant in the true sense. I understand the relevant observations of Barrett J. in that case to go no further than that, insofar as the liquidator believes he has information – in the form of evidence – to offer on the issue of a respondent’s honest or responsible conduct in relation to the conduct of the affairs of the company concerned, he should properly explain the relevance and significance of that evidence, as he perceives it, to the determination of that issue.
34. I reject also the submission made on behalf of the respondents that the Court should have regard to the fact, if fact it be, that significant parts of the evidence contained in the affidavits sworn, and relied upon, by the applicant comprise inadmissible hearsay of the kind expressly disapproved of by the Supreme Court in Re Bovale Developments Ltd [2011] 3 I.R. 279. The parties to the present application exchanged what was, by my reckoning, a total of 15 affidavits between the 14th May 2013 and the 8th January 2015. Any objection to the admissibility of any evidence contained in any of those affidavits should have been raised, with the necessary particularity, in good time prior to the hearing of the application, as was done in Bovale Developments, and not as a nebulous submission on the merits of the application in the course of the hearing itself.
35. On the basis of the conclusions that I have reached on the issues as I perceive them, it is unnecessary to express any view on the question of the significance, if any, of the delay in bringing the present application and I do not propose to do so.
Conclusion
36. For the reasons I have given, each of the respondents has satisfied me that he acted honestly and responsibly in relation to the conduct of the company’s affairs and, accordingly, I must decline to make the declaration of restriction sought.
Rollville Ltd -v- Companies Acts
[2011] IEHC 79 (26 January 2011 )
JUDGMENT of Mr. Justice Herbert delivered the 26th day of January 2011
The petitioner is a director and the holder of one of the two issued ordinary shares in Rollville Limited a company incorporated on the 29th March, 1999. The second named respondent is the holder of the other issued ordinary share and, is the other director of the company, of which he is also the secretary. The petitioner and the second named respondent were married on the 17th April, 1990. In or about February 2006, unhappy differences arose between the petitioner and the second named respondent which are the subject matter of legal proceedings in Northern Ireland. The petitioner claims, pursuant to the provisions of s. 205 of the Companies Act 1963, and additionally or alternatively, pursuant to the provisions of s. 213(g) of the said Act of 1963, that the affairs of the company are being conducted and, that the second named respondent has exercised his powers as a director and as a member of the company, in a manner which is oppressive to and in disregard of her interests as a member of the company and, in disregard of the interests of the company and, that the relationship of trust and confidence between them has irretrievably broken down.
In Amended Points of Claim, delivered on the 20th April, 2009, a number of grounds were put forward by the petitioner in support of her claim:-
“In the financial year ending 31 October 2006, the second named respondent wrongfully and fraudulently procured the first named respondent to make a loan €965,904 to Duval Estates Limited: €439,239 of this advance was taken from the Ulster Bank account of the first named respondent and, the balance of €511,000 was raised by way of a loan from the Bank of Scotland (Ireland) Plc, on which interest of €15,666 had to date accrued.
The second named respondent fraudulently forged her signature on the following documents in order to obtain the said loan from the Bank of Scotland (Ireland) Plc:
An Acceptance dated 16th March 2006, of a loan facility letter from the Bank dated the 13th March, 2006.
A Board Resolution of the first named respondent dated the 16th March, 2006.
Insurance Instructions dated the 16th March, 2006.
The second named respondent caused and wrongfully procured the first named respondent to create a charge over three apartments at Mountgorry Wood in favour of the Bank of Scotland (Ireland) Plc, as security for the said loan.
In the financial year ended the 31st October, 2006, the second named respondent wrongfully caused and procured the first named respondent to make an unauthorised loan of €30,000 to Bell Contracts, the name under which the second named respondent and his brother, Mr. Martin Bell carry on business as building contractors in Northern Ireland.
By a Combined Building Agreement and Contract for sale dated the 22nd May, 2006, the second named respondent wrongfully caused and procured the first named respondent to sell an apartment in Block A, Mountgorry Wood, Malahide Road, Swords, Co. Dublin, constructed by the first named respondent, to his brother, Mr. Martin Bell and his wife, for the sum of €246,696, when the average sale price achieved by such apartments was €285,837.
In late 2005 and, throughout 2006, after development works had been substantially completed at Mountgorry Wood since April or May 2005, the second named respondent procured and authorised payments and purchases to be made by the first named respondent for which no proper or sufficient vouched details or invoices were forthcoming.
Fox Engineering €36,248
J.C. Campbell Electrics €7,385
M.B. Protective Coatings €121,641
Junemar Limited €17,264
Bell Contracts (Plant Hire) €53,600
Bell Contracts (Administration) €90,000
Bell Contracts (Engineering and Quantity Survey) €64,686
Motor and Telephone Expenses 2006 €14,616
Tractor (September 2006) €29,000
Total €434,440
In addition to his salary as a Director of first named respondent, in 2004 the second named respondent exceeding his authority and without the consent of the petitioner drew €550,570 from the first named respondent as “Directors Drawings” and in 2005 drew €746,000 from the first named respondent as “Directors Drawings”
At the trial of the action the second named respondent represented himself, his former Solicitors prior to trial having been granted an Order pursuant to the provisions of O. 7 r. 3 of the Rules of the Superior Courts, declaring that they had ceased to act for the second named respondent.
On the second day of the trial of the action as Senior Counsel for the petitioner, was about to call in evidence a handwriting expert and several bank officials, the second named respondent admitted that he had forged the petitioner’s signature on the three documents as alleged. He offered by way of explanation the fact that his sole concern was to ensure that he could remain successful in the development and construction business and the re-development project at Perry Street, Dungannon, appeared to him to be an opportunity which he could not afford to miss. He accepted, as pleaded in the Amended Points of Claim, that the petitioner, supported by members of her family who were successful in this field in Northern Ireland, was wholly opposed to this project.
At the hearing of this Petition it was admitted by the second named respondent that without informing the petitioner or, seeking her approval as the sole other shareholder and additionally director of the first named respondent, he had given three apartments at Mountgorry Wood, Malahide, to the Bank of Scotland (Ireland) Plc. as security for this facility. He admitted that this facility had been obtained by him without the knowledge or approval of the petitioner and by forging her signature on the aforementioned documents. During the hearing of this petition the second named respondent accepted that the petitioner was not informed and had not given her consent to the drawing down on the 21st March, 2006, of this sum of €511,000 and to the transfer of that sum to Duval Estates Limited as part of what the second named respondent claims was a “loan” by the first named respondent to Duval Estates Limited of €965,904.
It was accepted at the hearing of this petition that this alleged “loan” was included as such in the draft accounts of the first named respondent for the financial year ending the 31st October, 2006, but under the erroneous designation of Duval Properties Limited. The second named respondent gave evidence and it was accepted on behalf of the petitioner that €150,000 of this money had been repaid to the first named respondent during 2006. It was admitted and accepted at the hearing of this petition that Duval Estates Limited was incorporated in Northern Ireland on the 30th January, 2002. The second named respondent and his brother, Mr. Martin Bell, each held 6000 ordinary £1 shares in the company, while the first named respondent and the petitioner each held a single “A” share in the company, which carried restricted rights. For the purpose of the instant case it is not necessary for the court to delve further into the structure, ownership or objects of this company or into whether, as pleaded in the amended Points of Claim, it was intended to constitute the first named respondent and Duval Estates Limited related companies in order to facilitate the purchase of property by Duval Estates Limited at Fivemiletown, Co. Tyrone.
The second named respondent, while accepting that the petitioner was entirely unaware of and, did not authorise the payment of this money by the first named respondent to Duval Estates Limited, claimed that the petitioner had at all times left every aspect of the running of the first named respondent exclusively to him, as instance, the fact that there had never been any board meetings. He claimed that this was a bona fide loan from the first named respondent to Duval Estates Limited, a related company, which was fully recorded in the draft accounts of the first named respondent for the financial year ending the 31st October, 2006, as an asset of the first named respondent. He stated that his sole object in arranging for this loan to be made to Duval Estates Limited was to ensure a supply of work for himself in order to provide for the family, even after the breakdown of the marriage in February 2006. The second named respondent claimed that a further sum of €289,000 would have been repaid by Duval Estates Limited to the first named respondent in September 2007 but for the refusal by the petitioner as a holder of a single “A” share in Duval Estates Limited to agree to the sale by it of two properties in Ballygawley, Co. Tyrone.
I am satisfied on the evidence that the sole reason why the petitioner refused to agree to these sales in September 2007, was that she was concerned that the properties, – a detached residence and a semi-detached residence were being sold at an undervalue. Having regard to the contemporary valuation reports put in evidence at this hearing, I am satisfied that the petitioner had substantial grounds for her belief having regard to the material difference in the amount of the respective valuations and, to the mis-description of the properties in the valuation report prepared for the second named respondent. I also find that having regard to the information of which she was in receipt about the conduct of the affairs of the first named respondent by the second named respondent, from Mr. Desmond Kelly, an accountant appointed by her for that purpose, from April 2007 onwards, the petitioner had a genuine concern which was both reasonable and rational as to whether any of the proceeds of the proposed sales would in fact be paid to the first named respondent by Duval Estates Limited.
The second named respondent accepted in cross examination that at the date of the petition in the instant case there was no money in the account of the first named respondent. The second named respondent claimed that the reason why he had not admitted to the forgery of the petitioner’s signature on the Bank of Scotland (Ireland) Plc, documents, between the 20th April, 2009, when this was first expressly pleaded in the amended Points of Claim and, the second day of the hearing of the petition by this Court was that he wanted his day in court.
I find that this transfer of €965,904 from the first named respondent to Duval Estates Limited was a fraud on the petitioner as member of the first named respondent and was not for her benefit or that of the first named respondent. It was for the sole benefit of the second named respondent at the expense of the petitioner. This was an exercise of directors’ powers by the second named respondent in a manner oppressive of the petitioner as being in total disregard of her interest as a member of the first named respondent.
In the period from May 2003 until February 2006, when three Family Law orders were made in Northern Ireland in favour of the petitioner against the second named respondent, the petitioner was paid a salary of £2,000 per month as a director of the first named respondent. The second named respondent was paid a salary of €56,000 for the financial year ending the 31st October, 2004, €64,000 for the financial year ending the 31st October, 2005 and €73,720 for the financial year ending the 31st October 2006, as a director of the first named respondent. I am satisfied on the evidence that in all cases P.A.Y.E. Income Tax was deducted at source by the first named respondent. The petitioner’s sole complaint with respect to these salary payments related to the unilateral total cessation of salary payments to her after February 2006.
In addition to these salary payments, I am satisfied on the evidence, that the second named respondent in the financial year ending the 31st October 2004, made drawings of €55,570 from the first named respondent and for the financial year ending the 31st October, 2005, drawings of €746,000. All of which were reflected in the accounts of the company. In the Amended Points of Claim it was alleged by the petitioner that she did not consent to these payments which were therefore ultra vires. During the hearing of this petition a dispute arose between Mr. Desmond Kelly, Accountant, called in evidence by the petitioner, and the second named respondent, as to whether or not tax had been paid on these drawings, – the second named respondent insisting that it had. After an overnight adjournment during which further inquiries were made from the Revenue Authorities, it was conceded by Mr. Kelly that tax of €258,570 had been paid to and accepted by the Revenue Commissioners in respect of the drawings of €550,570 and, €350,836 in respect of the drawings of €746,000. The second named respondent gave evidence that he had spent 99.9% of the sum remaining after payment of tax on the family. This was denied by the petitioner. However, it was accepted on behalf of the petitioner that to the extent that this court was satisfied that some or all of these drawing were applied by the second named respondent for the benefit of the family, she had no genuine ground for a complaint of oppression. Mr. Desmond Kelly gave evidence that there were no minutes of any board meetings approving of these drawings and that the former Auditors of the first named respondent had no information as to the circumstances in which these drawings were made. Mr. Kelly pointed out they designated as “expenses” and not as “loans”, by these former auditors. Mr. Kelly gave evidence that in the financial year ending 31st October, 2002, the second named respondent had drawings of €105,000 and in the financial year ending 31st October, 2003, his drawings were €160,000.
Despite the paucity of physical evidence in this case, ie. bank records, payment instruments, invoices and others documents, I am satisfied on the general evidence before the court and I so find, that in the period 31st October, 2003, to February 2006, the second named respondent, the petitioner and their children lived an extraordinarily lavish lifestyle. This was typified by expenditure on constructing and furnishing a particularly fine dwelling house, purchase of expensive motor cars, jewellery and holidays and the purchase of a string of very expensive ponies to enable the children to compete in equestrian events at a national and international level. Until the unhappy differences arose between them in February 2006, the second named respondent and the petitioner operated a joint bank account at the Northern Bank Plc. There was also a Home Loan account with the Ulster Bank Plc. to which repayments of €2,000 per month was consistently made by the second named respondent.
Having considered the oral evidence given to the court by Mr. Desmond Kelly and the second named respondent relative to this issue and, the documents and records proved or admitted into evidence and referred to by them, in particular, the accounts and draft accounts of the first named respondent; the Northern Bank Plc. joint account statements, the Ulster Bank account statements; the Northern Bank joint account cheque book stubs from the 6th September, 2005 to 6th October, 2006 (book of 100); the bank drafts and cheques relating to the purchase of ponies; and photographs; I am not satisfied that the second named respondent has discharged the evidential burden of establishing that 99.9% of these drawings, after the payment of tax, was spent on the family.
The petitioner herself gave very little credible positive evidence in relation to this issue. While I accept her evidence that she was not asked to and did not give prior approval to the majority of this expenditure, in particular in relation to the ponies, I am satisfied that she was fully aware of and accepted and, did not seek either to question or oppose it. I accept the evidence of the second named respondent that their son and daughter were at this time brilliant and dedicated riders who constantly competed in National and even International Pony Events, with his enthusiastic support and approval. I also accept the evidence of the second named respondent that this skill and interest was supported by an equestrian establishment run at a highly professional level with trainers, grooms, transporter, extensive facilities and equipment. I find on the evidence that the petitioner, while not herself terribly interested in this sport was very pleased with her childrens’ success and was happy at all times to support them, even if not at the same level of interest as the second named respondent.
I am satisfied that sufficient evidence of expenditure on household, family and family interests has been demonstrated by the second named respondent as to enable the court to be satisfied on the balance of probabilities that these drawings, however irregularly they may have been made as a matter of proper corporate governance, were not made as part of a conscious or deliberate scheme to misapply or reduce the assets of the first named respondent in disregard of the interests of the petitioner as a member of the first named respondent and, so as to cause her loss and damage as such member.
At the hearing of this petition the second named respondent accepted that on the 22nd April, 2006, an apartment at Mountgorry Wood, Malahide Road, Swords, was sold by the first named respondent to his brother Mr. Martin Bell and his brother’s wife for €246,696. The second named respondent did not dispute the evidence of Mr. Desmond Kelly that the average selling price for such apartments at the time was at the time €285,837. The breakdown of the petitioner’s marriage to the second named respondent in February 2006 did not alter in any way her position as the sole other shareholder in and sole other director of the first named respondent. Despite this she was not informed of the sale nor was she asked to consent to it.
At the hearing of this petition the second named respondent accepted that this sale to his brother and his brother’s wife was at an undervalue and he stated that he was prepared to repay 50% of the €40,000 underpayment to the first named respondent. By way of an explanation for this sale the second named respondent stated that, “he did not want to be too hard on his brother” as he had been of enormous assistance to him in the building of the Mountgorry Wood Apartment Complex. He accepted in cross examination that his brother had been fully paid for his work in this respect. In my judgment this disposal of an important asset of the first named respondent at a serious undervalue, without giving the petitioner full prior information about the proposed sale and, without obtaining her prior consent, was a misapplication of the assets of the first named respondent in the second named respondent’s own interests, and was an exercise of the directors powers in a manner which was “burdensome, harsh and wrongful” and in total disregard of the petitioner’s interests as a member.
I am satisfied on the evidence that building work on the Mountgorry Wood Apartment Complex was substantially completed in April or early May 2005. Involved was a total of 48 apartments in 4 Blocks on which work commenced in September 2003 and was completed in the order of Block “D”, Block “C”, Block “B” and Block “A”. The first named respondent was the site owner, the developer and, the building contractor. However, the second named respondent told the court that almost all the work had been done by subcontractors. He said that his brother Martin Bell and a team of men from Northern Ireland were responsible for the foundations, the substructure, bricklaying, plastering, roofing, landscaping and some other work. Plumbing, electrical, joinery and painting subcontractors were employed in addition. It was his recollection that the last sale of an apartment at Mountgorry Wood was in May 2006, just as the property market was starting to fall.
The second named respondent told the court that between 1999 and 2003 the only building work carried out by him was through the first named respondent. In 2003 he and his brother Mr. Martin Bell using the business name “Bell Contracts” started to get back into the building business and the property market in Northern Ireland. They built some new houses, but most of their work consisted of building and renovating hospitals, schools and public offices. He had handled most of this work until early 2007 when his brother Martin returned from working in the Republic of Ireland. Bell contracts operated a joint account in the name of Desmond and Martin Bell, trading as Bell Contracts at the branch of the Northern Bank at Cookstown, Co. Tyrone.
The first named respondent paid Bell contractors €28,800 on foot of an invoice dated the 5th April, 2005, for the hire of scaffolding for sixteen weeks, order dated the 30th April, 2005. (sic) Bell Contractors were paid €24,800 on foot of an invoice dated the 5th April, 2005, for the hire of portacabins and a digger for sixteen weeks, order dated the 31st May, 2005. (sic) The first named respondent paid Bell Contactors €64,685.95 on foot of an invoice dated the 2nd December, 2005, for “the provision of procurement, engineering and quantity surveying services” and, €90,000 on foot of an invoice dated the 2nd December, 2005, for “the provision of administration expenses to Rollville”. The first named respondent paid the second named respondent €14,616 for diesel fuel consumed (Diesel Card Ireland) and telephone calls made (Vodafone) in 2004 and 2005. The second named respondent claimed that he ran the project at Mountgorry Wood, Swords, from his office at 20 Union Street, Cookestown, Co. Tyrone and, that theses costs were incurred in travelling between this office and Swords and, telephone calls made for the purpose of the building work at Mountgorry Wood. In October 2006, a loan of €30,000 was made by the first named respondent to Bell Contracts. This sum was included in the accounts of the first named respondent for the financial year ending the 31st October, 2006, as a “loan”. The second named respondent claimed that this was a genuine loan and stated that he was willing to repay to the first named respondent 50% of whatever remained outstanding on foot of this loan. The petitioner claimed that each of these payments was unauthorised by her and was made in total disregard of her interests as a member of the first named respondent and, was an exercise by the second named respondent of his power as a director of the first named respondent in a manner which was oppressive to her as a member and as a director of the first named respondent.
On the evidence I am not satisfied that these payments, amounting in total to €249,968 represented bona fide transaction for the benefit of or from which the first named respondent had derived a benefit. If these had been payments from which the first named respondent received a benefit, the failure of the second named respondent, even after February 2006, when matrimonial problems had arisen between him and the petitioner, to inform the petitioner of and, to seek her approval for the making of these payments though irregular, would not amount to oppression of the petitioner. However, for a number of reasons I am not satisfied that these were bona fide payments from which the first named respondent derived the benefit: the invoices and payments relate to a period after May 2005, when on the evidence the building work at Mountgorry Wood had been substantially completed; the sequence, dates and appearance generally of the invoices in unconvincing; the invoices lack any proper details of the work alleged to have been done or the services alleged to have been rendered; no documents, records or details of any sort were furnished in evidence to support these claims for work done, goods supplied and services rendered by Bell Contracts to the first named respondent; the evidence established that the work at Mountgorry Wood started in September 2003 and was substantially completed in early May 2005, yet the particular sixteen weeks invoiced was not identified, or why it was isolated in this fashion or what particular aspect or aspects of the work at Mountgorry Wood was involved; there was a close interest between the second named respondent who authorised these payments on behalf of the first named respondent and Bell Contracts.
In the circumstances I am satisfied that theses payments amounted to a continuous misapplication of the funds of the first named respondent for the purpose of enabling the second named respondent to re-establish himself in the building and property development sector in Northern Ireland. In this respect the second named respondent acted in total disregard of the interests of the petitioner as a member of the first named respondent. In authorising these payments the second named respondent acted recklessly, unscrupulously and unfairly and, in a manner which was wrongful and, oppressive of the petitioner as a member of the first named respondent.
Having heard the evidence of the second named respondent, despite the wholly unsatisfactory lack of particularity in the invoice legends, “work done to the above”, I am prepared to accept that the total sum of €121,641 paid by the first named respondent to M.B. Protective Coatings Limited (a company controlled by Mr. Martin Bell brother of the second named respondent) in 2006 was a bona fide payment for “snagging”, public services and, other external works at Mountgorry Wood. I am also prepared to accept on the balance of probabilities that the sum of €19,595 paid to Junemar Limited (a company controlled by Mr. Martin Bell and his wife) despite the unsatisfactory nature of the legend on the invoice dated the 10th October, 2006, “work on Mountgorry Wood” was a bona fide payment for work done in remedying an ingress of water into the underground car park at Block A, Mountgorry Wood.
In September 2006, a year after all development work had been completed at Mountgorry Wood, a tractor was purchased by the first named respondent for a sum of €29,000, I find on the evidence that this tractor was principally used in maintaining the sand arena and for other purposes associated with the equestrian establishment maintained for the benefit of the petitioner’s and the second named respondent’s children and therefore to be regarded as a “family” expenditure. On the 13th June, 2006, a steel-frame shed was purchased by the first named respondent from Fox Engineering Limited for a sum of €36,248. I am satisfied on the evidence that this must be regarded also as a “family” expenditure as it was mostly used by the children of the petitioner and the second named respondent in connection with their equestrian activities. The court will therefore regard this total expenditure of €213,869 as genuine and as not constituting oppression of the petitioner as a member of the first named respondent.
Section 205(1) of the Companies Act 1963, employs the phrase “are being conducted/exercised”. This envisages that the oppression complained of, is operative at the date of the presentation of the Petition, (see Greenore Trading Company Limited and the Companies Act 1963 [1980] I.L.R.M. 94 at 101 per Keane J. (as he then was)). I am satisfied on the evidence of the petitioner and of Mr. Desmond Kelly, the accountant, that in April 2007, following an investigation of the accounts and draft accounts of the first named respondent by Mr. Kelly, the petitioner learned of the borrowing by the first named respondent of the sum of €511,000 from the Bank of Scotland (Ireland) Plc. and of the transfer of that sum together with a sum of €439,238 from the funds of the first named respondent in Ulster Bank Plc, to Duval Estates Limited. Mr. Desmond Kelly also became aware of the drawings made by the second named respondent from the first named respondent and of the various payments and loans made by the first named respondent hereinbefore considered.
I accept the evidence of Mr. Kelly that in June 2007, he made inquiries from and entered into correspondence with the former auditors of the first named respondent regarding these matters. He was not satisfied with the information which this firm was able to provide to him and, he was ultimately referred by them to the second named respondent. He then contacted the second named respondent but received no response whatever from him. In July and August 2007, the petitioner, through her solicitors, continued to protest to the then solicitors for the second named respondent with respect to the manner in which the second named respondent was conducting the affairs of the first named respondent and, she also continued unsuccessfully to seek information through them and from the former auditors of the first named respondent regarding these loans, payments and drawings. By a letter dated the 25th September, 2007, the petitioner proposed that the second named respondent purchase her shareholding in the first named respondent, failing which proceedings pursuant to the provisions of s. 205(1) of the Companies Act 1963, would issue. Correspondence in this regard was exchanged between the solicitors for the petitioner and the then solicitors for the second named respondent throughout the months of October and November 2007. The petition was presented on the 12th December, 2007.
In the points of defence delivered on the 12th March, 2008, on behalf of the second named respondent by the solicitors then acting on his behalf, it was pleaded, (at para. 6) that the petitioner had consented to and/or acquiesced in the first named respondent making the alleged loan to Duval Estates Limited. The second named respondent maintained this position until the second day of the hearing of this petition, despite the pleading in the Amended Points of Claim, delivered on the 20th April, 2009, that the second named respondent had fraudulently forged and/or procured the forging of the documents attached to the Bank of Scotland (Ireland) loan facility letter of the 13th March, 2006. Having regard to all of these circumstances, I am satisfied that the oppressive conduct by the second named respondent may properly be regarded as having continued up to the 12th December, 2007, when the petition was presented.
At paras. 36 and 37 of the Points of Defence, the second named respondent pleads that without prejudice to his claim that the petitioner is not entitled to relief under s. 205(1) of the Act of 1963, or to any relief, by reason of the fact that the first named respondent is deadlocked because of the breakdown of the matrimonial relationship between him and the petitioner, he is prepared to purchase the petitioner’s shares for fair market value or to consent to an order that the first named respondent be wound up. The petitioner prays that the second named respondent be ordered to purchase her shares in the company at their full market value; in the alternative, she seeks an order winding up the first named respondent.
Neither party at the hearing of this petition urged upon the court that an order be made winding up the first named respondent. I am satisfied on the evidence that for the court to make an order winding up the first named respondent, would not be in the interests of the members, even though the circumstances of the case would justify the making of such an order pursuant to the provisions of the s. 213(f) and (g) of the Companies Act 1963. Therefore the alternative remedy pursuant to the provisions of s. 205(3) of the Act of 1963, that the second named respondent purchase the petitioner’s shares in the first named respondent at a proper price must be provided. In, In Re. Clubman Shirts Limited [1991] I.L.R.M. 43 at 53, O’Hanlon J. approved and adopted the dictum of Oliver L.J. in In Re. Bird precision Bellows Limited [1985] 3 A.E.R. 523 at 529 where he held that:-
“. . . the ‘proper’ price is the price which the court in its discretion determines to be proper having regard to all the circumstances of the case.”
In arriving at this proper price the court is entitled to include an element of compensation for whatever injury may have been inflicted on the petitioner by the party responsible for the oppression. (see Horgan v. Murphy [1997] 3 IR 23 per. Barron J. at pp. 28/29).
In my judgment the proper price to be paid by the second named respondent for the petitioner’s shareholding in the first named respondent having regard to all the circumstances of this case is 50% of the value of the first named respondent as a whole, without any premium or discount because of the nature of the shareholding and, making the following assumptions:-
(1) That the full sum of €965,904 has been repaid by Duval Estates Limited to the first named respondent.
(2) That so much of that sum as amounts to €439,238.62 now stands unencumbered in the bank account of the first named respondent.
(3) That all sums of whatever nature and kind due on foot of the loan to the first named respondent from the Bank of Scotland (Ireland) Plc. have been repaid in full and that the first named respondent has received a full and final discharge from the bank.
(4) That all sums paid by the first named respondent to the Bank of Scotland (Ireland) Plc. by way of drawdown charges, interest, penalties or otherwise on foot of the said loan have been repaid by the second named respondent to the first named respondent and now stand unencumbered in the bank account of the first named respondent.
(5) That the sum of €30,000 has been fully repaid by Bell Contracts to the first named respondent and now stands unencumbered in the bank account of the first named respondent.
(6) That the sum of €40,000, being the amount by which Mr. Martin Bell and his wife were undercharged by the first named respondent in the purchase of an apartment at Mountgorry Wood, has been paid to the first named respondent and now stands unencumbered in the bank account of the first named respondent.
(7) That the total of the several payments found by this judgment to have been wrongfully made by the first named respondent to Bell Contracts and, to the second named respondent in respect of Diesel Card Ireland and Vodafone charges has been repaid to the first named respondent and stands unencumbered in the bank account of the first named respondent.
(8) That the three apartments at Mountgorry Wood, are no longer held as security by the Bank of Scotland (Ireland) Plc. and have each a value of €285,837 less the ordinary average costs of sale. There was no evidence before the court of any of the 48 apartments at Mountgorry Wood having been let by the first named respondent. I am satisfied on the evidence that but for their having been given as security to the Bank of Scotland (Ireland) Plc. each of these apartments would have been sold by mid 2006 for this average price. I am satisfied on the evidence that between mid 2006 and January 2011, the open market price of these apartments has fallen considerably. I am satisfied therefore, that by assuming that each of these apartments has a current market value of €285,837, less the ordinary costs of sale, the petitioner is sufficiently compensated for the oppressive acts of the second named respondent in causing or permitting the first named respondent to give these three apartments as security to the Bank of Scotland (Ireland) Plc. in March 2006.
(9) That the first named respondent has no liabilities.
As I do not regard this figure as, “erring on the side of generosity” and, because the conduct of the second named respondent, both prior to, – since the 16th March, 2006, – and subsequently to the presenting of the petition in this case until the second day of the hearing, has been exceptionally oppressive to the petitioner as a member and as a director of the first named respondent, the court will award interest on the purchase price from the 31st October, 2006 to the date of this judgment. This interest is to be calculated by reference to the rates paid from time to time by Ulster Bank Plc. for deposits of this amount withdrawable on 30 days notice. The total purchase price payable to the petitioner by the second named respondent for her shareholding in the first named respondent is to be regarded as a judgment debt and carry interest accordingly from this date to the date of final payment.
The court will award the petitioner her costs of the proceedings against the second named respondent to include any (if any) reserved costs, the same to be taxed and ascertained in default of agreement.
Director of Corporate Enforcement -v- McGowan & anor
[2008] IESC 28 (06 May 2008)
JUDGMENT of Mr. Justice Fennelly delivered the 6th day of May 2008
1. Where the directors of a company have failed over a period of thirteen consecutive years to make any of the annual returns prescribed by law to the Companies Registration Office, have they been “persistently in default in relation to the relevant requirements” ? Laffoy J held that the respondents had not been in persistent default, since they had not been adjudged guilty of any default by a court. That is the key legal issue on this appeal. Depending on how it is answered, the Court may have to consider whether to exercise its discretion to make an order disqualifying the directors. The principal concern of the Director of Corporate Enforcement is to correct what he perceives to be an erroneous interpretation of the relevant legislation.
Statutory provisions regarding disqualification of directors
2. The Companies Act 1990 (“the Act of 1990”) provides for a wide range of circumstances in which the High Court may on its own motion or pursuant to an application disqualify persons from acting, inter alia, as directors for such period as the Court thinks fit.
3. Section 160(2) of the Act of 1990, as amended by the Company Law Enforcement Act, 2001, so far as is relevant to the particular provisions invoked by the Director, provides:
(2) Where the court is satisfied in any proceedings or as a result of an application under this section that—
(d) the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company; or
(f) a person has been persistently in default in relation to the relevant requirements…
the court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.
Section 159 defines a “disqualification order” as:
“( a ) an order under this Part that the person against whom the order is made shall not be appointed or act as an auditor, director or other officer, receiver, liquidator or examiner or be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company, or any society registered under the Industrial and Provident Societies Acts, 1893 to 1978, or
( b ) an order under section 184 of the Principal Act…”
4. By virtue of Section 159 of the Act of 1990, “officer” in relation to any company, includes any director, shadow director or secretary of the company…” That section also defines the expression, “relevant requirements,” as meaning:
“…any provision of the Companies Acts (including a provision repealed by this Act) which requires or required any return, account or other document to be filed with, delivered or sent to, or notice of any matter to be given to, the registrar of companies.”
5. The “relevant requirements” in relation to which the Director claims that the respondents were in persistent default relates to the filing with the Companies Registration Office of annual returns in accordance with sections 125 and/or 126 of the Companies Act 1963, as amended. Section 125 of the Companies Act, 1963, as substituted by 159 of the Act of 2001 provides:
“125.—(1) Every company shall, once at least in every year, subject to section 127, make a return to the registrar of companies, being its annual return, in the prescribed form.
(2) If a company fails to comply with this section, the company and—
(a) every officer of the company who is in default, and
(b) any person in accordance with whose directions or instructions the directors of the company are accustomed to act and to whose directions or omissions the default is attributable,
shall be guilty of an offence.
(3) Proceedings in relation to an offence under this section may be brought and prosecuted by the registrar of companies.”
6. Since the definition of “relevant requirements” includes requirement under repealed provisions, it is of no consequence that part of the period of default by the respondents in making returns occurred before section 125 was amended in 2001.
7. Laffoy J interpreted section 160(2(f) by reference to subsection 3 of the section, which provides:
(3) (a) For the purposes of subsection (2) (f) the fact that a person has been persistently in default in relation to the relevant requirements may (without prejudice to its proof in any other manner) be conclusively proved by showing that in the five years ending with the date of the application he has been adjudged guilty (whether or not on the same occasion) of three or more defaults in relation to those requirements.
(b) A person shall be treated as being adjudged guilty of a default in relation to a relevant requirement for the purposes of this subsection if he is convicted of any offence consisting of a contravention of a relevant requirement or a default order is made against him.
8. The Act of 2001 provided the High Court with an alternative to the power of disqualification set out in section 160(2). Section 160(9A), as inserted by section 46(e) of that Act provides:
“In considering the penalty to be imposed under this section, the court may as an alternative, where it adjudges that disqualification is not justified, make a declaration under section 150.”
9. Section 150 confers a power to declare that a person to whom Chapter I of Part VII of the Act applies (in effect a person who was a director of an insolvent company) shall not, [subject to certain exceptions] 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…”
10. Finally, section 160 (6A) of the Act of 1990, as inserted by sections 42(e) of the Act of 2001, empowers the Director to make applications pursuant to the section.
The facts
11. Woodproducts (Longford) Limited (the “company”) was incorporated on the 2nd January 1975. The Respondents, Patrick McGowan and his wife Mrs Patricia McGowan were the sole directors of the company at all relevant times. The company has its premises and registered office in Longford. Its business is wood products and joinery. It continues to trade, employing 12 people.
12. The last annual return made by the company prior to the making of the Director’s application was delivered in 1991. It covered the year ending 31st December 1989.
13. On 25th June 1999 the company was struck off the Register of Companies pursuant to section 12 of the Companies (Amendment) Act, 1982 due to its failure to file annual returns. It was dissolved on 2nd July by operation of section 12(3) of the Act of 1982. However, a creditor applied successfully to have the company restored to the register. By order of the High Court dated 14th May 2001 the company was restored the Register of Companies. That order further provided that within three months from its date the respondents were to deliver all outstanding annual returns required by Section 125 or 126 of the Act of 1963 to the Registrar of Companies.
14. The order also included a requirement that the same persons deliver to the Revenue Commissioners a number of specified outstanding tax returns. These included corporation tax, value added tax, PAYE and PRSI. The company was represented by counsel at the hearing leading to that order. Both respondents were notified by letter of the making of the order by letters dated 12th June 2001. They were thus informed that they were required to deliver the outstanding returns without delay.
15. The directors did not comply with that order. On the application of the Revenue Commissioners, the High Court (Carroll J) made an order on 13th October 2003 extending for a period of two months the time within which the respondents were to deliver the outstanding tax returns specified in the order of 14th May 2001. Up to 25th November 2003, no annual returns had been delivered since 1991. Nor did they comply with their obligations in relation to tax matters. On 10th June 2003, the Collector General secured a judgment against the company in the sum of €33,525.41 together with €589 for costs; on 12th May 2002 the Collector general obtained a High Court judgment £246,287.63 and costs. Neither judgment had been satisfied at the date of the Director’s application, though it appears that the amounts have since been paid. Furthermore, each judgment had been registered as a mortgage against the Company’s property registered on Folio 1785F, Co Longford. In addition, the directors failed to respond to correspondence from the Director informing them of these matters.
16. None of the above facts are disputed by the respondents. The only suggestion of an explanation offered by the first-named Respondent in his affidavit is that, during the 1980s and into the 1990s the company “encountered difficulties in receiving payment and found it quite difficult to trade due to the substantial sums due and owing.” The complaint is that certain state bodies delayed in making payments. That would obviously affect cash flow of a small company.
17. Mr McGowan adds that the company has changed its trading policy and is now trading profitably. He states that some or all of the required tax returns have been made. He accepts that the directors did not act in a manner which was appropriate to their position. He says that they did not act dishonestly or act in a manner which could be construed as reckless to an extent which would justify that making of disqualification orders. He fully accepts that the High Court had jurisdiction to disqualify the Respondents from acting as directors but argues that, if the Court were to exercise its discretion not to disqualify, the Respondents would be able to trade, expand and deal with all outstanding issues. He accepted that he and his wife had been in flagrant breach of the order dated 14th May 2001 and unreservedly apologized for that disobedience. He also apologized for failure to appear before the High Court on 30th October 2003 when the matter was listed. In addition, the first-named Respondent said that the second-named Respondent had suffered from depression over a number of years due to matters unconnected with the subject-matter of these proceedings.
18. In summary, as is stated in the written submissions of the Respondents before this Court, they accept that they are “at the mercy of the Court.”
19. Nonetheless, as summarized by Laffoy J in her judgment, the respondents had taken a number of remedial actions following the initiation of the Director’s application. They were:
(1) The outstanding annual returns and accounts were filed in the CRO [Companies Registration Office] on 22nd April, 2004 and it was certified that the Company had met the annual return filing requirements of the CRO.
(2) The outstanding tax returns were filed with the Revenue Commissioners. The Revenue Commissioners issued nil assessments on foot of the Corporation Tax returns submitted.
(3) With effect from 27th February, 2004 the second respondent resigned as a director of the Company and Vincent Fox, an accountant by profession, was appointed a director in her place. On 22nd April, 2004 these changes were notified to the CRO on the relevant form (Form B10).
The proceedings: application; judgment; scope of appeal
20. By an originating Notice of Motion dated 26th November 2003, the Director applied to the High Court for orders pursuant to section 160(2)(d) and (f) of the Act of 1990 as amended declaring the each of the respondents be:
“…disqualified from being appointed or acting as an auditor, director or other officer, receiver, liquidator or examiner or be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company or any society registered under the Industrial Societies Acts, 1893-1978 for such period as to this Honourable Court shall seem just.”
21. The Director, in the affidavit grounding his application in the High Court claimed that these various defaults amounted to “conduct which makes both of the Respondents unfit to be concerned in the management of the Company or amounts to conduct which shows [the directors] to have been persistently in default of provisions of the Companies Acts requiring returns, accounts or other documents to be filed or given to the Registrar of Companies.”
22. Laffoy J gave separate consideration to the interpretation of the provisions, respectively, of paragraph (d) and (f) of section 160(2), though in reverse order. She noted that, in the case of paragraph, (f) the Director must satisfy the court that the respondents have been persistently in default in relation to compliance with provisions of the Companies Acts, in relation to making returns to the CRO.” In the case of paragraph (d) he must establish Conduct making a person unfit to be concerned in the management of a company……”
23. She observed that the Director could not avail of the provisions of sub-section (3), in the absence of any evidence of prosecution of the respondents for their failure to make the required annual returns.
24. Dealing firstly with paragraph (f), she cited the Shorter Oxford English Dictionary (3rd ed.) for the following definition of the verb “persist:” “to continue firmly or obstinately in a state, opinion, purpose, or course of action esp. against opposition.” Then, in a passage of which the Director makes specific complaint, she continued:
“What might be called the “three strikes” philosophy which underlies sub-s. (3) suggests that, on the proper construction of paragraph (f), persistent default is not merely default which has continued over a long period of time but is default which has continued in the teeth of intervention on the part of the courts more than once. Although the default by the Company in relation to its obligations under s. 125 over such a long period and the failure of the respondents to comply with the order of 14th May, 2001 is to be deprecated, I am not satisfied that it has been established on the evidence that the respondents have been “persistently in default” in relation to their obligations under s. 125 in the sense in which that expression is used in para. (f).”
25. Hence, the Director had not, in her view, established the facts necessary to justify a disqualification based on paragraph (f). In effect, she had no jurisdiction to make an order based on paragraph (f).
26. Laffoy J reviewed the authorities concerning the finding of unfitness necessary to justify an order based on paragraph (d). She made a number of severe comments on the behaviour of the respondents, such as:
Over a protracted period the respondents as directors of the Company blatantly disregarded their statutory duty to make annual returns. ……Further, the respondents, as directors of the Company, defaulted on their statutory obligations to make returns to the Revenue Commissioners under the tax code. They even ignored an order of this court ordering them to remedy the defaults. However, the most reprehensible conduct on the part of the respondents, as directors of the Company, was the failure to discharge the Company’s tax liabilities to the Revenue Commissioners. This failure must be roundly condemned given that, presumably, it involved a failure to remit to the Revenue Commissioners Value Added Tax paid by third parties to the Company and a failure to remit PAYE and PRSI deducted from the Company’s employees’ pay packets. Not only did they fail to discharge their tax liabilities but they suffered judgment for the sums due to the Revenue Commissioners and they even put at risk the industrial premises from which the Company carries on its business by permitting a “well charging” order to be made against those premises in a mortgage suit, with the prospect of a court sale if the liability to the Revenue Commissioners is not discharged.
In my view, the explanations proffered by the respondents in an attempt to mitigate the consequences of their conduct do not excuse their failure to comply with the law and protect the assets of the Company and the interests of the generality of its creditors and its employees.”
27. The learned judge then concluded as follows:
I have no doubt that the respondents acted irresponsibly. In the context of the application of s. 160, the question which arises is whether they have displayed a lack of commercial probity or, as it is sometimes put, whether they have fallen below the standards of commercial morality. In my view, the conduct of the respondents has come very close to that threshold, but has not quite reached it.”
28. As I have noted, the learned judge held, on the basis of her interpretation of paragraph (f), that the respondents had not been persistently in default in respect of their obligations “in relation to the relevant requirements.” Consequently, the Director had failed to establish that particular basis for the exercise of the court’s jurisdiction to make a disqualification order.
29. The position she took regarding paragraph (d) is less clear. The jurisdictional trigger for the exercise of that power pursuant to that paragraph is proof that the respondents are “unfit to be concerned in the management of a company.” The learned judge, in the passage quoted above, summarised the “question which arises” in that context as being whether the respondents had “displayed a lack of commercial probity or, as it is sometimes put, whether they have fallen below the standards of commercial morality.” She proceeded, though narrowly, to reach a negative conclusion on that issue. The respondents had “come very close to that threshold, but ha[d] not quite reached it.”
30. It follows that the learned judge made no finding that the respondents or either of them had been shown by the Director to be “unfit to be concerned in the management of a company.”
31. Nonetheless, the learned judge proceeded, in her judgment, to address the question of whether she should exercise the discretion conferred by the section by making a disqualification order. For that purpose, she appears to have been particularly influenced by her finding that it was “in the interests of the employees of, and third parties dealing with, the Company that the eventuality of a forced sale of the Company’s premises be avoided.” She was satisfied, on “the evidence, that can be achieved.”
32. In the absence of a finding of unfitness, the learned judge had not established her jurisdiction to make a disqualification order. It was not logical for her to proceed to consider the exercise of her discretion. From the point of view of the respondents, the outcome was the same whether she dismissed the application for failure to prove unfitness or because she exercised her discretion not to make an order. However, it is important for the purpose of the appeal. The Director’s Notice of Appeal treats the question of persistent default by reference to paragraph (f) in paragraphs 1 and 2. At paragraph 1, he claims that the learned judge misinterpreted paragraph (f) and at paragraph 2 complains of her failure to find, in fact, that the respondents had been in persistent default. In paragraph 3, the Director pleads that the learned judge “ought to have exercised her discretion to make disqualification orders……” The Notice of Appeal contains no ground challenging the failure of the judge to make a finding of unfitness. It emerged at the hearing that the Director appeared to have conflated the two questions. Mr Michael Cush, Senior Counsel for the Director, made submissions to the Court based on paragraph 3 of the Notice of Appeal, but accepted, when it was raised by the Court, that the making of the finding depends on an appreciation of the facts and is not a matter of discretion. Nobody adverted at the hearing to the absence of any ground of appeal challenging the finding.
33. This is an unsatisfactory context in which to ask the Court to interfere with the exercise by the learned High Court judge of her discretion. I entirely accept that the issues raised by the case are of great importance for the Director. They relate to proper standards for management of limited companies. The facts disclosed are disturbing. The High Court findings of irresponsibility against the respondents are fully merited. The learned judge used striking language in reaching the conclusion that “the conduct of the respondents has come very close” to establishing “a lack of commercial probity” or “commercial morality…” She described their behaviour as “reprehensible” and “roundly condemned” it. In my view the commercial behaviour of the respondents fully merited these sever criticisms. In fairness to the second-named Respondent, it is clear that her husband must shoulder almost the entire blame. It was such as to merit the making of the orders sought. However, the High Court failed to make the essential finding of unfitness. Nonetheless, I do not think it would be fair or just to embark on a review of the exercise of the judge’s discretion, where the Director has not appealed against the failure of the High Court to make the essential finding of fact.
34. For that reason, I will confine consideration of the appeal to the issue under section 160(2)(f).
Interpretation of paragraph (f)
35. I am satisfied that the learned High Court judge erred in her interpretation of paragraph (f).
36. She held that “persistent default is not merely default which has continued over a long period of time but is default which has continued in the teeth of intervention on the part of the courts more than once.” She imported into paragraph (f) what she described as the “three strikes” philosophy which underlies sub-s. (3)…” There is no warrant for that approach. Sub-section (3) is a deeming provision. In its own terms, it is expressed to be “without prejudice to …proof in any other manner.” What the learned judge has done is effectively to transform a faculty to rely on a deeming provision into a requirement.
37. The question is, therefore, whether, on the admitted facts, there was persistent default on the part of the respondents. The Oxford Dictionary definition of “persist” is “to continue firmly or obstinately in a state, opinion, purpose, or course of action esp. against opposition.” To persist is to do more than to continue, although repetition is involved. It implies an element of determination. The dictionary offers: “firmly.” It also often suggests opposition to something, whether an idea, a rule, advice or disadvantage. Paragraph (f) uses simple everyday language. Its terms are capable of application directly to the facts of a particular case. No elaborate citation of authority is needed. The Director has cited the judgment of Hoffmann J (as he then was) in Re Arctic Engineering Ltd [1986] 1 WLR 686. He interpreted the corresponding term in English legislation:
“”Persistently” connotes some degree of continuance or repetition. A person may persist in the same default or persistently commit a series of defaults.”
Insofar as that sentence seems to require no more than mere continuance or repetition, it suggests too low a standard. The word, “persistently,” as ordinarily understood and as confirmed by the Oxford Dictionary envisages some additional element, whether of opposition or determination.
38. He also observed:
“One must bear in mind that culpability is irrelevant to the question of whether there has been default constituting an offence under the Act and also that a finding of persistent default entitles the court to impose a disqualification order but does not oblige it to do so. Culpability can therefore be considered in deciding whether to disqualify the respondent and, if so, for how long. But it does not in my judgment constitute an essential element of persistent default.”
39. The respondents, failed annually, for a period of thirteen years, to comply with their legal obligation to file prescribed returns with the registrar of companies. Each failure constituted the commission of a criminal offence. They repeatedly acted in breach of a mandatory obligation, which lay upon them because they were directors of a company. They repeatedly committed criminal offences. That amply meets the requirement of persistent failure.
40. If that were not enough, they failed to comply with the order of the High Court dated 14th May 2001, which allowed them three months from its date to deliver all outstanding annual returns. For another period of more than two and a half years, no annual returns were filed.
41. In my view, the failure to file annual returns for so many years continuously demonstrates a quite extraordinary disregard for the statutory obligations of directors. When the company had been struck off and restored to the register pursuant to an order requiring the filing of the returns, the default became flagrant. As can be seen from the affidavit of the first-named Respondent, it is not disputed that the respondents did not perform their duties in a manner appropriate to their positions as Directors.
Exercise of discretion
42. The learned High Court judge did not reach the question of discretion by reference to paragraph (f), since she made no finding of persistent default. She exercised her discretion against making a disqualification order pursuant to paragraph (d). As I have pointed out, the question should not, strictly speaking, have arisen, since she had made no finding of unfitness.
43. Some only of the material considered by the High Court under paragraph (d) will be relevant to the exercise of discretion pursuant to Paragraph (f). It is only the failure to make annual returns that can now justify the making of an order. Hence, the failure to make tax returns under a wide variety of headings, suffering judgment to be entered in favour of the Revenue Commissioners or permitting a judgment mortgage to be entered against the company property are not relevant to the question of whether an order should be made.
44. The persistent and, as I have described it, flagrant failure of the respondents to file annual returns is undoubtedly such as would ordinarily warrant the making of a disqualification order. To say otherwise would be to disregard the importance of the power conferred on the court. The Director has cited English authority for the proposition that limited liability is a valuable commercial facility but that those who benefit from with must comply with the rules. Limited liability should be regarded as a privilege conferred by the law. It enables business to raise capital and the promoters to limit their liability to the amount subscribed, as well as to organise itself efficiently. The corollary is, however, that the beneficiaries must comply with the law as to companies. Too many companies have failed as a result of inefficiency, bad management, fraud or mere bad luck. The filing of annual returns offers some, admittedly limited, protection to possible creditors, who may be able to ascertain the financial state of the company. On this subject, Kelly J, in his judgment in Re NIB Ltd: Director of Corporate Enforcement v D’Arcy [2006] 2 IR 163, at page 176, cited the following passage from the judgment of Henry L.J. in Re Re Grayan Building Services Ltd. [1995] Ch. 241:
“The concept of limited liability and the sophistication of our corporate law offers great privileges and great opportunities for those who wish to trade under that regime. But the corporate environment carries with it the discipline that those who avail themselves of those privileges must accept the standards laid down and abide by the regulatory rules and disciplines in place to protect creditors and shareholders … The parliamentary intention to improve managerial standards … is clear … The statutory corporate climate is stricter than it has ever been, and those enforcing it should reflect the fact that Parliament has seen the need for higher standards.”
45. Where, as here, the circumstances arise for the exercise of the discretion to disqualify, consideration must be given to the principles upon which the power should be exercised. Firstly, it is clear that, even where the ground for its exercise is established, the court has discretion. The section uses the word, “may.” (See Cahill v Grimes [2002] 1 IR 372, per Murphy J at page 381). Secondly, it has been accepted in a number of cases that the purpose of exercise of the power of disqualification is not punitive but protective. Our courts have applied a dictum of Browne-Wilkinson V.-C. in In re Lo-Line Ltd. -1988] Ch. 477:
“What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal.”
46. Murphy J considered this to be a correct statement of the law in his judgment in Cahill v Grimes, already cited (see page 175). There seems to be no good reason to restrict that principle to the “unfitness” type of case, in which context the remarks were made. In the specific case of failure to file returns, section 125 of the Act of 1963 provides for a criminal penalty. The principal purpose of disqualification is, therefore, not to punish but to protect the public. I agree, however, with the written submissions of the Director who suggests that there should be an element of deterrence in the exercise of the discretion. It is part of the policy of the section to improve corporate governance. Courts have become increasingly vigilant and less tolerant in relation to lax standards and disregard of the law.
47. The reasons given by Laffoy J for the exercise of her discretion not to make disqualification orders are, so far as relevant to paragraph (f) as follows:
· that it was not unreasonable to conclude that to some extent the failure to file returns was facilitated by a failure on the part of the Companies Registration Office to take action to ensure compliance with section 125 until the late 1990s;
· “The saving grace is that the first respondent eventually, albeit when faced with an application by the Director for a disqualification order, remedied the breaches of the Companies Acts ……in relation to making returns; The outstanding annual returns and accounts were filed in the Companies registration Office on 22nd April, 2004 and it was certified that the Company had met the annual return filing requirements of the Office”
· Both parties combined in restructuring the corporate governance of the Company, which, hopefully, will prevent a repetition of the defaults which occurred in the past; With effect from 27th February, 2004 the second respondent resigned as a director of the Company and Vincent Fox, an accountant by profession, was appointed a director in her place.
48. Laffoy J was rightly concerned with the interests of the employees of the company and of third parties. A disqualification order is widely defined. It extends to taking part in the management of any company. On the evidence before the High Court, the company, after restructuring and rectification of its defaults, was continuing to trade, it was claimed, profitably. It is a small private company with twelve employees.
49. Taking all of these circumstances into account, I do not think a disqualification order is warranted. It would not, at this stage, serve any useful purpose and would probably disrupt the ongoing business of the company. For largely the same reasons, I would also decline to make a declaration pursuant to section 150 of the Act of 1990. Crucially, such a declaration would not permit a person to “… act in any way, whether directly or indirectly, as a director ……of any company.” It would not be possible to limit such a declaration in such a way as to allow the first-named respondent to continue as a director of the company. As Laffoy J correctly said, such a declaration would undoubtedly impact on the ability of the Company to give effect to its intention to discharge its liabilities to the Revenue Commissioners and to carry on as a going concern
50. The position might have been different if we had to consider the matter under the heading of unfitness. The Respondents narrowly escaped an adverse finding on that issue, which the Director has not challenged.
51. The position of the second-named respondent is, arguably, different. She is no longer involved in the management of the company. Nonetheless, it would be harsh to make an order or a declaration against her, when it is quite clear that her husband was entirely responsible for the defaults.
52. For these reasons, I would dismiss the appeal.
Duignan v. Carway
[2000] IEHC 195 (27th July, 2000)
DELIVERED EXTEMPORE BY THE HONOURABLE MR JUSTICE DIARMUID O’DONOVAN ON 27TH JULY 2000
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1. On 6th December 1994 the Applicant (the Official Liquidator of Verit Hotel and Leisure (Ireland) Limited) issued a Motion under section 150 of the Companies Act 1990 seeking a declaration that the Respondents should not be appointed to act as directors or secretaries or be involved with the promotion or formation of any company for a period of five years. That Motion was not proceeded with. Some five years later a notice of intention to proceed of 15th February 2000 was served on behalf of the Applicant and it was followed by a notice of re-entry dated 3rd March 2000.
2. By Notice of Motion dated 21st March 2000 the Respondents sought to dismiss the application under section 150 on the grounds of delay. Essentially, the Respondents are relying on two grounds. Firstly, they submit that the Motion brought under section 150 is now of no effect because five years have elapsed since it was issued. It is submitted that an order made pursuant to section 150 of the Companies Act 1990 must date from the commencement of the proceedings as the section does not specify when the five-year term commences. In that regard it is argued that the absence of such a provision in the section gives rise to an ambiguity and that the court must construe the section strictly as it is a penal provision and cannot interpret it as it thinks it might be interpreted.
3. If I considered section 150 to be ambiguous, I accept that I would be required to interpret it strictly and would not be entitled to put my own interpretation on it. However, I do not think that it is ambiguous. It is quite clear, it seems to me, that the five-year period is to commence whenever the court says that it is to commence.
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4. If the argument advanced on behalf of the Respondents is correct, there would, it seems to me, be an enormous number of anomalous consequences. For example, a company director who is anxious to limit the restriction imposed by the section could delay its commencement with vexatious proceedings or delay it by filing a series of affidavits and so on. As Mr Gleeson said, it would have arbitrary results in that the extent to which a director would be restricted from acting would depend on when the particular liquidator was in a position to bring a motion. It could be, he says, that one director could not act for a period of four-and-a-half years whereas another director would not have to be disqualified for four years or less.
5. It is also argued on behalf of the Applicant that if the section is to be interpreted in the manner suggested by Dr Forde (on behalf of the Respondents) it would have to be retrospective.
6. In my view, if a statute is intended to be retrospective it would have to be so stated in the body of the statute itself. In that regard, my view is confirmed by the judgment of Murphy J. in Hefferon Kearns Ltd and the Companies Act 1990 [1993] 3 IR 177. In any event, I agree with Mr Gleeson that the section is obviously prospective. I do not accept the submission by Dr Forde that any of the other sections in the Companies Act 1990 to which he referred or, indeed, section 1 of the English Companies Act 1986, indicate an ambiguity in section 150. An ambiguity is something which appears on its face. It seems to me that there is no ambiguity on the face of this section. It is quite clear that the restriction is to date from the date on which the order is made.
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7. If Dr Forde is correct, another consequence of interpreting the section in that way is that a person would be necessarily notionally disqualified for periods during which they were actually acting as a director because it would be ordered that they would cease to be a director as of such a date, which might be a year or more before the application was heard. In those circumstances I reject Dr Forde’s first ground.
8. Dr Forde’s second ground is that, generally speaking, there was excessive and inordinate delay in bringing on this motion. He submits that justice requires that the motion should be dismissed. He accepts that the motion could not have been proceeded with while constitutional proceedings instituted by the Respondents were in being but submits that there was inordinate, inexcusable and oppressive delay after those proceedings were disposed of. In particular, he rejects the suggestion that a claim for damages which had been brought by the Liquidator against the Respondents was an excuse for delaying proceeding with the section 150 notice because, firstly, a motion under section 150 is the easiest thing in the world for a liquidator to bring; that by virtue of the provisions of the Companies Act the onus of proof is reversed and that there is therefore no difficulty for the Liquidator in proceeding with the motion. In any event, he says, the damages claim related to the management of the Company which is also involved in a section 150 application and it would therefore have been convenient had the two matters proceeded in tandem. He says that the failure to do so on the part of the Liquidator gives rise to duplication and unnecessary costs. Dr Forde accepts that there was no specific prejudice to the Respondents but says there is an implied prejudice because section 150
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incorporates an accusation of dishonesty and irresponsibility on the part of the Respondents and that such an implied accusation should not unnecessarily be allowed to hang over their heads.
9. Dr Forde agreed that it is in the public interest that certain people should not be directors of companies and accepts that section 150 was passed for that purpose. That being so, he says, a liquidator should move as quickly as possible in bringing a section 150 application. In that context Dr Forde referred to the decision in Manlon Trading Limited , an English case, and said that the interest of the public in obtaining a disqualification order must diminish with the passage of time from the relevant liquidation proceedings or from the commencement of the disqualification proceedings. He says that the necessity for bringing this Motion has virtually disappeared since so much time has passed. He also referred to a quotation from Manlon Trading Limited [1995] BCLC 84 and agrees that the court held in that case that “where no prejudice to a fair trial is established, the court should permit the proceedings to proceed”. He says that to disqualify an individual from acting as a director will involve allegations which, if proved, undermine the status and reputation of business people and that such proceedings should be brought as quickly as possible. In effect, that is what the Manlon Trading Limited case held.
10. Miss Byrne (with Dr Forde) submitted that as section 150 is a penal provision one should not be allowed the same latitude as in civil cases and that this is a delay in prosecuting a claim, not just a delay in
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an interlocutory motion and that therefore I must have regard to those facts when dealing with this application.
11. On behalf of the Applicant Mr Gleeson says that three reasons must exist before the court could dismiss a Motion of this nature on the ground of delay and they are that the delay is inordinate, inexcusable and that it would be against the interests of justice were the case to proceed. Mr Gleeson argues that the delay in prosecuting this claim during the period when the constitutional action was in being was excusable, and that is accepted by Dr Forde. He says that it was also excusable after the termination of the constitutional proceedings and during the continuance of the damages proceedings brought by the Liquidator against the Respondents. I think that that is so. If the Respondents had successfully defended the damages claim, it seems to me that they would probably have successfully resisted the application under section 150, and the Liquidator would have appreciated that fact. I therefore think it was totally reasonable that he should delay proceeding with the section 150 Motion until the damages proceedings had been disposed of. However, Mr Gleeson concedes (and I agree with him) that there is no reasonable excuse for not proceeding with the section 150 Motion after the damages proceedings were determined. While Mr Gleeson accepts that that delay was inexcusable, he says that it was not inordinate. I do not agree with him. I think it was inordinate. I cannot think of any good reason why the Liquidator should not have gone ahead with the section 150 Motion after the damages proceedings had been disposed of. In those circumstances I think that the delay was inexcusable and inordinate.
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12. In that regard Mr Gleeson referred me to the decision of the Supreme Court in Primor plc v Stokes Kennedy Crowley [1996] 2 IR 459. It is submitted by Dr Forde that that case dealt with civil proceedings and that there was no penal element involved, as there is in this case, and that therefore the judgment of the Supreme Court is not relevant to this case. I do not agree with him. I cannot see any reason why the Supreme Court decision in Primor should not equally apply to these proceedings. What the Supreme Court held in that case was that “even where the delay has been both inordinate and inexcusable the court must exercise a judgment on whether, in it≤ discretion, on the facts the balance of justice was in favour of or against the case proceeding”.
13. Even though I have come to the conclusion that the delay in proceeding with this Motion was inordinate and inexcusable, it follows from the Supreme Court decision that that is not the end of the matter. I then have a discretion as to whether or not the balance of justice favours proceeding with it. The Supreme Court lists a number of considerations which must be taken into account when considering where the balance of justice lies and the relevant consideration in this case is 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.
14. As to the question of prejudice, Dr Forde concedes that there is no specific prejudice but says that there is a general prejudice arising from the fact that this Motion has been brought against his clients, the implication being that they are not honest or responsible people. However, that is a very general prejudice. I am not convinced that
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that general prejudice would in itself be sufficient to justify dismissing the Motion. I do not think that that general prejudice could interfere with a fair trial in the sense that I cannot see any reason why the Respondents would not be able to deal with the allegations implicit in the section 150 Motion, particularly as they would have available to them contemporaneous affidavits.
15. As to the balance of justice, I am also influenced by the fact that the public interest requires that unsuitable persons should not be directors. In that context I think that the public interest would overcome any delay in this case. I accept, as Dr Forde said, that perhaps a conscientious liquidator might have been more diligent in bringing these proceedings. However, as I have said, I do not think that the delay, however reprehensible it might be, is going to affect the Respondents’ capacity to get a fair trial if the Motion proceeds. In my view public interest demands it.
16. I will therefore dismiss the Motion and order that the Liquidator’s costs in bringing this Motion be costs in the winding up.
Tailored Homes Ltd, In The Matter of
[2017] IEHC 76 (15 February 2017)
JUDGMENT of Mr Justice Max Barrett delivered on 15th February, 2017.
I. Application Made
1. This judgment concerns an application under s.819 of the Companies Act 2014 for a declaration that each of Mr Michael Taggart and Mr John Taggart, being persons to whom Chapter 3, Part 14 of the Act of 2014 applies shall not, for a period of five years, be appointed or act in any way, directly or indirectly, as a director or secretary of a company, or be concerned or take part in the formation or promotion of a company, unless the company meets the requirements set out in s.819(3) of the Act of 2014.
II. Section 819
(i) Text of S.819.
2. Section 819 of the Act of 2014 provides as follows:
“819. (1) On the application of a person referred to in section 820 (1) and subject to subsection (2), the court shall declare that a person who was a director of an insolvent company shall not, for a period of 5 years, be appointed or act in any way, directly or indirectly, as a director or secretary of a company, or be concerned in or take part in the formation or promotion of a company, unless the company meets the requirements set out in subsection (3).
(2) The court shall make a declaration under subsection (1) unless it is satisfied that-
(a) the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company in question, whether before or after it became an insolvent company,
(b) he or she has, when requested to do so by the liquidator of the insolvent company, cooperated as far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company, and
(c) there is no other reason why it would be just and equitable that he or she should be subject to the restrictions imposed by an order under subsection (1).
(3) The requirements referred to in subsection (1) are-
(a) the company shall have an allotted share capital of nominal value not less than-
(i) €500,000 in the case of a public limited company (other than an investment company) or a public unlimited company, or
(ii) €100,000 in the case of any other company,
(b) each allotted share shall be paid up to an aggregate amount not less than the amount referred to in paragraph (a), including the whole of any premium on that share, and
(c) each allotted share and the whole of any premium on each allotted share shall be paid for in cash.
(4) In the application of subsection (3) to a company limited by guarantee, paragraphs (a) to (c) of it shall be disregarded and, instead, that subsection shall be read as if it set out both of the following requirements:
(a) that the company’s memorandum of association specifies that the amount of the contribution on the part of the member of it, or at least one member of it, being the contribution undertaken to be made by the member as mentioned in section 1176 (2)(d), is not less than €100,000;
(b) that the member whose foregoing contribution is to be not less than that amount is an individual, as distinct from a body corporate.
(5) In the application of subsection (3) to an investment company, paragraphs (a) to (c) of it shall be disregarded and, instead, that subsection shall be read as if it set out both of the following requirements-
(a) that the value of the issued share capital of the company is not less than €100,000,
(b) that an amount of not less than €100,000 in cash has been paid in consideration for the allotment of shares in the company.
(6) Where subsection (1) refers to being appointed or acting as a director or secretary of a company, or taking part in the formation or promotion of a company, “company” means any of the following:
(a) a private company limited by shares;
(b) a designated activity company;
(c) a public limited company;
(d) a company limited by guarantee;
(e) an unlimited company;
(f) an unregistered company.
(7) A prescribed officer of the court shall ensure that the prescribed particulars of a declaration under this section are provided to the Registrar in the prescribed form and manner (if any).”
3. A number of preliminary points might usefully be noted:
(1) the persons referred to in s.820(1) are the Director of Corporate Enforcement, the liquidator of the relevant insolvent company and a receiver of the property of the relevant company;
(2) the combined effect of s.819(1) and (2) is that a declaration of the type contemplated under s.819(1) must issue unless the court is satisfied as to each and all of the matters referred to in s.819(2);
(3) s.819 applies to all company types;
(4) s.819 is concerned with a person who was a director of an insolvent company. The term “insolvent company” is defined in s.818(1) of the Act of 2014 as “a company that is unable to pay its debts”; s.818(2) then provides that “For the purposes of the definition of ‘insolvent company’ in subsection (1), a company is unable to pay its debts if – (a) at the date of the commencement of its winding up it is proved to the court that it is unable to pay its debts (within the meaning of section 570), or (b) at any time during the course of its winding up the liquidator certifies, or it is proved to the court, that it is unable to pay its debts (within the meaning of section 570).”[1] In the within application the liquidator has furnished a certificate of the type referred to in s.818(2)(b), being a certificate of 26th February, 2016, that “Tailored Homes (Navan) Limited has at all times from the date of the commencement of the winding up of the said company, been and continues to be, unable to pay its debts within the meaning of…section 570 of the Companies Act 2014”; it was common case between the parties that this continued to be the position as of the date of hearing.
[1] Under s.570 of the Act of 2014 a company is deemed to be unable to pay its debts for the purposes of the Act of 2014 “(a) if – (i) a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding €10,000 then due, has served on the company (by leaving it at the registered office of the company) a demand in writing requiring the company to pay the sum so due, and (ii) the company has, for 21 days after the date of the service of that demand, neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or (b) if – (i) 2 or more creditors, by assignment or otherwise, to whom, in aggregate, the company is indebted in a sum exceeding €20,000 then due, have served on the company (by leaving it at the registered office of the company) a demand in writing requiring the company to pay the sum so due, and (ii) the company has, for 21 days after the date of the service of that demand, neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of each of the creditors, or (c) if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or (d) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company”.
4. If a director does not defend a s.819 application then an order will almost certainly issue under s.819(1), save in the extremely unlikely circumstance that the party bringing the application makes averments in her grounding affidavit that would lead the court to reach the conclusion that it was satisfied as to the matters referred to in s.819(2). So the burden of proof in these applications, specifically the burden of establishing such matters as would enable the court, on the balance of probabilities, to be satisfied in the manner contemplated by s.819(2), rests with a respondent former director.
5. The fundamental fairness and constitutionality of the effective imposition of the burden of proof on a director in this regard was doubted, without any definitive finding being reached, by Hardiman J. (with whom Finnegan and Macken JJ concurred) in Re Tralee Beef and Lamb Ltd [2008] 3 IR 347, 355. Yet the Oireachtas clearly remains sufficiently satisfied of the constitutionality of this arrangement that no attempt was made to amend it in the Act of 2014. And perhaps with good reason: one can see the inclusion of a court-administered dimension in the restriction process, an inclusion that does not appear to be mandated by constitutional law, as a generous attempt by the Oireachtas to calibrate carefully the restriction process in such a manner as to ensure that directors of insolvent companies are not subject to automatic restriction, but are given a ‘last chance’ in the form of a hearing at the High Court at which they may seek to prove such matters as will enable them to escape what would otherwise be an automatic restriction. In including the courts as it has, the Oireachtas may well have calculated that fundamental fairness is better served by having a court dimension to the restriction process, even if at the relevant court hearings the burden of proof is effectively reversed.
6. Notwithstanding the foregoing, the judgment of Hardiman J. continues to be of significance. For he, if the court may respectfully so observe, properly draws the attention of all succeeding courts to the importance of fundamental fairness as an aspect of the restriction process. This is of very great importance given the social stigma that can attach to directors who are subject to restriction, the financial consequences that can result so far as their future employability as directors is concerned, and the blemish that such a restriction may even bring in terms of the potential for a company that is operated by a onetime restricted director to obtain borrowed finance at reasonable rates. That stigma, those consequences, that blemish seem unlikely to be obviated easily if ever once a restriction order is imposed, notwithstanding the ostensible ‘out’ for onetime restricted directors that is contemplated by s.819(1) and (3).
7. In the within application, counsel for the Taggart brothers has urged on the court that the stigma that would attach to his clients is a factor that the court ought to bear in mind in its deliberations, and he is certainly right to do so insofar as encouraging the court to bring great carefulness to how it approaches the within application (not that such encouragement is required). However, the court, with respect, considers that he goes too far in suggesting that any possible causes for restriction which are put forward by the liquidator must be weighed against the practical effects of such an order. That, is a consideration that might be relevant to an assessment under s.819(2)(c); otherwise the court’s task is to gauge whether or not such reasons for restriction as are offered by a liquidator are accepted by the court, on the balance of probabilities, as true; if they are true, if there was a want of honesty, if there was a want of responsibility, or if there was a want of cooperation with the liquidator, then the court cannot be satisfied in the manner contemplated by s.819(2) and a declaration must issue under s.819(1).
(ii) Defences Available under S.819.
(a) Overview.
8. The effect of s.819(2) of the Act of 2014 is that it is a defence to an application to restrict, that “(a) the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company in question, whether before or after it became an insolvent company, (b) he or she has, when requested to do so by the liquidator of the insolvent company, cooperated as far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company, and (c) there is no other reason why it would be just and equitable that he or she should be subject to the restrictions imposed by an order under subsection (1).”
(b) Honest and Responsible.
9. Professor Hutchinson in the current (fifth) edition of Keane on Company Law provides, at paras. 27.199-27.224, a most helpful analysis of the “The defence of acting honestly and responsibly”. It seems to the court that the key principles arising in this regard are as follows:
(1) There are three types of situation which the court is typically required to consider in s.819 applications, viz. (i) issues involving compliance by a company with its formal obligations under the Companies Acts, (ii) the commercial management of the company, especially at the period when the company was insolvent or heading in that direction, and (iii) compliance by the directors with their Frederick Inns obligations, i.e. ensuring that once a company is facing insolvency its assets are dealt with in a manner designed to ensure the proper distribution of those assets in accordance in insolvency law.[1]
(2) In assessing director behaviour under this category, a court should have regard to (i) the extent to which the director has or has not complied with any obligations imposed on her by the Companies Acts, (ii) the extent to which her conduct could be regarded as so incompetent as to amount to irresponsibility, (iii) the extent of the director’s responsibility for the insolvency of the company, (iv) 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, (v) the extent to which the director, in the conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards. [2]
(3) The just-mentioned criteria should not be read as precluding the court from also taking into account a failure by a director to comply with her duties in equity and at common law.[3]
(4) It is important in a restriction application to have regard to the entire tenure of an individual as director of a company in determining whether they have acted honestly and responsibly.[4]
(5) Since restriction provisions do not apply to a person who has ceased to be a director more than 12 months, their primary aim is to deal with directors who acted dishonestly or irresponsibly in the last 12 months of the company’s existence.[5]
(6) A standardised or formulaic approach cannot be adopted by the courts: each s.819 application should be viewed in the light of the issues that are important in that particular case.[6]
(7) The maintenance of proper books and accounts and the employment of appropriate experts will go a long way to discharging the onus of showing that a director behaved responsibly; the converse, i.e. that failure to keep accounting records always constitutes a failure to act responsibly, is not necessarily true; however, failure to make annual returns and keep proper accounting records are often found to constitute evidence of not acting responsibly.[7]
(8) A failure to comply with tax law may be found to involve dishonest or irresponsible behaviour. However, (a) a distinction tends to be drawn between where the breach of tax law is temporary or done with intent to rectify the situation at some future point, (b) failure to make tax returns for a relatively limited period of time will not, of itself, indicate that the directors of a company have acted either dishonestly or irresponsibly; (c) cooperation with the Revenue Commissioners where there has been a want of tax compliance is often viewed as positive, provided there was no intent to trade on monies due to the Revenue Commissioners in the shadow of an inevitable winding-up.[8]
(9) Mere errors of judgment on the part of directors of an insolvent company may not be enough to warrant the making of a restriction order on the basis that they have not acted responsibly.[9]
(10) Hindsight must be applied with caution.[10]
(11) Quite when trading through difficulties crosses the line from commercially sensible to legally reprehensible may be difficult to pinpoint; however, hindsight must not be allowed to dictate the answer; a failure to take steps to improve the financial circumstances, and a failure to commence winding-up proceedings within a reasonable time of ceasing to trade may be relevant.[11]
(12) 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, even non-executive directors must be increasingly conscious that they cannot be mere ciphers or purveyors of votes at the whim of management.[12]
[Court Note: When it comes to non-executive directors, the court would respectfully endorse the learned view offered by Professor Hutchinson at para. 27.214 of Keane on Company Law (5th ed.) that many of the decided cases in this area “have been concerned with non-executive directors who were ‘passive’ or ‘nominal’ directors (i.e. persons who were formally appointed as directors but who were not expected to play any role, or only a very limited role, in the management of the affairs of the company) and there has been little examination of the extent of what is expected of what might be considered ‘professional’ non-executive directors, i.e. the kind required to be found on the boards and board committees of listed PLCs. It seems safe to suggest that more will be expected of them than of passive or nominal non-executive directors.” Also of note in this regard, of course, are non-executive directors in the financial services sector; with much now being expected of such directors by the Central Bank as a check on the actions of financial services providers, it seems almost inevitable that the more their role is seen as critical to a healthy financial services sector, the more will be expected of them in the event that their actions ever fall to be reviewed in a s.819 application in the, hopefully unlikely, prospect of a regulated financial services provider ever again becoming insolvent.]
(13) As regards ‘nominal’ or ‘passive’ directors, to the extent that real moral blame is relevant, a lack of same does not oblige the court to excuse such a director who has not made a reasonable effort to keep abreast of the affairs of a company.[13]
[Court Note: When it comes to ‘nominal’ and ‘passive’ directors, it is worth noting that many of these cases involved individuals, often family members, who agreed to serve on a company operated by another family member so as to satisfy the requirement under the previous company law regime that a private limited company have a minimum of two directors. Again, in this regard the court would respectfully endorse the learned view offered by Professor Hutchinson at para. 27.217 of Keane on Company Law (5th ed.) that “Any distinction that may have been made for ‘passive’ or ‘nominal’ directors may…prove unwarranted under the Companies Act 2014 since, as we have seen, it is now possible for an LTD to have only one director. Moreover, the position of such directors must now be viewed in the context of s.223(3) [of the Act of 2014] which requires them to provide a written acknowledgement of their duties as directors. There is no longer any need for passive or nominal directors in an LTD, and those who remain on in such a capacity on conversion to an LTD after the coming into force of the Act would be well advised to resign.”
(14) That a director is a director of a wholly owned subsidiary in a group of companies does not relieve her of the responsibility of considering whether specific transactions are in the interests of a company, even though the margin of discretion s/he enjoys in the making of such decisions is factually very limited.[14]
[Court Note: Though the issue does not arise for adjudication in the within application, it appears to the court that this particular principle may need to be applied with some caution. Many international financial service providers have a presence in Ireland. Provided that no aspect of a proposed cross-border financial services transaction is unlawful, and given that no rational international financial services group is going to sanction a group-level, cross-border transaction that is not expected to yield a group-level benefit, it could perhaps be contended to be excessively cautious as a matter of Irish corporate law that the Irish limb (which may be a purely tax-driven limb) of a transaction should be required to be in the particular interest of the particular Irish corporate entity involved (especially where that entity is a special purpose vehicle) even though there is a clear(er) benefit to be derived group-wide from the transaction. A ‘rising boats’ logic which would allow the Irish entity to have regard to the group-wide benefit as being in its interest as a group member might perhaps be more commercially realistic. However, this question has not been argued before the court and the court emphasises that its observations in this regard are entirely obiter.]
(15) Where conduct is not dishonest, in the sense that a director derives nothing personally from an action, it may nonetheless be irresponsible for the purposes of s.819.[15]
(16) While the conduct of a director subsequent to a winding-up is not relevant in determining whether s/he has acted honestly and responsibly, it may be relevant in considering whether there is any reason why it would be just and equitable to subject her to a restriction order.[16]
[1] Re Swanpool Ltd, McLaughlin v. Lannen [2006] 2 ILRM 217; [2] Re La Moselle Clothing Ltd and Rosegem Ltd [1998] 2 ILRM 401; [3] Re Tralee Beef and Lamb Ltd, Kavanagh v. Delaney [2004] IEHC 139; Re Mitek Holdings Ltd, Grace v. Kachkar and Ors [2010] IESC 31; [4] Re Squash (Ireland) Ltd [2001] 3 IR 35; [5] Re Gasco Ltd [2001] IEHC 20;[6] Re Mitek Holdings Ltd, Grace v. Kachkar and Ors [2010] IESC 31; [7] Re Costello Doors Ltd (Unreported, High Court, Murphy J., 21st July, 1995);, Re Greenmount Holdings Ltd, Stafford v. O’Connor [2007] IEHC 246, Re Walfab Ltd, Director of Corporate Enforcement v. Walsh [2016] IECA 2; [8] Re Noxtad Limited, Van Dessel v. Esmonde [2014] IEHC 278, Re Digital Channel Partners Ltd, Kavanagh v. Cummins and ors [2004] 2 ILRM 35, Re Shellware Limited, Taite v. Breslin [2014] IEHC 184; [9] Re Squash (Ireland) Ltd [2001] 3 IR 35; [10] Re Noxtad Limited, Van Dessel v. Esmonde [2014] IEHC 278, Re Gerdando Ltd [2014] IEHC 187, Re Shellware Ltd [2014] IEHC 184; [11] Re Pierse Contracting, Coyle v. O’Nolan [2015] IEHC 74; Re Careca Investments Limited [2005] IEHC 62; [12] Re Mitek Holdings Ltd, Grace v. Kachkar and Ors [2010] IESC 31; [13] Re Walfab Ltd, Director of Corporate Enforcement v. Walsh [2016] IECA 2; [14] Re 360 Atlantic (Ireland) Ltd, O’Ferrall v. Coughlan and Anor [2004] IEHC 412; [15] Re Swanpool Ltd, McLaughlin v. Lannen [2006] 2 ILRM 217; [16] Re CMC (Ireland) Ltd, Fennell v. Carolan [2005] IEHC 340.
(c) Reasonable Co-operation.
10. Because s.819 is drafted in such a way that an order under s.819(1) must issue unless the court is satisfied as to the matters referenced in s.819(2)(a)-(c), any respondent former director who is the subject of s.819 proceedings is now effectively required, as part of her or his defence to such proceedings, to establish that s/he did ‘cooperate as far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company’. However, though not required, it will obviously assist the more efficient administration of justice if the party bringing such proceedings indicates in the pleadings if it is satisfied that such cooperation was provided; that will relieve the respondent and court from having to address this aspect of matters in detail.
(d) Just and Equitable.
11. This aspect of what is now s.819(2) is a little-explored provision, even though it perhaps offers the court the widest latitude as regards impugning director behaviour. In Re La Moselle Clothing Ltd and Rosegem Ltd [1998] 2 ILRM 345, 353 Shanley J. opined that because what is now s.819(2)(a) refers to a respondent former director having “acted honestly and responsibly in relation to the conduct of the affairs of the company in question” (emphasis added) and because the underlined constraint does not appear in what is now s.819(2)(c), this latter provision falls to be read as wider in ambit, extending to “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)”. This seems undoubtedly correct, but two ancillary points might perhaps be made in this regard. First, the inclusion of s.819(2), a provision new to Irish company law, might be contended to narrow the ambit of s.819(2)(c) to the extent that alleged want of cooperation with a liquidator should now be treated with, at least in the first instance, under s.819(2)(b), albeit that behaviour that does not quite satisfy s.819(2)(b) may perhaps offer “other reason” for the purposes of s.819(2)(c). Second, it is notable (and, in this Court’s respectful opinion, correct) that Shanley J. confined his example of behaviour relevant to what is now s.819(2)(c) to egregious behaviour in the corporate context. It does not appear to the court that the provision is intended by the Oireachtas to offer a roaming jurisdiction to the court whereby it may draw on an aspect of a respondent former director’s life in the non-corporate context, for example (and this does not arise in the within application) that s/he has committed a road traffic offence, as offering “other reason” for the purposes of s.819(2)(c).
III. Background
12. Turning then to the facts of the within application, Mr Michael Taggart and Mr John Taggart, two brothers, are well-known in the building trade. They built their first house together in 1986. Between that date and 2008, they built and sold somewhere in excess of 4,000 homes in Ireland and the United Kingdom. They employed hundreds of employees and, in the process, generated extensive tax revenues for, amongst others, the Irish Exchequer. In addition to building houses, they also developed commercial properties in Ireland, the United Kingdom and even further afield in the United States and New Zealand. Over the course of their more than two decades of generally successful trading, the two brothers became the directors of in excess of 100 companies. So, generally speaking, the two brothers have long experience of operating companies and, up to 2008, operating them without landing in legal difficulty.
13. So far as the company that is the focus of the within proceedings is concerned – Tailored Homes (Navan) Limited (in liquidation) – it was established on 1st June, 2008, to develop the land on a site in Johnstown, County Meath (hereafter ‘the Site’). It ceased to trade at end-2010. In November, 2012, Mr O’Donoghue was appointed as liquidator. During the relatively short lifespan of the company, Mr Michael Taggart was its managing director and Mr John Taggart its construction director. In these respective capacities, Mr Michael Taggart oversaw some construction work but was primarily concerned with design, quality and sales. By contrast, Mr John Tagggart primarily oversaw the construction work.
14. The Site itself was owned by Tailored Homes. It is suggested that Mr Michael Taggart may also have had some interest in it; from the evidence it is not clear that this was so. It was purchased with funding from Anglo Irish Bank (hereafter the ‘bank’), with the bank holding security over the land in respect of both this loan and other loans extended by it to one or other or both of the Taggart brothers and/or various corporate entities in which one or other or both of them held an interest. The bank, as secured lender, required Tailored Homes to deliver all of the sale proceeds to it. And it confirmed to Tailored Homes that, in doing so, it would pay all VAT due to the Revenue Commissioners but, for reasons unclear, it may even be inadvertence, it failed to do so (save, it seems, as regards the first house sold). This failure landed Tailored Homes in significant difficulties with the Revenue Commissioners, through no fault of Tailored Homes.
15. In passing, the court notes that Mr Michael Taggart initially swore each of his affidavits on his behalf and that of his fellow director and brother, Mr John Taggart. Given that the two men have not only worked together for thirty years but are brothers, it is entirely understandable that they proceeded to swear their evidence so. However, it is appropriate in proceedings such as these that if one director is to swear what might be styled a ‘principal’ affidavit, there would also be an ancillary affidavit sworn by the other director adopting the averments of the first with any (if any) qualifications it is desired to make. Such an ancillary and unqualified affidavit has latterly been sworn by Mr John Taggart.
IV. Alleged Sales of Properties at ‘Significant Loss’
16. In his grounding affidavit, the liquidator avers that “[T]he Company’s failure primarily relates to the sale of houses at a significant loss which led to Revenue liabilities in the sum of €586,021”. The Taggart brothers would be rather exceptional builder-developers, if they did not suffer some loss on house sales made post-2008, but an examination of the appraised prices of the properties relevant to the within application and the price at which they were sold indicates that the loss incurred in this regard was in fact marginal. The below table is a redacted version of a table that was furnished in evidence to the court which compares the gross price obtained on property sales at the Site with the appraised values of those properties:
House Gross Price
(€k) Appraised Value (€k) Difference
(€k)
1 199 199 –
2 169 169 –
3 169 169 –
4 295 299 +4
5 199 199 –
6 199 199 –
7 219 219 –
8 219 219 –
9 199 199 –
10 209 209 –
11 224 219 -5
12 219 219 –
13 219 219 –
14 199 199 –
17. As can be seen from the foregoing, the overall differential between the gross prices obtained and the appraised prices on the houses at the Site over a total circa. €3m-worth of sales is a comparatively trivial €1k. The houses that were sold were not, therefore, sold at a significant loss. And the company’s failure does not therefore primarily relate to the sale of the houses at such a loss. To the extent that property was not sold, the Taggart brothers are not responsible for the collapse of the property market that occurred post-2008. The issue of Revenue liabilities is considered later below.
V. Alleged Prejudice to Trade Creditors
18. The liquidator also avers in his grounding affidavit that “The Statement of Affairs furnished by the Directors includes a further amount owing to creditors in the sum of €169,375.15…owing to 17 creditors who appear to be predominantly subcontractors and building trade suppliers”. In fact, this €169,375.15 was later negotiated down to €135,104.21 and this amount was then paid out by the bank to those creditors. So it is very difficult to see that trade creditors have been adversely impacted by the liquidation (save, perhaps, in the mutually agreed downward renegotiation of amounts owing…and these were mutually agreed amounts, so the court hesitates to find that anything adverse occurred in this regard, at least on the evidence before it). Whether the trade creditors were unfairly preferred over the Revenue Commissioners is a separate matter; on the evidence before it, and separate from the issue of timing, the court does not in any event see, contemporaneous with the settlement agreed with the creditors, that dominant intention to prefer which would be a pre-requisite to such a finding.
VI. Trading Through Losses
19. The liquidator criticises the Taggart brothers for allowing Tailored Homes (Navan) Limited to trade continuously at a loss when, the liquidator avers “there was no reasonable prospect of discharging same”. A closer examination suggests this to be a somewhat unreasonable analysis of matters. It is of the nature of the property development business that debts are incurred at the site development stage. The initial works on the Site included the construction of a so-called ‘show village’ encompassing eight houses and a marketing suite. In addition, other ancillary costs were incurred, including the development of a website to promote the development and associated marketing materials. As the Site comprised 354 units, it was anticipated, and reasonably so, that the additional cost for a show village would have been recovered from revenue accumulated from the sale of the show houses which would not in ordinary circumstances have been sold until the development was complete. As is clear from the above-mentioned table, the houses that were sold were not generally sold at a loss and overall yielded a €1k loss which is not of an amount to be notable in an application such as that now presenting. While Tailored Homes was undoubtedly a leveraged entity, there is nothing remarkable or unusual in this in the context of property development; and there is nothing to suggest that the Taggart brothers behaved dishonestly or irresponsibly as directors in this regard, even with that special carefulness that directors ought naturally bring to the operation of a company that is leveraged so. The worst that might perhaps be alleged of the Taggart brothers, and the court does not cast this stone, is that the two brothers may not have anticipated, it seems apparent from their actions that they did not in fact anticipate, when establishing Tailored Homes in June, 2008, that the national economy would collapse three or four months later; but they were not alone in that, nor is any (if any) failure in this regard on their part suggestive of dishonesty or irresponsibility. As regards Tailored Homes’ continuing to trade after the property market collapsed post-2008, this was done not out of some vain hope that the property market would somehow reverse itself and all would be well but because the development in which Tailored Homes was engaged was not ‘just’ a 400-home development; it was a greatly diversified development that included a healthcare facility and a nursing home, which Tailored Homes and, for a time, its financiers considered might well succeed, and for which, for quite some time, enjoyed a very real prospect that it would be the subject of a comprehensive re-financing. However, notwithstanding the continuing prospects of such a re-financing, as will be seen under the next heading below, the court considers that the Taggart brothers did allow Tailored Homes to continue in existence even after it had passed markers which would have clearly flagged contemporaneously with their occurrence (and thus whose significance is not now merely recognised with the benefit of hindsight) that the time for placing the company into liquidation had come.
VII. Delayed Liquidation
20. Tailored Homes was established in June, 2008. It ceased trading at end-2010. It was placed into liquidation on the petition of the Revenue Commissioners in November, 2012. The liquidator’s twin contentions in this regard are that “the failure by the Directors to place the Company into voluntary liquidation at an earlier date did unfairly prejudice creditors, particularly Revenue” and that it “continued to incur credit”. As mentioned above, the court does not see that the trade creditors were prejudiced in the manner suggested. The Revenue liabilities are dealt with separately below. As to the delay in placing the company into liquidation, the court accepts that: right the way through 2012, Tailored Homes was engaged in negotiations with its financiers as to how matters would be managed, and payments allocated, going forwards; and a re-financing of the company’s affairs was a reasonable prospect and was not done out of some vain hope that the housing market would somehow recover. As against this, however, during this period, as will be seen, the company was entirely unable to discharge PAYE/PRSI liabilities that arose to be paid in three successive years and was so reduced in circumstances that it could not even pay for its annual accounts to be prepared (which in turn led to a failure to file same). It is always difficult to identify the exact moment when a company falls to be placed into liquidation and the court has to be careful not to approach matters with the benefit of hindsight. But the repeated annual failures to pay PAYE/PRSI and the reduction in circumstances to such an extent that annual accounts could not be prepared suggest to the court that there were trigger events a-plenty which ought to have prompted the Taggart brothers to commence the liquidation process long before the Revenue Commissioners saw fit to do so.
21. The court notes in passing a related criticism by the liquidator that Tailored Homes did not open a separate bank account in which to deposit the proceeds of the house sales so that those funds would be available for the general body of creditors. The court is not sure how assiduously this aspect of matters is being pursued. But it seems somewhat far-fetched given that from in or about early-2010, the bank, as secured creditor, had de facto control over the allocation of such proceeds as Tailored Homes received. That is not to say the directors were not responsible for how the company continued to operate; they undoubtedly were responsible. It is merely to recognise the practical constraints of the factual matrix within which they and Tailored Homes were operating at this time. Just by way of example of how tightly those constraints were applied, it is perhaps helpful to quote from a letter sent by Matheson Solicitors to the bank on 20th January, 2010, concerning the disposal of proceeds from then pending residential sales closings and the response received by e-mail of 25th January, 2010:
a. Letter on Matheson notepaper
“…Date: 20 January 2010…
RE: TAILORED HOMES (IRL) LIMITED AND TAILORED HOMES (NAVAN) LIMITED
DEDUCTIONS SOUGHT IN RESPECT OF UPCOMING CLOSING OF RESIDENTIAL PROPERTIES….
I write to advise that our mutual client Tailored Homes (Navan) Limited has indicated that certain residential sales are projected to close in the [Site]…in or about early March 2010.
With this in mind you might please note that I am writing to seek…consent…to the following deductions out of the proceeds of sale of each of the residential units….
1. Part V (Social and Affordable Housing) Payment to Meath County Council….
You might please confirm…consent…to (1) the deduction of the sum of €2,522.19 from each closing of a residential unit (354 units)…and (2) the payment of such deduction by this Firm on behalf of Tailored Homes (Navan) Limited directly to Meath County Council….
2. VAT as due to Revenue Commissioners in respect of sale of Residential Units
Please note that certain funds will fall due to be paid by Tailored Homes (Navan) Limited and/or Tailored Homes (Irl) Limited to the Revenue Commissioners, out of the proceeds of the sale of the residential units sold….
You might please advise the method preferred…in respect of dealing with the issue of VAT on the sale of residential units…It may be preferable to open a separate account to deal with the issue of VAT.
In any case you might note that it is considered practical to allow for a deduction of the necessary amount due to the Revenue Commissioners in respect of VAT, out of the proceeds of the sale of the of the residential units….
Please revert…on this issue.
3. Solicitor’s Fees….
You might please confirm…agreement…to the deduction of our fees in the sum of €1,250.00, plus VAT, plus outlays as incurred, out of the proceeds of sale of each residential unit….
4. Auctioneers Fees….
You might please confirm…agreement…to the deduction of the Auctioneer’s fee at the rate of 0.75% of the passing consideration for each residential unit, plus VAT thereon, out of the proceeds of each sale of each residential unit….
5. Financial Contributions due to Meath County Council in respect of the Residential Units….
Please confirm…the payment of the financial contributions due to Meath County Council…on the basis of the rolling payment in advance of the amount due to Meath County Council to discharge six residential units….
6. Terms of the Part V Agreement
I would direct you specifically to the proposed terms of the Part V Agreement…whereby Tailored Homes…have agreed to provide ten ‘free units’ and €1,000,000 in capital contributions to Meath County Council in compliance with the requirements of Part V of the Planning and Development Act 2000 (Social and Affordable Housing).”
b. Reply E-mail from bank lending manager.
“…Sent: 25 January 2010.…
I respond to your letter and the various points raised as follows:
1. I confirm…consent…to (1) the deduction of the sum of €2,522.19 from each closing of a residential unit (354 units) and (2) the payment of such deduction by MOP on behalf of Tailored Homes…directly to Meath County Council.
2. I would like to receive in the full gross sales proceeds and then pay back out the VAT directly to the Revenue as and when it falls due for payment.
3. I confirm…agreement…to the deduction of your fees in the sum of €1,250 plus VAT, plus reasonable outlays as incurred, out of the proceeds of sale of each residential unit….
4. I confirm….agreement…to the deduction of the Auctioneer’s fee at the rate of 0.75% of the passing consideration for each residential unit, plus VAT thereon, out of the proceeds of sale of each residential unit contained in the Estate.
5. I am currently not in a position to confirm…the payment of the financial contributions due to Meath County Council…on the basis of the rolling payment in advance of the amount due to Meath County Council to discharge six residential units. I will…revert to you in due course.
6. I confirm…approval…to the proposed Part V Agreement….I also confirm that you may proceed to negotiate same with the solicitors acting on behalf of Meath County Council.”
22. It is obvious from the foregoing that when it came to matters financial, Tailored Homes, as early as January, 2010, was having to do a lot of tacking with the bank. The liquidator has sought in his affidavit evidence to parse the above reply message, suggesting that the “I would like …” regarding the proposed VAT payment arrangements is stronger than the “I confirm…” used in other paragraphs and that the Taggart brothers enjoyed some freedom of action when it came to the VAT proceeds that they have not conceded. Two points might be made in this regard. First, the practical reality, regardless of grammatical niceties, is that if a commercial customer is indebted to a bank to the amount of several million euro and looks like it will not be able to repay that amount in full, an assertion by the bank as to what it ‘would like’ that commercial customer to do is but a polite way of telling that commercial customer what it must do if it wants to keep the bank ‘on-side’. Second, in the context of the above-quoted correspondence the difference of phraseology seems readily explainable. The other points in Matheson’s letter effectively state ‘Here’s what’s intended; please confirm that you are satisfied with same’ whereas point no. 2 is effectively ‘Here’s a suggestion, but what would you like to do?’ And the answer to such a question, however exactly it is posed, is, perhaps unsurprisingly, “I would like…”. A more sensible answer to the bank’s “I would like…” would have been ‘The company is required by law to pay the VAT, the company is responsible if the VAT goes unpaid, and so the company must have its solicitor pay the VAT directly’. There really would be very little that the bank could say in reply to that, but perhaps desirous to placate the bank to the maximum extent possible while they were seeking to negotiate a re-financing, the Taggart brothers proceeded differently. In any event, regardless of the nature of Tailored Homes’ relationship with the bank, the Taggart brothers, as directors of Tailored Homes, were responsible for the direction of the company and for the decision as to whether and when to place the company into liquidation. All the evidence points to this as having been done too late and, again, one does not need to rely on hindsight to reach this conclusion: there were clear markers that should have made apparent to the brothers that the commencement of liquidation was due and then overdue.
VIII. Alleged Failure to Cooperate with Liquidator
23. The liquidator complains about an alleged failure to cooperate with him. Two complaints are made in this regard. First, that the statement of affairs was late in coming. Second, that the statement of affairs contained errors. The court turns to consider the second issue (that the statement contained errors) under a separate heading below. This is because it does not seem to the court that a deficiency in the statement of itself points to a failure to cooperate with the liquidator, nor has the liquidator suggested any reason as to why the court should view any such deficiency so. Moreover, the court cannot but note in this regard that (i) the statement of affairs was sworn in May, 2013, (ii) the liquidator, in his second and third interim reports filed with the ODCE, confirms that “Since May 2013 the directors have co-operated with me in my investigation into the management of the Company”, and (iii) the court does not understand it to be suggested that matters have changed since. So there has been no want of cooperation by the Taggart brothers since the statement was provided and there is no suggestion that the statement was sworn other than honestly. As to the first point (that the statement was late in coming), there is an entirely credible explanation provided by Mr Michael McTaggart in his sworn evidence as to why there was a delay in providing the statement of affairs. To put this evidence in context, the court notes that the liquidator was appointed in November, 2012, the High Court itself allowed various extensions of time in providing the statement from as early as January, 2013, and the statement was finally sworn in May, 2013. Per Mr Michael McTaggart:
“[Timing of provision of statement of affairs]
38. The backdrop to the provision of the Statement of Affairs is as follows. In early December 2012, I requested accountants PFS and Partners to assist me in preparing responses to questionnaires provided by the Applicant [i.e. the liquidator] and statements by the directors which were confirmed as having been received by the Applicant on 10 December 2012. I had understood at this time that this was all that was required by the Applicant…at that time. On the same day the Applicant sent me a template Statement of Affairs to be completed by the directors which I immediately passed to PFS and Partners. In communicating with the Applicant I explained the difficulties that I had personally in retrieving the information requested within the timelines required by the Applicant. I clearly and regularly explained that I did not have the personal knowledge, personnel resources or finances to employ a person with the requisite skills to carry out this work within the timeframe required by the Applicant.
39. In addition, throughout the course of January, February and March 2013 both I and my co-Respondent were working in Benghazi in Libya trying to conclude work contracts, in the UK trying to attract further investment and in the United States where we were involved in a contractual dispute before the Courts. Therefore we were unable practically to deal with the Statement of Affairs. However, I remained in telephone communication with the Applicant and his solicitor in respect of it. As soon as I returned to Ireland in early April 2013 I wrote to the solicitor for the Applicant confirming the steps I was taking in respect of preparing the Statement of Affairs and the ongoing difficulties that we had in doing so. Principally at this time we were trying to obtain the assistance of the Company’s former bookkeeper who was engaged in other full time employment. I notified the Applicant’s solicitor that I would have difficulty in preparing an entirely accurate Statement of Affairs in the circumstances.”
24. The court respectfully concludes that when it comes to the late provision of the statement of affairs, that had nothing to do with any want of cooperation with the liquidator. One does not even begin to approach the behaviour that was at issue in Re MK Fuels Ltd [2014] IEHC 305. In truth, based on the evidence before it, the court sees no evidence of a want of cooperation, beyond the little more than bare assertion of the liquidator which seems entirely answered by the evidence of the respondents.
IX. The Substance of the Statement of Affairs
25. A statement of affairs is sworn to by directors and it is not, therefore, a matter to be approached lightly or glibly. But neither is perfection to be expected; errors may unwittingly creep in to even the best prepared and most honest of statements of affairs. Provided there is cooperation by directors in explaining such innocent deficiencies as may appear in a statement and that there has been no dishonest intention on their part when swearing to the substance of the statement, that should usually be an end of matters. Dishonesty, by contrast, cannot be tolerated. But there is no evidence, none at all, before the court of any dishonesty on the part of either Mr Michael Taggart or Mr John Taggart. Moreover, on close examination the court must admit to very considerable doubt that the scale of discrepancy purported by the liquidator to present in the statement of affairs in fact pertains. In his grounding affidavit, the liquidator avers, inter alia, as follows:
“21. I say and believe that there is a substantial discrepancy between the position of the Company as set out in the Statement of Affairs and the position set out in the last accounts filed by the Company.
22. I say that despite the Company filing accounts which included unsold stock to the value of €2.6m as an asset of the company, the sworn Statement of Affairs provided by the Respondents did not include the stock of unsold houses and it would appear that [the] value of these assets was entirely attributed to Tailored Homes…and used to discharge its [liabilities]…in priority to the Company’s liabilities to the Revenue Commissioners and to trade creditors.”
26. In his initial affidavit, Mr Michael Taggart responds to these assertions as follows:
“[Substance of statement]
40. I take issue with the allegation that there was a substantial discrepancy between the position of the Company as set out in the Statement of Affairs and the position as set out in the last accounts filed by the Company and any inference that could be drawn therefrom. In this regard I refer to paragraphs 20-23 of the Applicant’s Grounding Affidavit. In preparing this Replying Affidavit and as explained above the Statement of Affairs was ultimately prepared by me almost four years after the last filed accounts were prepared which were prepared by a firm of auditors. I did not have access to the books and records of the Company and the task of compiling the Statement of Affairs was made very difficult for this reason….
41. The Applicant at paragraph 22 refers to the Company’s filed accounts including unsold stock to the value of €2.6 million as an asset of the Company. He correctly states that the sworn Statement of affairs did not include the stock of unsold houses. He appears to use this as the basis for his allegation that the Respondents’ Statement of affairs was inaccurate in that there was a discrepancy between the two. This allegation is incorrect. When the accounts were submitted in 2009 it was understood that the business would continue to trade as usual and that the Work in Progress (WIP) would ultimately be recovered by the Company. Almost four years later a Receiver had been appointed over the Site and had effectively controlled all revenue streams from the Site. It is my recollection that as the Company did not own the land on which the houses were constructed the view was taken that no value could be attributed to the WIP in the books of the Company. In addition…the land was under the control of NAMA who effectively had control of the assets and WIP on the land. It was and is my understanding and I am so advised that unless WIP is believed to be recoverable by the Company it should certainly not have been included in the Statement of Affairs. To the best of my knowledge and belief it was on this basis that the WIP was excluded from the Statement of Affairs and accordingly there is no discrepancy between the Statement of Affairs and the filed accounts as alleged.”
27. The court: (i) accepts as true the difficulties that present in preparing a statement of affairs when a director is acting at some remove from a company (it is in fact a difficulty that directors not infrequently point to in applications such as that now presenting); (ii) considers that the issue regarding the €2.6m meets with a credible explanation from Mr Taggart; (iii) noting from the liquidator’s second and third interim reports to the ODCE that from May, 2013, the month in which the statement of affairs was sworn, both of the Taggart brothers were engaging in a spirit of cooperation with the liquidator, considers that this acknowledged cooperation just does not chime with any suggestion that the Taggart brothers were seeking to be devious in what the statement of affairs stated; if anything, it suggests the contrary.
X. Cause of the Company’s Insolvency
28. In his second affidavit, the liquidator elaborates in some detail on an allegation that is touched upon in his previous affidavit and concerning what he perceives to be underhand dealing that made Tailored Homes “completely insolvent”. Per the liquidator:
“50…[T]he Company became entirely insolvent by virtue of the admitted transfers by [the] Company of the entirety of its sales proceeds to Tailored Homes Ireland [Limited, a related Taggart company]. Tailored Homes Ireland and [Mr Michael Taggart]…owned the lands which were developed by the Company. Moreover, the Respondent Directors of the Company were also the directors of Tailored Homes Ireland….
51. The Site developed by the Company was financed…with [borrowed] monies…secured by way of, inter alia, what I say and believe was a fixed charge over the Site, and a floating charge over ‘all WIP thereon’, namely the work product/stock of the Company….
52. Although the basis for this is entirely unclear, the Respondents appear to regard that security situation as justifying their decision to discharge the liabilities of Tailored Homes Ireland….For the avoidance of doubt, Tailored Homes Ireland is not and was not a creditor of the Company….[T]his is a cause for concern. At no stage have the Respondents been able to indicate any basis in law for these remittances. I say and believe that the explanation…that the Respondents ‘deemed [it] unnecessary’ to have a form of building agreement between the Company and Tailored Homes Ireland is simply inadequate, as is their suggestion that ‘there was an oral agreement and understanding between them’.
53. I say and believe that this is doubly so in circumstances where the liabilities of Tailored Homes Ireland were guaranteed by each of the Respondents, so that each of these transfers had the effect of reducing the Respondents’ liability in the sum of many hundreds of thousands of euro.
54. Further, the Respondents continued to accrue liabilities until the time of its liquidation, in circumstances where it is clear that the benefit (if any) which the Company would have derived from the Respondents’ purported negotiations would have been transferred directly to Tailored Homes Ireland. While the benefit to Tailored Homes Ireland is clear from this arrangement, it is remarkably difficult to understand how the Respondents can possibly have conceived that they were acting in respect of the Company.”
29. Three points might be made regarding the above-quoted averments.
30. First, the court respectfully does not share the surprise of the liquidator as to the absence of certain written agreements in the circumstances presenting. While the court agrees with the liquidator that such written agreements are desirable, it is mindful that both liquidator and court are trained in disciplines that are cautious in outlook and watchful to the desirability of documenting agreements generally. However, one is dealing in this case with, to borrow from Mr Michael Taggart’s second replying affidavit, a building enterprise which, however successful, revolved ultimately around the building experience and commercial nous of two entrepreneurs who “are brothers…have been business partners for 30 years….speak on an almost daily basis and…have done so since either of us could speak.” In truth, it is almost to be expected that in such a close-run family enterprise, there would not always be that premium placed on documenting matters which would likely present in an enterprise involving business partners and fellow directors who were not also closely bound together by ties of affection and blood. And it is only fair to note that there is no general legal requirement that companies must take care to document every significant commercial transaction, albeit that as a practical matter it would seem generally sensible and in their own best interests that they should.
31. Second, as it happens there is an alternative and credible explanation for the above-mentioned arrangements. It appears that Tailored Homes Ireland owned the Site which it purchased with its borrowings. Tailored Homes, i.e. the company that is the focus of the within proceedings, was established to build houses on the Site and it drew down funds from its bank for the purpose of building units on the Site. By contrast, at the behest of the bank, these funds were paid to Tailored Homes’ then solicitors for onwards transmission to the bank (subject to the understanding that the applicable VAT would be paid onwards to the Revenue Commissioners). This financial arrangement, the court notes in passing, is one that the liquidator himself has previously stated to the ODCE to have been “as would have been expected”. Certainly the court can see the commercial logic as to why a bank would want sales proceeds retained by a commercial customer’s solicitor and thereafter advanced directly to itself. Once one understands all of the foregoing to have been the arrangement presenting, then one can see why trade creditors fell to be paid out of the borrowings whereas the Revenue Commissioners fell to be paid out of the sales proceeds. Notable too in this regard is the fact that the bank confirmed to the Taggart brothers that its continued financing of Tailored Homes’ activities on-site was dependent on the gross proceeds of sale being remitted to it from Tailored Homes Ireland. So there was a commercial rationale for each of Tailored Homes and Tailored Homes Ireland to have acted as they did. Matters could have been better documented, perhaps they should have been better documented, but in the context of the within application nothing seems to flow from the fact that they were not documented, and certainly that they were not better documented does not prompt the necessary conclusion that what was done was underhand.
32. Third, the true cause of Tailored Homes’ insolvency, it seems to the court, is simply that it was engaged in property development at a time when the property market collapsed, with the result that anticipated sale-levels and prices then plummeted, quickly plunging the company into irremediable financial difficulty.
XI. Revenue Liabilities
33. The VAT liabilities have been touched upon already. The gross sales proceeds went to the bank. The expectation and documented understanding was that the VAT portion would thereafter be paid to the Revenue Commissioners. As well as the correspondence referred to above, the court has, for example, seen e-mail correspondence of 9th November, 2010, from the bank to Tailored Homes stating that “[T]he Bank reiterates its commitment to paying outstanding VAT monies as soon as possible.” For some reason, the liability was not settled; but, in the circumstances presenting, the fact that it was not settled does not rebound to the detriment of either of the Taggart brothers as directors.
34. In all the circumstances presenting, the court’s greatest concern when it came to the Revenue liabilities was when it heard mention of unpaid PAYE/PRSI to the amount of €93,500. Whatever the scale of the amount involved, and the amount involved here is large, such a failure always falls to be considered most seriously because these are, in effect, fiduciary taxes collected on behalf of company employees who are ultimately the parties to suffer from a company’s failure to pay them over to the Revenue Commissioners. Of all the assertions made in the course of the within proceedings as to the respondents’ behaviour, the court considers this to be among the most serious. However, the court is ever conscious in this regard of the observation of Finlay Geoghegan J. in Re Digital Channel Partners Limited [2004] 2 ILRM 35, in which an unpaid tax bill of €1.5m was in issue that “[I]n relation to tax liabilities there must be something more than a limited failure over a period to indicate that the directors have acted irresponsibly….[I]n so far as there may be evidence that there has either 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 be indicative of the fact that directors have been acting at least irresponsibly.” (Related observations are also to be found in the decisions of the High Court in Re Shellware Limited [2014] IEHC 184, para.8 and Arkins v. Murphy & Anor [2015] IEHC 2, para. 34).
35. When looking at the PAYE/PRSI dimension of matters, it appears to the court that there are three significant features to the respondents’ actions that fall to be considered:
– first, Mr Michael Taggart avers that all the PAYE and PRSI liabilities that were incurred by Tailored Homes were incurred while it was trying to secure funding and in the understanding that the financing to be extended would comprise, inter alia, funding that would enable these liabilities to be met.
– second, that the directors ‘hung on’ as they did and considered such a re-financing was a reasonable prospect was not done in some vain hope that the housing market would somehow recover and all would be well. The development in which Tailored Homes was engaged was not ‘just’ a 400-home development; it was a greatly diversified development that included a healthcare facility and a nursing home and which Tailored Homes and its financiers considered might well succeed notwithstanding the national economic circumstances presenting and in respect of which there was a reasonable prospect that a complete re-financing would yet be forthcoming.
– third, when Tailored Homes received eventual confirmation from NAMA that it would only accept proposals that did not involve its providing continued funding, the directors immediately accepted that there was no future prospect for the development, all work and employment ceased.
36. The difficulty, however, that the Taggart brothers face is that the PAYE/PRSI liabilities arise over a three-year period, being €11,711 during the calendar year 2010 (the last year for which Tailored Homes filed returns), an estimated €37,787 during the calendar year 2011, and an estimated amount just in excess of €44,000 for the calendar year 2012. So these were not PAYE/PRSI liabilities incurred in the dying days of a fully trading company, when fevered efforts were being made to find new business and directors were liaising with the Revenue Commissioners and seeking to do right by all as a company’s revenue stream went wrong for good. In fact, there is nothing before the court, no evidence at all, to suggest that the Taggart brothers ever sought to agree with the Revenue Commissioners how they proposed to discharge the unpaid PAYE/PRSI. On the contrary, the evidence before the court suggests that the Revenue Commissioners were throughout this period chasing for all such taxes as were owed to them, though extending every possible latitude within the constraints of their own statutory responsibilities (there is, for example, an e-mail of 14th June, 2011, in which an officer of the Revenue Commissioners states, albeit not in the context of PAYE/PRSI, that “I cannot hold forever on this – I am giving you 14 days from today’s date to get payment sorted. We have not received any payment since June ’10 for this Company”) and being stonewalled in response, with no payment of taxes made and no effort to agree how those taxes would be paid. Instead Tailored Homes’ entire focus was on securing a comprehensive re-financing, to the detriment of every other responsibility, including the responsibility to pay over PAYE/PRSI or arrive at some form of agreed process with the Revenue Commissioners, if such agreement was possible, as to how, inter alia, the undischarged PAYE/PRSI liability would be met. The court does not doubt that the Taggart brothers were seeking to do what they thought best in the very challenging economic circumstances presenting. Even so, it cannot conclude that their actions when it came to a protracted failure to discharge PAYE/PRSI liabilities arising in three successive calendar years were responsible. Had there been meaningful and proper engagement with the Revenue Commissioners during this period concerning how and when those liabilities would be settled, the court might well have concluded differently.
XII. Annual Returns with Appended Accounts
37. All books and records and management accounts were kept up-to-date by Tailored Homes while it was trading. It filed its last annual return in 2009, but appears to have missed 2010 and 2011, with the liquidator coming on board in 2012. It is very important that companies file in a timely manner their complete annual returns, with appended accounts when required, and a failure to do so is not to be treated lightly, though it is only fair to mention as a possible factor of relevance that there is no evidence to suggest that any-one was especially prejudiced by such failing. Be that as it may, Mr Michael Taggart rightly acknowledges the importance of compliance (and it is important to comply) with filing requirements, averring as follows in his affidavit evidence: “I acknowledge that the failure…was regrettable….Throughout the relevant period the Company had been limited to two staff members who worked tirelessly…to secure continued funding to complete the development and to ensure that all creditors including Revenue were paid. Any such failure must be viewed in that context.” In fact, it appears that during this period the only funds available to Tailored Homes were provided to it by the bank; and these, it seems, enabled the company to pay for everyday needs but were not, Mr Michael Taggart avers, sufficient to meet the cost of preparing annual accounts, though it does not seem that there was a related descent into internal accounting disorder. The fact that the company simply did not have the financial wherewithal to finance the preparation of annual accounts presents something of a conundrum: is it irresponsible for directors not to arrange the doing of something that the company of which they are directors cannot afford to do? The answer, it seems to the court, is that the directors ought by that point, when a company is so far reduced in funds, to accept that the company is no longer in any way in a tenable position and to proceed accordingly, but not to decide that they will allow the company to continue to break the law in the hope that some future remediation exercise may be undertaken following a potential comprehensive re-financing. No measure of hindsight is required to reach this conclusion. The court therefore concludes that there was also a want of responsibility shown in this regard.
XIII. Conclusion
38. For the various reasons offered above, the court is not satisfied as to each and all of the matters recited in s.819(2) of the Act of 2014. A declaration therefore falls to be made under s.819(1) of that Act. If the court enjoyed a discretion to impose a shorter restriction period than that which automatically arises under s.819(1) it might well have invoked that discretion and applied a shorter restriction period in all the circumstances presenting; however, no such discretion exists at this time.
Grace (Liquidator) v. Kachkar & Ors
[2005] IEHC 63 (21 February 2005)
Judgment of Ms. Justice Finlay Geoghegan delivered on the 21st day of February, 2005.
The applicant is the official liquidator of each of the companies named in the title. He was so appointed by order of the High Court made on the 11th December, 2002. Prior to that he had been examiner, appointed by the High Court, of each of those companies.
This judgment relates to his application under s. 150 of the Companies Act, 1990, for a declaration of restriction in respect of each of the first and second named respondents, Mr. Kachkar and Mr. Carrigan.
It is undisputed that each of Mr. Kachkar and Mr. Carrigan were directors of each of the companies named in the title within twelve months of the date of commencement of the winding up. It is further undisputed that each of the companies is insolvent and accordingly s. 150 of the Act of 1990 applies to each of the companies and to Mr. Kachkar and Mr. Carrigan.
The liquidator made reports to the Director of Corporate Enforcement under
s. 56 of the Company Law Enforcement Act, 2001, and was not relieved of his obligations to bring these applications.
Background facts
Miza Ireland Limited is the holding company of the other four companies (“the Irish Miza Group”). The Irish Miza Group was a manufacturer of branded and non-branded generic pharmaceutical products. All products were manufactured by Mitek Pharmaceuticals Limited.
Miza Ireland Limited is a wholly owned subsidiary of Miza Pharmaceuticals Inc. (“Miza Inc.”) a company incorporated and registered in Canada.
The companies in the Irish Miza Group (other than Miza Ireland Ltd.) were formerly part of the Antigen Group along with a least three other Irish companies. The Antigen Group had similarly manufactured in Ireland branded and non-branded generic pharmaceutical products. The additional companies had responsibility for the sale and distribution of generic and branded pharmaceutical products manufactured by the Antigen Group worldwide.
The former Antigen Group companies were required to upgrade their Irish manufacturing processes in order to comply with standards required by the Irish Medicines Board. This necessitated the closure of the pharmaceutical production facility in July 2000 with consequent adverse effects on revenue. It would appear, as a direct result of this, the High Court was petitioned in May 2001 for the appointment of an examiner to the Antigen Group. On the 9th May, 2001, Mr. Jason Sheehy (“the Examiner”) was appointed interim examiner and his appointment was subsequently confirmed on 28th May, 2001.
A scheme of arrangement was formulated by the Examiner and put before the creditors in August 2001. It provided for the payment in full to the creditors of the principal sums over a period of time ranging from 3 months to 30 months. The investor for the scheme of arrangement was a joint venture between Miza Inc. and Goldshield. In essence they (or their subsidiaries) were to provide a total of approximately IR£24m for the purpose of funding the acquisition of the Antigen Group from Mr. George Fasenfeld, the shareholder in Antigen Holdings Limited, for the sum of IR£6.7m and to fund the creditors in the scheme of arrangement amounting to IR£17.3m. The above scheme of arrangement was approved by the creditors. It was to be implemented by a complicated series of agreements and transactions.
The scheme of arrangement was approved by the High Court on the 8th November, 2001. Thereafter the agreements already entered into commenced to be implemented and certain further agreements were entered into. The effect of these agreements and their preliminary implementation may be summarised as follows for the purposes of this application.
Goldshield through a subsidiary, Startville Limited, acquired the shares in three companies then owned by Antigen Holdings Limited concerned with the marketing, distribution and sale of the pharmaceutical products. Startville Limited paid IR£6.7m for the product licences, authorisations, goodwill and finish stock of Antigen Pharmaceuticals Limited and certain equipment of Antigen Limited. This sum was paid to Antigen Holdings Limited which in turn loaned it to Miza Ireland Limited which used it to acquire the shares held by George Fasenfeld in the Antigen Group.
A manufacturing and supply agreement was entered into between Miza Ireland Limited, Goldshield Group plc and Miza Inc. pursuant to which the Irish Miza Group was to sell and Goldshield was to purchase all of its production. Gross margins were provided for under the agreement.
There is a difference on the affidavits between the liquidator and Mr. Kachkar as to the true meaning and import of the agreements in relation to the provision of the funding by Miza Inc. and its subsidiaries on the one hand and Goldshield on the other for the sums due to creditors under the scheme of arrangement. The liquidator contends that the agreements required the sums to be provided on an equal basis by Miza Inc. and Goldshield through its subsidiaries whereas Mr. Kachkar essentially takes the view that in accordance with a KPMG report done in November 2001 the sums due under the scheme of arrangement should have been capable of being financed out of the monies to be paid by Goldshield for the product manufactured by the Irish Miza Group with the addition of a small asset-based loan of approximately IR£1.5m. It is not necessary for me for the purposes of this application to determine the precise contractual obligations.
Notwithstanding the agreements put in place in November 2001 there appears to have been a delay in the implementation of the new relationships and production arrangements in the first quarter of 2002. Mr. Kachkar appears to blame this at least in part on Goldshield and again I need not resolve this.
The first payment under the scheme of arrangement to creditors was due on the 12th February, 2002. The Irish Miza Group defaulted in paying the full amounts then due. Difficulties arose between the Irish Miza Group and Goldshield in relation to the production agreement and cashflow in the Irish Miza Group deteriorated.
It appears from the facts set out in the affidavit that at the same time Miza Inc. was involved in a major financing initiative in Canada. It appears that this was intended to fund worldwide operations and capital investments of the Miza Group including those in Ireland. Preliminary confirmation of financing was received from Genstar Capital in the US in the summer of 2002 which with Genstar’s consent was notified to Miza’s creditors.
Following the Genstar commitment CCL Industries Inc. (“CCL”) a Miza Inc. shareholder agreed to provide Miza companies with interim financing of $3m. Of this Miza Inc. made available to the Irish Miza Group a total of approximately $1m in two tranches of €795,832.29 and €201,481.81 respectively at the end of July 2002. However, over the following month approximately the Irish Miza Group appear to have transferred out €501,526 to Miza Inc. and Miza U.K. In August 2002 Genstar decided not to proceed with the financing. There were continuing disputes between Miza Inc. and Goldshield. The perilous state of the Irish Miza Group was recognised by the directors at latest in early September 2002. The first meetings of directors of which minutes were produced were held on 9th and 10th September, 2002.
Subsequently in September 2002 attempts appear to have been made by the then Irish management of the Irish Miza Group (who were not directors of any of the companies named in the title) and representatives of Goldshield and CCL to procure investments/funding for the Irish Miza Group. Relations between Mr. Kachkar and Mr. Carrigan on the one hand and the Irish management on the other appear to have broken down at this time and pursuant to a request made by the Irish management with the support of representatives of Goldshield and CCL Mr. Kachkar and Mr. Carrigan resigned as directors on the 9th October, 2002.
On the 29th October, 2002, the liquidator was appointed as interim examiner on the petition of the Bank of Ireland and the Bank of Scotland (Ireland) Limited and on the 11th December, 2002, following an unsuccessful examinership, he was appointed official liquidator of each of the companies.
Issues
On the facts set out in the affidavits filed herein no issue arises as to the honesty of Mr. Kachkar and Mr. Carrigan in relation to the conduct of the affairs of each of the five companies in the Irish Miza Group whilst they were directors of same. This is acknowledged by the liquidator pursuant to his investigations and I am so satisfied. The liquidator, in accordance with the practice direction in relation to applications under s. 150 has raised matters for consideration by the court under four headings which he submits mean that Mr. Kachkar and Mr. Carrigan cannot discharge the onus placed on them by s. 150 of the Act of 1990 of establishing to the satisfaction of the court that they acted responsibly as directors of the companies.
1. As directors of Miza Ireland Limited (to which they had been appointed on 2nd November, 2001) they put up to the High Court a scheme of arrangement which was dependent on investment from Miza Inc. when they had not in place funding for Miza Inc. which would permit such investments to be made.
2. Mr. Kachkar and Mr. Carrigan either permitted or directed the payment from the Irish companies of significant sums of money and assets in the order of €2.8m. It is contended that these were transferred on the basis of inter-company charges but with no real basis for same, that the companies were insolvent at the time the transfers were made and also at the same time unable to make the payments due to the scheme creditors.
3. Mr. Kachkar and Mr. Carrigan procured that the Irish companies give two sets of securities at a time when they were insolvent: firstly, a composite guarantee and mortgage debenture between the Irish companies and Miza Inc. on 11th December, 2001 and, secondly, a composite guarantee and mortgage debenture between the Irish companies and CCL Industries Inc. on 13th September, 2002.
4. Mr. Kachkar and Mr. Carrigan permitted the Irish companies to continue to trade whilst insolvent and it is submitted that it was irresponsible to permit the continued trading after February 2002. It is contended that the creditors of the companies have been adversely affected in that there has been an increase of approximately IR£9m between the amount due to creditors under the scheme of arrangement and that due at the commencement of the winding up.
Applicable law
Section 150 of the Act of 1990 imposes a mandatory obligation on the High Court to make a declaration of restriction unless the court is satisfied “as to any of the matters specified in sub-s. (2)”. The relevant matters to this application are “that the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company . . .”.
An application such as this brought by a liquidator under s. 150 (4) pursuant to his obligation under s. 56 of the Act of 2001, is not a normal inter partes adversarial application. The onus of establishing that he/she acts responsibly rests on the director. Whilst in practical terms a director may primarily seek to address the matters raised by the liquidator, pursuant to the practice direction referred, the director is not relieved of the general onus established by s. 150 of the Act of 1990.
The matters to which the court should have regard in determining the responsibility of a director for the purposes of s.150(2)(a), as set out by Shanley J. in La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM 345 and as approved by the Supreme Court in Re Squash (Ireland) Limited [2001] 3 IR 35, are:
“(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts, 1963-1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the director’s responsibility for the insolvency of the company.
(d) The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.
(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.
In a judgment given in the matter of Tralee Beef and Lamb Limited (In Liquidation), Unreported, High Court, Finlay Geoghegan J., 20th July, 2004, I concluded that the court under para. (a) above should also have regard to the duties imposed on a director at common law. Further, in that case I agreed with the general formulation of the duty of an individual director as stated by Jonathan Parker J. in Re Barings plc. and Ors. (No.5); Secretary of State for Trade and Industry v Baker and Ors [1999] 1 BCLC 433 in the following terms:
“Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.”
In a judgment given in the matter of 360atlantic (Ireland) Limited (In receivership and liquidation), Unreported, High Court, Finlay Geoghegan J., 21st December 2004, I considered albeit on a very different factual basis the possibility of differing principles applying to persons who were directors of wholly owned Irish subsidiaries within a worldwide group and at the same time directors of other companies within the group. In that judgment I made the following observations which appear relevant to the issues I have to consider herein:-
“The fact that the Company is a wholly owned subsidiary within a worldwide group does not appear to alter the legal principles applicable to the duties of directors but rather to create a particular factual scenario which must be taken into account when considering the discharge of those duties.”
[“…”]
. . . it would appear totally permissible and indeed a proper exercise of the duties of directors in the interests of the [Irish] Company for the directors to fully take into account and indeed even to follow the policies adopted for the entire group when managing the business of the Irish Company.”
[“…”]
Accordingly it appears to me that where a group corporate structure exists, such as in the present case, and the issue under s.150 of the Act of 1990 is whether a director of the wholly owned Irish subsidiary company acted responsibly in the sense of discharging the minimum common law duties, he must be able to establish at a minimum that he did inform himself about the affairs of the Irish subsidiary company as distinct from any other company within the group and together with his fellow directors that he did take real steps to consider and take decisions upon at least significant transactions to be entered into or projects undertaken by the Irish subsidiary company. There must be evidence of a real consideration by the directors of whether significant transactions or operations to be undertaken were desirable in the interest of the Irish subsidiary company or could be said to be for the benefit of the Irish subsidiary company. I readily recognise that in many instances the interests of the Irish subsidiary company may be so intertwined with the affairs of the group as a whole that the answer may be obvious. However, the fact that the answer is obvious does not appear to absolve the directors from at least addressing the question.
If the issue of the responsibility relates to the nature of decisions taken (which it does not on the facts of this application) as distinct from the absence of any decisions different and further considerations may apply. It is not necessary to consider those on the facts of this case.”
On the facts of this case it may be that the nature of the decisions taken may arise. Further consideration is given to this below.
Conclusions
I have considered the entire tenure of Mr. Kachkar and Mr. Carrigan as directors of Miza Ireland Limited and other companies within the Irish Miza Group as I am bound to do in accordance with the decision of the Supreme Court in Re Squash (Ireland) Limited [2001] 3 IR 35. Each were directors of each of the companies for a period of between ten and eleven months. Each were appointed directors of the five companies named in the title on varying dates in November and December 2001 and each resigned as directors of all the companies in October 2002.
I have also taken into account the fact that each of Mr. Kachkar and Mr. Carrigan were executive directors of other companies within the worldwide Miza Group. Each have stated on affidavit, and I accept, that they were under obligations to all the companies within the Miza Group and had to “ensure that each company within the Miza Group succeeded”. In accordance with the above principles it appears appropriate that this fact should be taken into account.
I have also taken into account that fact that Mr. Kachkar and Mr. Carrigan were the only executives within the Miza Group to be directors of the Irish Miza Group. The only other director of four of the companies named in the title was Ms. Buckley who was a non-executive director. She was invited to become a director to fulfil the requirement of an Irish resident director. She appears to have been introduced through her brother who acted as consultant to the Miza Group in Canada. Mr. Kachkar and Mr. Carrigan have very properly accepted on affidavit that they were more familiar with the detailed affairs of the Miza Group and the Irish Miza Group and in particular the financial matters than Ms. Buckley.
I must also take into account the fact the Mr. Kachkar and Mr. Carrigan were appointed as directors of the Irish Miza Group at a time when that company was coming out of examinership and had obligations under a scheme of arrangement which had been put to and approved by the High Court with their support. Whilst I do not consider that their support for the scheme without funding available to Miza Inc. would preclude the court finding they acted responsibly as directors of the Irish Companies it is a relevant fact in considering their actions as directors of the companies named in the title hereof in the subsequent period. The Irish Miza Group were companies in straitened financial circumstances at the end of 2001 and dependent upon the success of the proposed scheme of arrangement and joint investment from Miza Inc. and Goldshield for their survival. Even on Mr. Kachkar’s view of the joint investment arrangements he envisaged that in addition to monies coming from Goldshield pursuant to the production agreement the Irish Miza group would need a loan of about £1.5m.
I do not consider that the continued trading after February 2002 of itself precludes the Court from finding that Mr. Kachkar and Mr. Carrigan acted responsibly as directors as submitted by the liquidator. As previously decided, the court must be very careful not to judge such decisions made by directors with the benefit of hindsight. The delay in the resolution of issues with Goldshield and approaching finality and perceived improvements in production probably justified continued trading. However, the precarious financial position of the Irish Miza Group after February 2002 must be taken into account when considering the appropriate control and supervision of the financial affairs of the Irish Miza group required of the directors to discharge their common law duty of care.
I have concluded on the facts set out in the affidavits that Mr. Kachkar and Mr. Carrigan have failed to discharge the onus on them to satisfy the court that as directors of each of the five companies named in the title to these proceedings they acted responsibly in relation to the conduct of the affairs of such companies.
I wish to make clear that this Court is only considering whether Mr. Kachkar and Mr. Carrigan have satisfied the Court that they acted responsibly in relation to the conduct of the affairs of the five Irish Miza Group companies. The Court is not considering their actions as directors or senior executives of any other companies within the Miza Group. It is only taking those positions into account in the limited sense of giving rise to what may have been from time to time competing obligations.
There are significant disputes between Mr. Kachkar and Mr. Carrigan on the one hand and Mr. Michael Cormack on the other, in relation to facts pertaining in particular to transfer of monies from the Irish Miza Group to Miza companies in Canada, US and UK and the basis for same. However, even on the picture of financial control and management which emerges from the affidavits of Mr. Kachkar and Mr. Carrigan and in particular relating to intra-group corporate charges and transfers out of Ireland to other Miza Group companies and the granting of security in September 2002 to CCL Industries the Court could not be satisfied that they acted responsibly in relation to the control and supervision of the financial affairs of the Irish company.
Mr. Cormack was the financial controller of Mitek Pharmaceuticals Limited, the only trading company in the Irish Miza Group. Both Mr. Kachkar and Mr. Carrigan seek to distance themselves from any control of Mr. Cormack. In the Miza worldwide group structure he appears to have reported directly to Mr. John Van Scheppen, the chief financial officer of Miza Inc. Mr. Van Scheppen held no position in the Irish Miza Group. Notwithstanding this it appears that he was the person who primarily gave directions to Mr. Cormack in relation to financial matters in the Irish Miza Group. Mr. Kachkar and Mr. Carrigan as directors of the companies in the Irish Miza Group do not appear between February 2002 and August 2002 to have taken steps to supervise and control the financial affairs of the Irish Miza companies particularly in relation to transfers of monies from it to other companies within the Miza worldwide group. There is no evidence that Mr. Kachkar and Mr. Carrigan as directors of the Irish companies took any decision in this period as to the appropriateness of the transfers being directed having regard to the then financial situation of the Irish companies. There are limited examples of Mr. Kachkar directing Mr. Cormack to make such transfers but these appear to relate to the needs of other companies within the Miza Group.
In February 2002 the Irish companies failed to discharge the full amount due, at that date, to the creditors under the scheme of arrangement. There also had been delay in finalising the segregation of the manufacturing and marketing arms of the business in accordance with the agreements with Goldshield. This delay and alleged lack of funding by Goldshield is blamed for some of the financial difficulties of the Irish Miza Group in this period. I am prepared to accept that these factors may have contributed to the difficult financial situation then pertaining in the Irish Miza Group. However, if anything this increased the obligations on Mr. Kachkar and Mr. Carrigan as directors of the Irish companies to control and supervise the financial affairs of those companies. I am satisfied as a matter of probability that monies or debts aggregating approximately €2.8m were transferred out of the Irish Miza Group to Miza companies in the UK, US and Canada between February 2002 and August 2002. Against this there were loans made at the end of July 2002 of approximately €1m from Miza Inc.
Much of the dispute in the affidavit centred on whether or not the Miza Group applied a system of corporate charges to the Irish Miza Group in 2002. I accept on the affidavits that as a matter of probability at Mr. Van Scheppen’s direction there were included in the budget and accounts for the Irish Miza Group corporate charges to other Miza companies. However even if the work done by executives of other Miza companies for the Irish Miza Group was such as to justify the imposition of corporate charges there is a quite separate question as to the appropriateness of the Irish companies making payments to meet such charges in the period between February 2002 and August 2002 when the Irish companies were unable to pay the amounts due to the creditors under the scheme of arrangement and were under very considerable financial pressure from its own suppliers. There is no evidence in this period of Mr. Kachkar and Mr. Carrigan either considering or taking a decision as to whether such payments at the relevant times were appropriate and justified in the interest of the Irish Miza Group. Even if there were competing demands from other Miza companies to which they had obligations, at minimum they must be considered to be under an obligation to consider the issue as directors of the Irish companies. Further there is no evidence that they considered the amount of such charges from the perspective of the Irish Miza Group.
By the beginning of September 2002 Mr. Kachkar and Mr. Carrigan were properly concerned about the ability of the Irish Miza Group to continue trading. Notwithstanding this, on the 13th September, 2002, a debenture creating security over the Irish Miza Group was given in favour of CCL Industries Inc. This is justified as being based on an earlier contractual commitment. Such commitment appears to have been a commitment by Miza Inc. There is no real explanation offered by Mr. Kachkar and Mr. Carrigan as to how they considered it proper to issue a debenture in favour of CCL Industries Limited on the 13th September, 2002, in the light of the very proper discussions which appear to have taken place between the full board (via telephonic meeting) on the 9th and 10th September. In the absence of very clear explanations the Court could not be satisfied that Mr. Kachkar and Mr. Carrigan had acted responsibly in issuing the debenture.
Not being satisfied that Mr. Kachkar and Mr. Carrigan acted responsibly as directors in relation to the conduct of the affairs of the companies named in the title hereof, the Court is bound to make the declarations sought.
Approved: Finlay Geoghegan J.
Leahy -v- Bailey & ors
[2016] IEHC 592 (28 October 2016)
JUDGMENT of Mr. Justice David Keane delivered on the 28th of October 2016
Introduction
1. This is an application for a declaration of restriction against each of the respondents under s. 819(1) of the Companies Act 2014 (‘the 2014 Act’), formerly s. 150(1) of the Companies Act 1990 (‘the 1990 Act’).
Background
2. Spur (Liffey Valley) Restaurants Limited (‘the company’) was incorporated on the 27th November 2001. As its name suggests, the company operated a restaurant in the ‘Liffey Valley Shopping Centre’ at Fonthill Road, Clondalkin, Dublin 22.
3. By ordinary resolution on the 25th January 2013, the members of the company resolved to wind it up and to appoint the applicant as liquidator for that purpose.
4. At the commencement of the winding up, the respondents were the directors of the company, and the first named respondent was its secretary.
5. The applicant has certified that, at the commencement of the winding up, the company was insolvent in that it was unable to pay its debts within the meaning of s. 570 of the Companies Act 2014.
6. On the 30th October 2013, the Office of the Director of Corporate Enforcement wrote to inform the applicant that he was not relieved of his obligation under s. 56(2) of the Company Law Enforcement Act 2001 (‘the 2001 Act’) to apply to this court for a declaration of restriction in respect of each of the respondent directors under s. 150 of the 1990 Act (now s. 819 of the 2014 Act).
7. The present application is brought by motion issued on the 1st February 2016, originally made returnable for the 7th March 2016. While there was some correspondence between the applicant and a representative of the first and second named respondents prior to the application, there was no appearance on behalf of any of the respondents in opposition to it.
The legal issue
8. From the evidence before me, I am satisfied that each of the respondents was a director of the company at the material time; that the company is, and was at the date of the commencement of its winding up, insolvent; and that the Director of Corporate Enforcement has not relieved the applicant of the obligation to bring the present application.
9. It follows that I am obliged to make a declaration of restriction under s. 819 of the 2014 Act in respect of each of the respondents unless satisfied that the conduct of each or any of them comes within the circumstances set out in sub-s. (2) of that section.
10. I am therefore required to consider whether I can be satisfied that each of the respondents acted honestly and responsibly in relation to the conduct of the company’s affairs and that it is not otherwise just and equitable to subject any of them to restriction.
The evidence
11. The company traded for a period of approximately eleven and a half years between July 2001 and December 2012.
12. Each of the respondents was a director of the company throughout that period and until the commencement of the company’s winding up. The first named respondent was operations director, the second named respondent was managing director, and the third named respondent was a non-executive director.
13. The applicant acknowledges that, with one notable exception to which reference will be made shortly, the company maintained proper books and records and that it filed the appropriate returns with the Companies Registration Office. According to the statement of affairs prepared by its directors, the company had unpaid Revenue liabilities amounting to €169,482 at the commencement of its winding up, comprising €155,450 in unpaid VAT and €14,649 in unpaid PAYE/PRSI. The company made the required VAT returns and payments for each two month period up to and including that of July and August 2012 and the necessary PRSI and PAYE payments for all periods up to and including September 2012.
14. The applicant avers that, while the company initially traded profitably, in later years it experienced a significant decline in its turnover from approximately €3.3 million in 2007/8 to €2.3 million in 2010/11. The directors sought to address this difficulty by implementing reductions in the company’s overheads and staff costs but were unable to secure a reduction in the rent of its restaurant premises sufficient to permit it to continue to trade.
The factual issue
15. The specific factual issue raised by the applicant concerns the manner in which the company dealt with a debt that was owed to it by another company named Trinity Leisure Limited (‘Trinity’). Trinity is an English registered company that holds 95% of the company’s issued shares. According to both the directors’ report in Trinity’s most recent available returns (for the year ended the 30th June 2009) and its most recent available annual return made on the 19th January 2011, the directors of Trinity are the first and second named respondents.
16. The company’s financial statements for the year ended the 30th June 2010 record that its assets include amounts owed to it by ‘group undertakings’ in the amount of €1,963,989, and that its liabilities include shareholders’ loans in the sum of €1,117,645. No intangible assets are included amongst the company’s fixed assets in its balance sheet as at the 30th June 2010.
17. In contrast, the company’s financial statements for the year ended the 30th June 2011 record that the amount owed to it by a ‘group undertaking’ had fallen to €31,200; that it had no outstanding loans from shareholders; and that it now had intangible assets valued at €825,000. Moreover, the 2011 financial statements purport to restate certain figures from the 2010 financial statements and, in doing so, include €21,344 as the amount owed to the company by ‘group undertakings’ in 2010, instead of the figure of €1,963,989 actually recorded in the 2010 financial statements.
18. In correspondence with the first and second named respondents, the applicant was informed that Trinity was both the group debtor and the shareholder loan provider identified in the 2010 financial statements and that, for the purposes of the 2011 financial statements, the indebtedness of Trinity to the company was reduced by netting off those two sums. However, as the applicant points out, such netting off would have left Trinity as a net debtor of the company in the amount of €846,344.
19. The explanation that the first and second named respondents have provided for the further ostensible reduction of Trinity’s debt to the company by an additional sum of €825,000, is that the company acquired franchise rights and the transfer of the lease of its restaurant premises from Trinity for an agreed consideration in that amount, leaving Trinity with a remaining indebtedness to the company of just €21,344.
The applicant’s position
20. Concerning the acquisition of franchise rights by the company from Trinity, the applicant avers that he has not been provided with any, or any sufficient, details of the transaction whereby those rights were acquired or of the manner in which those rights were valued for the purpose of that transaction. In particular, the applicant’s evidence is that the respondents have failed to provide him with a copy of the franchise agreement or with a copy of the software used to maintain the company’s accounts that might enable any valuation of those rights to be meaningfully examined.
21. Similarly, in respect of the assignment by Trinity of the lease of the company’s restaurant premises to the company, the applicant avers that the respondents have failed to provide him with a copy of that lease or with any independent valuation of it, in circumstances where the applicant expresses the belief, based on his professional experience, that, given the economic circumstances then prevailing; the high rent that was being charged on the company’s premises; and the anticipated cost of replacing the specialist fit out of those premises, it is difficult to see how any significant value could have been ascribed to the tenant’s interest in that lease at that time.
22. The liquidator points out that, when the company’s 2011 financial statements (recasting, in relevant part, the company’s balance sheet for 2010) were approved by the company’s directors in March 2012, the respondents must have been aware that the company was by then in significant financial difficulty. Accordingly, the applicant acknowledges, and the Court accepts, that, in the absence of the necessary evidence to support the explanations proffered, it is not possible to be satisfied that the relevant transactions were not contrived and deliberately backdated to avoid, amongst other difficulties, the potential application of s. 286 of the Companies Act 1963. After all, were it not for those purported transactions, the company, which went into liquidation with an estimated net deficiency of €309,116, would have had a specific debt of €825,000 to pursue, whereas, in consequence of them, it has instead intangible assets to which an equivalent value has been ascribed in the company’s accounts but which appear to have no realisable value in the liquidation.
23. Further, the respondents’ failure to provide the necessary information and material in response to the applicant’s request for it, amounts to a specific failure to co-operate with the applicant, as liquidator, capable of amounting by itself to a separate reason why it would be just and equitable to make a declaration of restriction against each of the respondents.
24. The position of the third named respondent is different from that of the other two, in that he was at all material times a non-executive director of the company. Indeed, in correspondence with the applicant on behalf of the first and second named respondents, some doubt was expressed as to whether he was, in fact, a director at all. The evidence adduced by the applicant is sufficient to satisfy me that he was, although he does not appear to have played any part in the conduct of the company’s affairs during his tenure – a fact which, from that respondent’s perspective, creates its own separate difficulty.
The law
25. As Murphy J. made clear in Business Communications Ltd v Baxter and Parsons (High Court, 21 July 1995, unreported), where the necessary proofs are otherwise in order under s. 150(1) of the 1990 Act (equivalent to s. 819(1) of the 2014 Act), the onus is on a respondent director to establish that he acted honestly and responsibly and that there is no other reason why it is just or equitable to restrict him, insofar as he seeks to rely on the provisions of s. 150(2) of the 1990 Act (equivalent to s. 819(2) of the 2014 Act) to resist the making of such an order .
26. Here, the respondents have elected not to appear in opposition to the application and, in many cases, that would be enough to determine its outcome. In this instance, in view of the relatively long and previously unblemished tenure of each of the respondent directors; in light of the company’s previous record of general compliance with its obligations under the Companies Acts and the applicable taxation statutes; and because the concerns that have been very properly raised by the applicant refer to what are, in effect, just two transactions (albeit significant ones in light of the aggregate sum involved and the overall deficiency in the company’s assets), I requested the applicant to address me on the relevant legal principles as they apply to the facts at hand.
27. The applicant suggests that each of the five matters identified by Shanley J. in La Moselle Clothing Ltd and Rosegem Ltd v Soualhi [1998] 2 ILRM 345 at 352 as those to which it is appropriate to have regard in determining whether a director has acted responsibly are relevant here. The Supreme Court approved the La Moselle test in Re Squash (Ireland) Ltd [2001] 3 IR 35, although as Fennelly J. made clear in Re Mitek Ltd; Grace v Kachkar [2010] IESC 31, the matters it identifies should not be considered exhaustive or as somehow substituting standardised judicial criteria for the general words of the statute.
28. Indeed, in Re Tralee Beef and Lamb Ltd; Kavanagh v Delaney (High Court, 20th July 2004, unreported), Finlay Geoghegan J. provided some amplification of the La Moselle test, pointing out that any significant breach of the general duty of skill and care that each director owes to a company, and, in that context, the specific duty of each director to inform himself about its affairs and to join with his co-directors in supervising and controlling them, is likely to amount to irresponsible conduct.
29. Quite separately, in view of the requirement imposed on directors to satisfy the Court that there is no other reason why it is just and equitable to make a declaration of restriction, the applicant acknowledges that the Court must also have regard to the conduct of each of the respondents after the commencement of the winding up, most notably, the failure of each to co-operate with the applicant, as liquidator, in not responding adequately to the specific requests that he made for copies of the franchise and lease agreements between the company and Trinity.
30. Having carefully considered the applicant’s very helpful submissions, it seems to me that the matters most relevant to the issue of whether the Court can be satisfied that the respondent directors acted responsibly or, indeed, honestly in relation to the conduct of the company’s affairs are:
(a) the extent to which each has or has not complied with any obligation imposed on him (or her) by the Companies Acts;
(b) the extent to which each and, in particular, the third named respondent has complied with the duty imposed on him by common law to inform himself about the company’s affairs and to join with his co-directors in supervising them, and
(c) the extent of the directors responsibility for the net deficiency in the company’s assets disclosed at the commencement of its winding up.
31. The applicant notes that, because of the failure of the respondents to provide the documentation and information necessary to allow a proper examination of the purported franchise and lease agreements, it is not possible to be satisfied that there has been compliance with the requirements of s. 29 of the 1990 Act (equivalent to s. 238 of the 2014 Act) in respect of substantial property transactions between the company and persons, such as Trinity, connected with its directors.
32. The applicant further observes that the respondents’ failure to provide him with copies of the relevant agreements is capable of amounting to a breach of the requirements of s. 202(1) of the 1990 Act, as amended (equivalent to s. 282 of the 2014 Act), which include the obligation to keep proper books of account that, amongst other things, correctly record and explain the transactions of the company and enable the annual accounts of the company to be readily and properly audited. As Murphy J. put the matter in Business Communications, already cited:
‘Ordinarily, responsibility will entail compliance with the principal features of the Companies Acts and the maintenance of the records required by those Acts. The records may be basic in form and modest in appearance. But they must exist in such a form as to enable the directors to make reasonable commercial decisions and auditors (or liquidators) to understand and follow the transactions in which the company was engaged.’
33. The specific circumstances of this case create very obvious concerns. Although the company’s financial statements for the year ending on the 30th June 2011 suggest otherwise, the purported lease and franchise agreements between the company and Trinity were not reflected on the balance sheet in the company’s financial statements for the year ending on the 30th June 2010. Even in the earlier of those two periods, the company was already sustaining trading losses, according to those financial statements. Copies of the purported agreements have never been produced. The transactions concerned benefitted another company of which the first and second named respondents were directors and shareholders, giving rise to an obvious potential conflict of interest on their part in relation to the fiduciary duties that they owed to the company. The practical benefit that the company derived from those purported transactions is, to say the least, questionable, involving, as they did, the acquisition by the company at considerable cost of assets with little or no realisable value on insolvency when the company was already in financial difficulty. The amount expended by the company in those two transactions – €825,000 – is more than twice the company’s net deficiency on insolvency of €309,116, according to the statement of affairs prepared by the respondents. The amount expended, whenever it occurred, was significant for a company that had net assets of €788,472 at the end of June 2010 and net assets of €619,506 twelve months later, according to its own financial statements.
34. Turning to the position of the third named respondent, there is nothing to suggest that his role was ever anything other than an entirely passive one. There was some suggestion in the course of the application that his involvement as a director of the company may have been prompted by the perceived requirement, at the time when the company was incorporated, for at least one of its directors to be a person resident in the State, in circumstances where the first and second named respondent were, and apparently are, resident in the United Kingdom. It is unnecessary, perhaps even inappropriate, to speculate in that regard. The inescapable fact is that the third named respondent agreed to become a director, for whatever reason, and did so. And, as the Court of Appeal has recently reiterated in Director of Corporate Enforcement v Walsh [2016] IECA 2, it would be contrary to the whole notion of proper corporate regulation to exonerate token directors from liability or relieve them from restriction on the basis of their voluntary adoption of an entirely passive role.
Conclusion
35. Taking these matters into account, in circumstances where each of the respondents has failed to establish a defence under s. 819(2) of the 2014 Act and where the necessary proofs are otherwise in order, the Court is obliged to make the appropriate declaration of restriction under s. 819(1) of that Act concerning each of the respondents and I will do so.
Elite Logistics Ltd -v- McNamara
[2012] IEHC 246 (20 June 2012)
Judgment of Ms. Justice Laffoy delivered on 20th day of June, 2012.
The parties
1. The plaintiff in these proceedings, a limited liability company which was incorporated in 1994, is now being wound up by the Court on foot of a winding up order made on 5th September, 2007. On that day Mr. Jim Luby (the Liquidator) was appointed official liquidator by order of the Court, having been appointed provisional liquidator by order of the Court made on 31st July, 2007. The plaintiff was wound up on the petition of the defendant.
2. The defendant was at all material times a director of the plaintiff and its company secretary until the winding up order was made on 5th September, 2007. As I understand it, when the winding up order was made, he was the only director of the company.
3. By order of the Court (Finlay Geoghegan J.) made on 31st July, 2008 in the proceedings in the Examiners Court (record No. 2007/330 COS) it was ordered, pursuant to s. 231 of the Companies Act 1963 (the Act of 1963), that the Liquidator was at liberty to institute and maintain these proceedings.
4. From the initiation of the proceedings until after notice of trial was served and the proceedings were set down for hearing the defendant was represented by two firms of solicitors in succession and by counsel. However, before the matter came on for hearing, the solicitors then representing him came off record and the defendant appeared in person at the hearing.
The plaintiff’s case and the defendant’s response as pleaded in general
5. The essence of the plaintiff’s claim, as pleaded in the statement of claim, is that the defendant, wrongfully and in breach of his fiduciary duties as a director to the plaintiff, used the funds of the company to acquire in his own name four properties and a Mercedes motorcar, which assets were retained by the defendant for his own use and benefit and in respect of which the plaintiff, being the beneficial owner, obtained no benefit. When the matter came on for hearing on 6th June, 2012 the Liquidator, sensibly in my view, had decided that it was not worth pursuing the claim in relation to the Mercedes, which had been registered in 2005. In relation to one of the properties, an apartment in Spain, in which it was admitted by the defendant that the plaintiff had a twenty per cent beneficial interest, on the previous day the defendant had furnished a bank draft representing twenty per cent of the market value thereof to the Liquidator. In the circumstances, it was unnecessary to proceed with this aspect of the matter. I propose considering what is pleaded in relation to each of the properties which remain in issue separately.
106, Boyd Street, Glasgow, Scotland (the Scottish property)
6. It is pleaded in the statement of claim that the defendant caused the plaintiff to purchase this property for his own personal benefit and that of a family member, his mother. It is further pleaded that the property was included in the plaintiff’s accounts for the year ended 31st December, 2006, that the defendant informed the Liquidator at a meeting on 15th August, 2007 that this property was purchased through the company as a personal investment for him and that he had intended to purchase it back from the company, but this had not occurred. Further, the solicitors then acting for the defendant confirmed in September 2007 that the defendant, as legal owner of the property, holds the same on trust for the benefit of the plaintiff. However, despite demands on behalf of the Liquidator, the defendant has failed to transfer the property to the plaintiff.
7. The essence of the defence, having excised some pleading niceties, is that it is acknowledged that this property was purchased by the plaintiff and “is held in the legal ownership of the defendant”, that it remains entirely in the beneficial ownership of the plaintiff and that the defendant “holds the title .. . in trust” for the plaintiff. As will appear later, as regards the legal title, this is not strictly speaking correct. Such excuse as there is in the defence for the fact that this property has not been transferred to the plaintiff is that the defendant had not being able to finance the repurchase of the property at full market value, which had been intended.
8. As in the case of the other two properties in issue, the plaintiff makes the usual joinder of issue in its reply.
Apartment No. 16, Block A, Pueblo el Jardin, Arroyo de la Miel, Benalmadena, Spain (the Spanish property)
9. It is pleaded in the statement of claim that the defendant had confirmed that this property, although registered in the name of the defendant, was owned by the plaintiff. It was shown in the plaintiff’s 2006 company accounts at a value of €265,000. It was sold in or around 2005 and the proceeds of sale, €142,500, were paid by bank draft to the defendant. These funds have not been accounted for to the plaintiff.
10. In the defence, it is admitted that this property was beneficially owned by the plaintiff, and that the proceeds of sale amounting to €142,500 were paid to the defendant as legal owner by way of bank draft on 27th October, 2005. However, it is denied that the defendant has failed to account for the proceeds of sale. It is asserted that, while the bank draft was lodged to the defendant’s own bank account, thereafter the proceeds of sale were reimbursed by the defendant to the plaintiff.
33, Golf Links, Malahide, County Dublin (the Irish property)
11. It is pleaded in the statement of claim that this property is the private residence of the defendant. In the defence it is referred to as “the Defendant’s Family Home”. On the basis of questions I put to the defendant at the hearing of the action, I am satisfied that the provisions of the Family Home Protection Act 1976 have no application to this property. The property is registered with the Property Registration Authority on Folio 98753F, County Dublin.
12. The plaintiff’s case is that this property was purchased in or around late 2002 with the support of €751,928 of the plaintiff’s funds, in return for which a declaration of trust executed by the defendant acknowledged that the plaintiff has a forty per cent beneficial interest in the property. The defendant was registered as owner of the property on 7th February, 2003. On the same date a charge in favour of the Governor and Company of the Bank of Ireland, which has not been satisfied, was registered. As will appear later, that latter plea is no longer accurate. No rent or any other form of benefit was derived by the plaintiff in return for its forty per cent interest in the property.
13. There is then pleaded the Liquidator’s analysis of a transaction which was recorded in the books of the plaintiff in the run up to the presentation of the petition to wind up the plaintiff by the defendant as petitioner. It is pleaded that on 24th May, 2007 an entry was made in the directors’ loan account debiting the plaintiff in the sum of €1,200,000 under the description “Sale Proceeds House”. On 21st July, 2007, just ten days prior to the presentation of the petition, that transaction was reversed and the plaintiff was debited in the sum of €840,000, but no explanation has been provided for the reversal. It is acknowledged by the plaintiff that, separately, at various times in the year prior to the liquidation of the plaintiff, the defendant advanced monies to the plaintiff by way of loan. It is pleaded that the effect of the transaction on 21st July, 2007 was to transfer the plaintiff’s principal asset, its forty per cent interest in this property, at a value of €840,000, thus reducing the balance owed to the defendant by the plaintiff as recorded in the directors’ loan account from €923,926.70 to €83,926.70. The plaintiff asserts that the sums advanced to the plaintiff by the defendant prior to the liquidation were not advanced to purchase the plaintiff’s forty per cent interest in this property, but rather were loans made by the defendant to the plaintiff. It is expressly pleaded that the transaction on 27th July falls within s. 286(1) of the Act of 1963 as a fraudulent preference done within six months of the date of the liquidation of the plaintiff.
14. In the defence, the defendant admits that the plaintiff was the beneficial owner of forty per cent of this property from the time of its acquisition in 2002 and admits that no rent was derived by the plaintiff, but denies that no form of benefit in return for its forty per cent beneficial interest was derived by the plaintiff. It is contended that the plaintiff enjoyed a profit upon disposal of its interest, which reflected an appreciation of its interest in the asset, which I understand to mean the difference between the sum of €751,928 of the plaintiff’s money used to acquire the property and the “consideration” of €840,000, being the reduction in the amount owed by the plaintiff to the defendant on the directors’ loan account. As regards the transaction whereby the defendant contends he acquired the plaintiff’s beneficial interest in this property, the “plot thickens” in the defence, in that it is pleaded that on 15th December, 2006, by a resolution of the board of directors, the plaintiff resolved to transfer its interest in this property to the defendant in consideration of the sum of €840,000, but the defendant was unable to pay the agreed consideration and his directors’ loan account was reduced by the appropriate amount. It is specifically pleaded that, in the absence of funds advanced by the defendant, the plaintiff would not have been in a position to continue to trade, that the defendant consistently made up the shortfall in the plaintiff’s working capital required to meet its liabilities, and that “such payments were always to be set off against the beneficial interest” of the plaintiff in this property. It is denied that the “redemption of’ the plaintiff’s beneficial interest in this property is a transaction which comes within s. 286(1) of the Act of 1963. Emphasis is laid on the fact that the transaction occurred on 15th December, 2006 and not within a period of six months of the date of liquidation of the plaintiff, albeit that it is not recorded as having occurred at that date. It is further denied that the transaction was made with a view to giving the defendant a preference over other creditors. It is further denied that at the date of the transaction the plaintiff was unable to pay its debts as they fell due.
Reliefs sought by plaintiff
15. As regards the Scottish property, the plaintiff seeks a declaration that the defendant holds the legal interest in it on trust for the plaintiff and an order directing the defendant to transfer the legal interest therein to the plaintiff, in addition to all necessary accounts and inquiries.
16. In relation to the Spanish property, the plaintiff seeks all necessary accounts and inquiries.
17. In relation to the Irish property, the plaintiff seeks an order declaring that the transaction entered into on 21st July, 2007 constituted a fraudulent preference within the meaning of s. 286 of the Act of 1963 as amended, and is invalid accordingly and an order pursuant to subs. (1) of s. 286 voiding the transaction entered into on 21st July, 2007. The plaintiff also seeks a declaration that the plaintiff is entitled in equity to a forty per cent interest in the Irish property and, if necessary, an order directing the partition and sale of the property in accordance with the legal and equitable interests so declared. Finally, the plaintiff seeks all necessary accounts and inquiries in relation to the Irish property.
18. The defendant denies that the plaintiff is entitled to any of the foregoing reliefs and, additionally, seeks to set off against any liability of the defendant such sums as may be awarded on foot of his counterclaim.
The defendant’s counterclaim
19. The basis of the defendant’s counterclaim is that at the date of the winding up there remained due and owing by the plaintiff to the defendant the sum of €41,726, as particularised in the Statement of Affairs. The defendant has counterclaimed for this sum. The defendant has also counterclaimed for an indemnity from the plaintiff in respect of his joinder in proceedings instituted by Wyeth Medica Ireland Ltd. (Wyeth) against the plaintiff in which, it is asserted, the defendant has been joined solely by virtue of his status as a director of the plaintiff.
20. In the plaintiff’s reply and defence to counterclaim, while it is admitted that €41,726 is due to the defendant on foot of the directors’ loan account, it is stated that the failure of the company to discharge that sum arises directly from its insolvency and liquidation. It is also denied that the defendant is entitled to any indemnity from the plaintiff in respect of the Wyeth proceedings.
Evidence
21. The Liquidator testified and put such documentary evidence as is available to him in relation to the properties in issue before the Court. The defendant also testified. I propose outlining what I consider to be the relevant evidence in relation to each of the properties in issue in setting out my conclusions.
Conclusion in relation to the Scottish property
22. The Liquidator established that on 2nd December, 2002 the defendant executed a declaration of trust wherein he acknowledged and declared that he held the Scottish property “upon trust and all income accrued and to accrue, if any, upon the same trust as bare nominee for” the plaintiff, which is referred to as “the Beneficial Owner” and wherein he agreed to transfer the property in such manner as the plaintiff should from time to time direct and undertook, when called upon so to do by the plaintiff, to transfer the property. The execution of the declaration of trust by the defendant was witnessed by an accountant. Before these proceedings were initiated, by letter dated 14th May, 2008, the plaintiff’s solicitors called on the defendant, pursuant to the declaration of trust, to transfer the Scottish property to the plaintiff, which the defendant has not done. Even absent the declaration of trust, there is overwhelming evidence before the Court that the plaintiff is the beneficial owner of the Scottish property. A statement of an account of the plaintiff with Bank of Ireland Treasury & International Banking put in evidence shows that on 26th March, 2003 the sum of €201,695.94 was transferred out of that account to acquire the Scottish property. Even if the defendant had not executed the declaration of trust expressly acknowledging that the plaintiff is the beneficial owner, the fact that the property was purchased with the plaintiff’s money would have given rise to a resulting trust in its favour.
23. There is a problem, however, in that the evidence before the Court includes a copy of the result of a search in the Land Register in Scotland conducted on 7th May, 2007 which records the “proprietor”, which I assume is the equivalent of the registered owner in this jurisdiction, as “Margaret MacNamara … and Patrick MacNamara … and the survivor of them”. The defendant’s evidence is that hi s elderly mother, who is eighty years of age, has been allowed to use the Scottish property. The defendant testified that when the plaintiff company was being set up, his mother gave him £45,000 as working capital on the basis that, when he would have money, he could pay it back to her, which he has not done. Although the Scottish property is in joint names, the defendant acknowledged that he held it in trust for the plaintiff, because, as I understand his evidence, to get an advance from the plaintiff’s bank, it had to be seen to be the property of the plaintiff.
24. Because of the title position, the orders I propose making in relation to the Scottish property are:
(a) an order that the plaintiff is the beneficial owner of the Scottish property; and
(b) an order directing the defendant to transfer his legal interest and to procure the transfer of the legal interest of Margaret MacNamara in the Scottish property to the plaintiff.
I do not propose, at this juncture, to direct any specific accounts or inquiries. However, the Liquidator will be given leave to take such steps in Scotland as are necessary and appropriate to procure the registration of the plaintiff as the proprietor of the Scottish property in the Land Register in Scotland.
Conclusion in relation to the Spanish property
25. It is common case that the proceeds of sale of the Spanish property were paid to the defendant personally by way of bank draft. The Liquidator’s evidence was that he could find no evidence in the books and records of the plaintiff of the proceeds of the bank draft going to the plaintiff. The defendant’s evidence was that the money was paid to the plaintiff either by payment into its accounts either with Allied Irish Banks or Bank of Ireland, but he did not identify any particular lodgment or lodgments in either account as representing such payment. Accordingly, it is not possible to make a finding that the proceeds of the Spanish property were actually transferred to the plaintiff. In the circumstances, I propose making an order in the terms sought by the plaintiff directing all necessary accounts and inquiries in relation to the proceeds of the sale of the Spanish property.
Conclusions in relation to the Irish property
26. The Irish property is a dwelling house situate at Malahide, County Dublin. The title, as is recorded above, is registered on Folio 98753F of the Register of Freeholders, County Dublin. On 7th February, 2003 the defendant was registered as full owner with absolute title on the folio. On the same day, a charge for present and future advances stamped to cover €508,000 repayable with interest was registered as a burden on the folio, the owner of the charge being the Governor and Company of the Bank of Ireland. That charge was cancelled on 20th November, 2007. Prior to that, on 20th August, 2007, a charge for present and future advances repayable with interest, IIB Homeloans being the register owner of the charge, was registered as a burden on the folio. The Liquidator has put before the Court a copy of a valuation furnished by the defendant’s then solicitors to the plaintiff’s solicitors on 20th February, 2008, which was obviously obtained for the purposes of an application for an IIB Homeloan. The valuation report was dated 31st May, 2007. The valuer, Peter Redmond, put a value of €2,100,000 on the property in its then condition. As a matter of simple arithmetic, that means that forty per cent of the value of the Irish property as at May 2007, as per Mr. Redmond’s valuation, was €840,000.
27. On 2nd December, 2002 the defendant executed a declaration of trust, in the same format as the declaration of trust referred to at para. 22 above, in which he acknowledged and declared that he held a forty per cent interest in the Irish property upon trust for the plaintiff and in which he undertook, when called upon to do so, to transfer that percentage interest in the property to the plaintiff.
28. There is a serious issue of fact as to whether there was an agreement around mid-December 2006 between the plaintiff and the defendant that the defendant would purchase the plaintiff’s forty per cent interest in the Irish property in consideration of the reduction of the defendant’s loan account. The Liquidator has put in evidence a letter dated 29th June, 2007 from the plaintiff’s then accountants, BKR Ormsby & Rhodes, enclosing a number of documents to be signed by the defendant and Adam O’Sullivan, whom I understand was a director of the plaintiff at that time. The documents, each of which is dated 15th December, 2006 but none of which has been signed by either intended signatory were intended to be:
(a) the minutes of a meeting of the directors of the plaintiff held on 15th December, 2006 at which it was proposed that the plaintiff dispose of a forty per cent interest in the Irish property to the defendant, a director of the company, for €840,000 and it was resolved that the proposal be put to the members of the company in an Extraordinary General Meeting immediately after the directors’ meeting to seek approval under s. 29 of the Companies Act 1990 (the Act of 1990) by way of ordinary resolution;
(b) a consent to short notice of an Extraordinary General Meeting to be convened on 15th December, 2006; and
(c) the minutes of an Extraordinary General Meeting attended by the defendant and Mr. O’Sullivan at which it was resolved that the plaintiff dispose of its forty per cent interest in the Irish property to the defendant for €840,000 and that the disposal was approved of under s. 29 of the Act of 1990.
The Liquidator’s evidence was that there was no signed version of the three resolutions and that there was no contemporaneous evidence that the directors’ meeting or the Extraordinary General Meeting took place on 15th December, 2006.
The defendant’s evidence was that the paper in relation to the directors’ meeting has gone missing. He thought he had done everything legitimately.
29. For a number of reasons, I think it is highly unlikely that the meetings necessary to comply with s. 29 of the Act of 1990 took place on the 15th December, 2006. First, it seems to be something of a coincidence that the price of €840,000 as representing forty per cent of the value of the property reflects the valuation carried out by Mr. Redmond in late May 2007. Secondly, the balance on the defendant’s directors’ loan account in December 2006 was approximately €62,000 short of €840,000. Thirdly, there has been no explanation as to why the sum of €1,200,000 was debited from the defendant’s directors’ loan account on 24th May, 2007 and that debit was reversed on 21st July, 2007. Accordingly, I consider it appropriate to find, on the balance of probabilities, that the general meeting to approve the acquisition by the defendant of the plaintiff’s forty per cent interest in the Irish property did not take place on 15th December, 2006. In fact, there is no evidence that such a meeting took place and such approval was given to fulfil the requirements of s. 29 of the Act of 1990 at any time. Therefore, by virtue of s. 29 the transaction is voidable at the instance of the plaintiff.
30. Apart from that, by virtue of s. 220(2) of the Act of 1963, the winding up of the plaintiff is deemed to have commenced on the date of the presentation of the petition, that is to say, on 31st July, 2007. I think it is reasonable to infer on the evidence that, insofar as there was a “transaction”, it was effected on 21st July, 2007, within ten days of the commencement of the winding up, when the entry was made in the defendant’s directors’ loan account reducing the balance thereon by €840,000. No other evidence whatsoever of the “transaction” whereby the defendant acquired the plaintiff’s forty per cent beneficial interest in the Irish property has been adduced, which raises the question as to whether there was a “transaction” at all.
31. Section 286(1) of the Act of 1963, which is the provision which is expressly relied on in the statement of claim, provides as follows
“Subject to the provisions of this section, any conveyance, … or other act relating to property made or done by or against a company which is unable to pay its debts as they become due in favour of any creditor, or of any person on trust for any creditor, with a view to giving such creditor … a preference over the other creditors, shall, if a winding-up of the company commences within 6 months of the making or doing the same and the company is at the time of the commencement of the winding up unable to pay its debts (taking into account the contingent and prospective liabilities), be deemed a fraudulent preference of its creditors and be invalid accordingly.”
Sub-section (3) of s. 286 provides:
“A transaction to which sub-section (1) applies in favour of a connected person which was made within two years before the commencement of the winding- up of the company shall, unless the contrary is shown, be deemed in the event of the company being wound up –
(a) to have been made with a view to giving such person a preference over the other creditors, and
(b) to be a fraudulent preference, and
(c) be invalid accordingly.”
In sub-section (5) of s. 286 the expression “a connected person” is defined as meaning a person who at the time the transaction was made was, inter alia, a director of the company.
32. Insofar as there was a “transaction” on 21st July, 2007, or, contrary to the finding made above, on 15th December, 2006, whereby the defendant acquired the plaintiff’s forty per cent beneficial interest in the Irish property in consideration of the sum of €840,000, which consideration was discharged by a reduction of the balance due by the plaintiff to the defendant on the defendant’s directors’ loan account, the transaction was invalid under s. 286 of the Act of 1963. I have reached that conclusion because I am satisfied –
(a) that on 21st July, 2007 the plaintiff was unable to pay its debts as they fell due,
(b) that at the commencement of the winding up on 31st July, 2007 the company was unable to pay its debts as they fell due,
(c) as the defendant was a connected person within the meaning of s. 286, there is a presumption that the “transaction” was made with a view to giving the defendant a preference over other creditors of the plaintiff and to be a fraudulent preference, and
(d) the defendant has not adduced any evidence sufficient to rebut that presumption.
33. Accordingly, I propose making an order declaring that the transaction entered into on 21st July, 2007 constituted a fraudulent preference within the meaning of s. 286 of the Act of 1963 and is invalid and that the plaintiff is, and has at all material times since it was acquired by the defendant been, the beneficial owner of forty per cent of the Irish property. The jurisdiction of the Court to order a partition or sale of co-owned property is now governed by s. 31 of the Land and Conveyancing Law Reform Act 2009. I do not propose making any order for partition or sale at this juncture and I propose adjourning this aspect of the plaintiff’s claim generally with liberty to re-enter, so that the plaintiff can consider the appropriate procedure as to invoking the jurisdiction and, in particular, what parties should be on notice of the application.
The counterclaim
34. As regards the defendant’s counterclaim for the sum of €41,726, which sum is acknowledged by the defendant to be due to the plaintiff as an unsecured creditor, the defendant’s only remedy for recovery of that sum is to prove in the winding up. Having regard to the decision of the Supreme Court in Re Greendale Developments Ltd. (in Liquidation) (No. 2) [1998] 1 I.R. 8, that sum cannot be properly set off against monies or other assets for which the defendant is liable to the plaintiff. Similarly, as regards the claim by the defendant that he is entitled to an indemnity from the plaintiff in relation to the Wyeth proceedings, even if the plaintiff had established an entitlement to such indemnity, and in my view he has not, his only remedy would be to prove in the liquidation for the quantum of the indemnity.
Section 150 application
35. In tandem with these plenary proceedings, the Court heard a separate application brought by the Liquidator on foot of an originating notice of motion dated and filed on 3rd February, 2009 (Record No. 2009 No. 330 COS) in which the Liquidator sought a declaration that the defendant be restricted from acting as a director or secretary of a company for a period of five years pursuant to s. 150 of the Act of 1990. The decision on that application is set out hereunder.
36. The factual basis on which the Liquidator sought a restriction order against the defendant, as set out in his grounding affidavit sworn on 2nd February, 2009 is as follows:
(a) that although the financial books and records of the plaintiff have been maintained to an acceptable standard, he has not received any minute book or details of any board meetings for any period of the plaintiff’s trading;
(b) the matters which form the basis of the claims in the plenary proceedings, which I have outlined earlier, which the Liquidator averred were the matters of foremost concern to him in relation to the defendant’s conduct of the affairs of the plaintiff, in short, the use of the plaintiff’s funds for the purchase of non-business related assets, including the Scottish property, the Spanish property and the Irish property; and
(c) the fact that the defendant had recently been added as a defendant in the Wyeth proceedings, in which it was pleaded that the plaintiff had defrauded the plaintiff in those proceedings by overcharging for arranging the air freight of its products.
In determining whether an order should be made under s. 150, I have attached no weight to the matter referred to at (c), because I consider that there is no satisfactory evidence in relation to the Wyeth proceedings before the Court. It is fair to record that it was made clear on behalf of the Liquidator that no issue arises in relation to the honesty of the defendant in the conduct of the affairs of the company.
37. Accordingly, the issue for the Court is whether the defendant has discharged the onus imposed on him by s. 150(2) of the Act of 1990 of proving that he acted responsibly in relation to the conduct of the affairs of the company. In relation to that issue1counsel for the Liquidator referred the Court to the judgment of the Supreme Court in Re Squash (Ireland) Ltd. [2001] 3 IR 35 and, in particular, the approval by McGuinness J. in her judgment (at p. 40) of the following statement of the law by Shanley J. in La Moselle Clothing Ltd. v. Soualhi [1998] 2 ILRM 345 (at p. 352):
“… a director broadly complying with his obligations under the provisions of the Companies Acts and acting with a degree of commercial probity during his tenure as a director of the company will not be restricted on the grounds that he has acted irresponsibly.
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 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.”
Having regard to the outcome of these plenary proceedings, it is impossible to conclude that the defendant has acted responsibly in relation to the affairs of the company. There has been a finding that the purported “transaction” whereby the defendant attempted to appropriate to himself, to the detriment of the generality of the creditors of the company, what appears to be the plaintiff’s most valuable asset, that is to say, the forty per cent interest in the Irish property, was in breach of s. 29 of the Act of 1990 and was also in breach of s. 286 of the Act of 1963. The conduct of the defendant, which necessitated the plenary proceedings, amounted to irresponsibility and has exacerbated the insolvency of the plaintiff. In relation to the matters on which findings have been made in the plenary proceedings, I have no doubt that the defendant has displayed a serious lack of proper standards.
38. Accordingly, the order sought by the Liquidator under s. 150 of the Act of 1990 will be made.
Wallace -v- Fergus & Ors
[2013] IEHC 53 (08 February 2013)
JUDGMENT of Mr. Justice Herbert delivered the 8th day of February 2013
1. The applicant seeks a declaration, pursuant to the provisions of s. 150 of the Companies Act 1990, that the respondents named in the title hereof, who were directors of the insolvent company named in the title hereof at the date of and within twelve months prior to the commencement of its winding-up, failed to act responsibly in relation to the conduct of the affairs of that company. If so satisfied the section imposes a mandatory obligation on the Court to declare that the respondents shall not for a period of five years, be appointed to act in any way, whether directly or indirectly, as a director or secretary, or to be concerned or take part in the promotion or formation of any company unless that company meets the requirements set out in s. 150(3) of the Act of 1990.
2. The company was incorporated in the State on the 26th April, 1973. The principal objects named in the Memorandum of Association were to carry on the business of constructing residential homes, property speculation, the rental of plant and machinery and, the rental of holiday homes. The original directors of the company were the first named respondent and Ms. Marlyn Fergus. The second named respondent, a son of the first named respondent, was appointed a director of the company on the 29th May, 2003. The third named respondent, a niece of the first named respondent, was appointed a director of the company on the 8th March, 2005. The second and third named respondents resigned as directors of the company on the 1st September, 2008. Apart from a single issued share held by Ms. Marlyn Fergus, the entire issued share capital of the company was held by the first named respondent.
3. In Bank of Scotland plc. v. Charlie Fergus [2012] IEHC 131 (Unreported, High Court, 30th March, 2012), it was held by Finlay Geoghegan J. that the first named respondent was at all material times the chief executive and principal promoter of the company and the director thereof. In an affidavit sworn on the 19th August, 2008, in a matter in this Court, bearing record No. 2008/347 COS, and entitled, “In the matter of the Companies (Amendment) Act 1990, (as amended) and In the matter of Fergus Haynes (Developments) Limited”, in which the company sought an order of the Court appointing an examiner to the company, the first named respondent stated that he had been involved in the day to day running of the company since its incorporation, that the second named respondent had responsibility for the company’s plant and machinery, that the third named respondent was involved in the company on a day to day basis and was charged with taking care of the administrative side of the company’s business, including the maintenance of its management accounts, and that Ms. Marlyn Fergus was not involved in the day to day running of the company. However, it is noted that a “Ms. Marlene Fergus” as a director of the company, together with the first named respondent, signed the annual returns of the company and the directors’ report for the financial years ending 31st December, 2005 and 31st December, 2006.
4. The company petitioned for the appointment of an examiner on the 20th August, 2008. The application was refused on the 1st September, 2008. On the 6th September, 2008, Bank of Scotland (Ireland) plc by deed, appointed a receiver over the property, assets and undertaking of the company on foot of a fixed and floating charge. On the 17th September, 2008, on the petition of Atradius Credit Insurance N.V. claiming a debt unsatisfied after demand of €1,267,676.65, this Court made an order winding up the company and appointed the applicant, an insolvency partner in the firm of K.P.M.G., 1 Stokes Place, St. Stephens Green, Dublin, Official Liquidator. On the 24th February, 2010, Bank of Scotland (Ireland) plc, issued the proceedings, hereinbefore referred to against the first named respondent as guarantor on foot of an unsatisfied demand dated the 15th December, 2009, for a sum of €8,444,457.88.
5. On the 13th May, 2010, the applicant furnished a Report pursuant to the provisions of s. 56 of the Company Law Enforcement Act 2001, to the Director of Corporate Enforcement. By letter dated the 2nd September, 2010, the director, pursuant to the provisions of s. 56(2) of the Act of 2001, relieved the applicant of his statutory obligation to bring an application pursuant to the provisions of s. 150 of the Act of 1990 against Ms. Marlyn Fergus, but not as regards the respondents. On the 13th October, 2010, the applicant issued a Certificate that the company was unable to pay its debts within the meaning of s. 214 of the Companies Act 1963. The present motion was issued on the 13th October, 2010, grounded on an affidavit of equal date but was adjourned from time to time pending the decision of this Court in the aforementioned guarantee proceedings taken by Bank of Scotland (Ireland) plc, against the first named respondent. On the 30th March, 2012, this Court, (Finlay Geoghegan J.) gave judgment in favour of Bank of Scotland (Ireland) plc, against the first named respondent for a sum of €9,211,746 on foot of a guarantee dated 1st June, 2006.
6. The applicant in the present application claims that the respondents had not acted responsibly. The claim that they had not acted honestly as directors of the company in the management and conduct of the affairs of the company which is insolvent was not pursued by counsel for the applicant at the hearing of the application.
7. The applicant claims that the respondents had not acted responsibly in failing to ensure that annual returns, required by s. 125 of the Companies Act 1963 and s. 7 of the Companies (Amendment) Act 1986 to be made to the Registrar of Companies, were made. I find on the affidavit evidence that whereas properly constituted and audited annual returns were made for at least the financial years ending the 31st December, 2004, 31st December, 2005 and 31st December, 2006, no annual returns were made thereafter up to the date of the commencement of the winding-up of the company. On the affidavit evidence before the court, the only document of account created in the financial year ending 31st December, 2007, is what appears to be a draft Balance Sheet (in format 2), as at 31st December, 2007. This document is not signed and is not certified by a director and the company secretary as having been approved by the board of the company. None of the other documents required by s. 7 of the Companies (Amendment) Act 1986 to be annexed to an annual return were forthcoming for the financial year ending the 31st December, 2007. A failure to comply with the requirements of s. 125 of the Act of 1963 is an offence punishable by a fine.
8. As was clearly indicated by the Supreme Court in Re: Mitek Holdings Limited, Grace v. Kachkar [2010] 3. I.R. 374, per. Fennelly J. at p. 386 etc., non-compliance with the formal statutory requirements of the Companies Acts 1963-2009, can warrant a finding of a failure to act responsibly in the management of the affairs of a company. However, the Supreme Court pointed out that any such failure must be considered in context. A relatively short term failure to comply with formal obligations of this nature, where historically there had been compliance over a longer period would be difficult to describe as irresponsible, unless it contributed to the insolvency or hid the true condition of the company from third parties dealing with it. In the present case, while deprecating the failure to make annual returns for the financial year ending the 31st December, 2007, I am satisfied that this failure related only to that financial year and could not reasonably be said to have contributed, either directly or indirectly, to the insolvency of the company or to have hidden its true condition from parties dealing with it.
9. The annual returns for the financial year ending the 31st December, 2005 were certified by the first named respondent and Ms. Marlene Fergus as having been approved by the board on the 30th May, 2006. These annual returns are date stamped as having been filed in the Companies Registration Office on the 25th August, 2006 or the 26th September, 2006 (both dates appear). The date upon which the annual returns for the financial year ending the 31st December, 2006, were approved by the board is, unfortunately, not inserted in the space allowed in the formal certification by the first named respondent and Ms. Marlene Fergus. However, these annual returns are date stamped as filed in the Companies Registration Office on the 9th October, 2007. Section 125 of the Companies Act 1963, requires that annual returns be completed within 60 days of the Annual General Meeting of the company for that year and, a copy signed by both a director and the secretary, “forthwith forwarded” to the Registrar or Companies. If this apparent historical practice of laying the annual returns before a meeting of the board in mid summer had continued into 2008, I am satisfied on the balance of probabilities that the company was by that time unable to pay its debts.
10. At para. 24 of his affidavit sworn in the examinership application on the 19th August, 2008, to which I have already referred, the first named respondent stated that the company was at that date insolvent and unable to pay its debts. At para. 20 of the same affidavit, the first named respondent avers that on the 7th August, 2008, Atradius Credit Insurance N.V. issued a petition to wind up the company because it was then unable to meet instalment payments as they fell due on foot of a debt repayment agreement. The affidavit evidence established that on the 30th July, 2008, A.C.C. Bank permitted an early encashment by the company of a Solid World Bond because it had been explained to the bank that the company was experiencing cash flow difficulties. I therefore consider it a reasonable inference that by May 2008, the company was probably unable to pay its debts and had ceased or almost ceased trading due to lack of funds.
11. The availability of annual returns for the financial year ended the 31st December, 2007, would, of course, be of enormous assistance to the applicant in the liquidation of this company. However, considering the admitted crisis in the property development market nationally and in the construction industry specifically and the evidence of the dire financial position of the company in the first half of 2008, it would be more than somewhat idealistic to expect that annual returns for the financial year ending the 31st December, 2007, would have been prepared at this time. Since this was the only failure to make annual returns prior to the winding up of the company on the 17th September, 2008, I am not satisfied that this failure alone would warrant a finding of lack of responsibility on the part of the respondents in the management of the affairs of the company.
12. I am not prepared to accept that the fact, that following a revenue audit in 2008, additional liabilities in a compromise sum of €106,927 were identified as due by the company to the Revenue Commissioners, over and above the sum of €14,657, included by the respondents in the list of current liabilities in the Statement of Affairs, as at the 17th September, 2008, is in itself sufficient to warrant a finding of lack of responsibility on the part of the respondents in the management of the affairs of the company. The affidavit evidence before the Court on this application is not sufficient to enable me to come to any conclusion as to how these additional liabilities to the Revenue Commissioners arose. As was pointed out by Finlay Geoghegan J. in Re. Digital Channel Partners (In Voluntary Liquidation) [2004] 2 I.L.R.M. 35, something more than non-compliance for a limited period of time with tax legislation is required to show that directors did not act responsibly in the management of the affairs of a company. At para. 60.1 of his grounding affidavit, the applicant avers that the fact of these additional liabilities, “would suggest that Revenue returns had not been returned on an accurate and timely basis . . .”. In my judgment, however, it would not be just or fair for this Court to make a finding against the respondents of lack of responsibility in the management of the affairs of the company on surmise of this nature absent any factual evidence in the grounding affidavit demonstrating that this was so.
13. The applicant claims that the failure of the respondents to keep audited accounts, management accounts and board minutes after the financial year ending the 31st December, 2006, must mean that the respondents could not thereafter have determined or been aware of the true financial state of the company from time to time so as to be in a position to make reasonable commercial decisions in the conduct of its affairs. Additionally, he states that the absence of these documents prevented him as liquidator from following the transactions in which the company was engaged and from ascertaining the exact amount of its liabilities. The applicant does not however, make the case that no books and records were kept by the company.
14. At para. 4.2 of the exhibited Report of the Independent Accountant dated the 19th August, 2008, prepared for the purpose of the unsuccessful examinership application, the following is noted:-
“The financial statements of the Company for previous years have been audited and no issues arose in relation to maintaining proper books and records of the Company;
Management accounts for the Company are prepared by George Gannon and Company Accountants, an independent firm of professional accountants;
I was provided with access to the books and records of the Company.”
15. As I have already pointed out, at para. 6 of his affidavit sworn on the 19th August, 2008, for the purpose of the examinership application, the first named respondent averred that the third named respondent was involved in the company on a day to day basis and was charged with taking care of the administrative side of the company’s business including the maintenance of its management accounts. However, in a second replying affidavit sworn on the 14th June, 2012, in the present application (the first was sworn on the 10th February, 2011, but did not address this issue) the first named respondent states as follows:-
“The Liquidator alleges that my Niece Joanne Fergus-Sheridan was responsible for failing to keep accurate records. Joanne Fergus-Sheridan’s responsibilities within the Company were to carry out the finishing touches to the properties in the form of internal declaration and quality finishes and to liaise with Auctioneers and customers and to forward on a weekly basis to the Tax Consultants George Gannon and Company any documentation that required his attention. On my request she liaised with Banks to draw down and repay loans to the Bank. She was not responsible for book keeping as she was not qualified or suitable, all accountancy was dealt with by the Accounts George Gannon Accountants, we employed three staff for this work. One of whom was a trainee Accountant.
The Annual accounts were prepared based on the information that was forwarded to George Gannon. . . .”
16. In her first replying affidavit in the present application sworn on the 10th February, 2011, the third named respondent states:-
“My function within the company was an assistant to the Managing Director, with responsibility with promoting sales and at late interior design of finished houses. I was not a Financial Controller, all major functions within the Company was under the sole control of my uncle, Charles Fergus.”
17. In a further replying affidavit in the present application sworn on the 14th June, 2012, the third named respondent states as follows:-
“The Liquidator alleged that I was responsible for failing to keep accurate records. My responsibilities within the Company were to carry out the finishing touches to the properties in the form of internal decoration and quality finishes and to liaise with auctioneers and customers and to forward on a weekly basis to the Tax Consultants George Gannon and Company any documentation that required his attention.
With the request of Charles Fergus, I liaised with Banks for him to drawn down and repay loans to the Banks as per his request. I was not responsible for book keeping as I was not qualified in that department although I recognised books and records were being kept, all of these files were removed by the Receivers.
All accountancy was dealt with by the Accounts George Gannon accountants; we employed three staff for this work. One of whom was a trainee Accountant.
The Annual accounts were prepared based on the information that was forwarded to George Gannon. All these were forwarded ready for the next set of accounts.”
18. Historically perhaps and, I do not put the matter any stronger than this, management accounts may be been prepared by George Gannon and Company, Accountants. Though the burden is on the respondents to show that they acted responsibly in the conduct of the affairs of the company, no affidavit from this firm of Accountants was obtained by the respondents and put before the Court in this application. I note the use by the independent accountant of the expression, “are prepared” but also note, that the author of the report of the 19th August, 2008, in the examinership application does not state that he had made available to him and had considered any such management accounts, particularly in the period after the 31st December, 2006. The only document of account after that date to which he makes reference in his report is what appears to be and which he accepts as a draft Balance Sheet as at the 31st December, 2007. I find on the affidavit evidence before the Court that no management accounts were prepared and no board minutes were kept in the period from the 31st December, 2006, to the commencement of the winding up of the company on the 17th September, 2008.
19. Section 202 of the Companies Act 1990 requires every company to keep proper financial records in the form of proper books of account that correctly record and explain the transactions of the company and at any time enable the financial position of the company to be determined with reasonable accuracy. As was pointed out by Kenny J. in Healy v. Healy Homes Limited [1973] I.R. 309 at 311: “One of the ways in which this important object is achieved is by imposing an obligation on each director to make sure that this is being done”. Non compliance can result in serious criminal and civil sanctions.
20. The Auditor’s Report of M.J. Lyons, Accountants, 192 Dukes Road, Burnside, Rutherglen, Glasgow, forming part of the annual returns for the financial year ending the 31st December, 2006, states that in their opinion they had obtained all the information and explanations which they considered necessary for the purposes of the audit, that proper books of account had been kept by the company and, that the financial statements were in agreement with the books of account. The applicant claims that thereafter the books and records maintained by the company were not adequate to enable him to follow the transactions in which the company was engaged or to enable him to ascertain the exact amount of the liabilities of the company, including the true extent of its liability to the Revenue Commissioners. No details or particulars whatsoever of this alleged inadequacy is given in either of the applicant’s affidavits. Both the first named respondent and the third named respondent aver – in remarkably similar passages (including errors) – in their respective affidavits in this application to which I have already referred, that a staff of three was employed by the company, one of whom was a trainee accountant, to keep books and records and, that all accountancy work was dealt with by George Gannon and Company, Accountants.
21. In the absence of any such details and particulars I cannot, even on a prima facie basis, determine whether what the applicant alleges in this respect is correct or not. I have no difficulty in accepting that without audited accounts and even management accounts, the task of the applicant in attempting to follow the transactions in which the company was engaged and, in assessing the full extent of its liabilities is made very much more onerous and time consuming. However, I cannot in the absence of evidence in the form of details and particulars in the applicant’s grounding affidavit and his supplemental affidavit, conclude that an analysis of the books and records maintained by the company would not provide this information. Without pertinent details and particulars of the alleged inadequacies and shortcomings in the books and records of the company, it would in my judgment, be altogether unjust and unfair to cast on the respondents the burden of demonstrating that the books and records of the company did in fact enable the applicant to trace the transactions in which it was engaged and to assess the full extent of its liabilities. In an application of this nature a liquidator cannot by means of unsupported assertions or conclusions put the directors on proof that on the balance of probabilities their management of the affairs of the company was objectively responsible. For these reasons in the instant case I cannot and do not make any finding that the company failed to keep proper books of account and records or that the respondents failed to act responsibly in the management of the affairs of the company in not ensuring that such books and records were kept.
22. I am not aware of any express statutory provision which requires company directors to prepare or keep management accounts. The requirement to keep financial accounts contained in s. 202 of the Companies Act 1990 was considered by Shanley J. in Mantruck Services Limited (In Liquidation): Mehigan v. Duignan [1997] 1 IR 340, where at p. 356 he held as follows:-
“Section 202 details the nature and extent of the accounting records which a company is obliged to keep. It is clear from the words of the section that the obligation of a company to ‘keep’ proper books of account is not an obligation to act as a mere passive custodian of books and papers but rather the positive obligation to create books and records in a particular form with specified contents. It is also clear from the wording of the section that the obligation to keep proper books of account is necessarily a continuing obligation: they should be kept on a ‘continuous and consistent basis’ and must be such that they ‘will at any time enable the financial position of the company to be determined with reasonable accuracy’ (s. 202, sub-s. 1(b)) and books of account shall contain entries ‘from day to day’ of all sums of money received and expended by the company (s. 202, sub-section 3(a)).”
23. I am not satisfied that even this positive statutory obligation to keep what after all are financial accounts may properly be expanded into a statutory obligation to prepare and maintain management accounts, even if both are dependent upon the same basic sources of information.
24. However, as was pointed out by MacMenamin J. in M.D.N. Rochford Construction Limited (In Liquidation): Fennell v. Rochford [2009] IEHC 397 (Unreported, High Court, 18th August, 2009), citing the decision of Murphy J. in Vehicle Imports Limited (In Liquidation) [2000] IEHC 90 (Unreported, High Court, 23rd November, 2000), it is the duty of each individual director of a company to inform himself or herself about its affairs and to join with the other directors in supervising and controlling those affairs (see also Re: Mitek Holidays Ltd. (ante) at p. 386 et. seq.).
25. In this respect MacMenamin J. held that profitability was the key issue for every company, whether great or small, and directors of a company if acting responsibly in the supervision and control of the affairs of that company must engage in a continuing assessment of its profitability. MacMenamin J. then continued as follows at para. 50:-
“One test which must be applied as to directors’ responsibility is the extent to which they were alert to this key issue, and ensured that there were available to them management accounts so as to ascertain whether, on a month by month basis, a company was trading profitably. This is not to impose a counsel of perfection on directors. It is mere prudence in order to ensure that an enterprise is not engaging in over-trading, and that increased turnover is not misconceived as increased profitability. It is by no means unusual in applications of this type for directors to have confused one for the other. Monthly management accounts, and a clear assessment of where the company is going, are as essential to company directors as navigation instruments are to a pilot. Directors cannot excuse the fact that they were, for an extended period, ‘flying blind’, by asserting that their duties had simply been delegated to ‘someone else’. . . .”
26. I am therefore satisfied that while there is no express statutory or legal obligation to prepare management accounts, a failure to do so may, in the circumstances of a particular case, constitute a breach of a director’s common law duty to inform himself of herself about the affairs of the company and to participate in supervising and controlling those affairs. For decades past it has been the professional practice of all Accountancy Bodies to strongly recommend the keeping of management accounts, at monthly or other frequent intervals depending upon the nature of the business being carried on by the company, as a good business practice to assist directors and managers in the proper management of the affairs of their company. The affidavit evidence suggests that in the instant case, management accounts were in fact prepared probably up to and including the financial year ending the 31st December, 2006.
27. In my judgment this failure to prepare management accounts on a monthly or even more frequent basis for an entire period of at least nineteen months prior to the 19th August, 2008, when the first named respondent in his affidavit of that date, to which I have already referred, admitted that the company was insolvent and unable to pay its debts, was highly irresponsible. The company carried on a construction and development business which manifestly called for forward planning, budgeting, operational and financial control and, informed decision taking on an ongoing basis. None of this could be carried out responsibly without management accounts. I am satisfied on the affidavit evidence that this company, to borrow the very expressive phrase of MacMenamin J., was “flying blind” during the entire of this lengthy period in the course of which market and trading conditions changed, disimproved, became difficult and, by mid 2008 catastrophic. In these circumstances the draft balance sheet of the 31st December, 2007, was of no practical assistance. Though the onus was on them to establish that they had in fact acted responsibly in the management of the affairs of the company, particularly during this lengthy period, I find that the respondents failed to address this issue at all and, failed to point to any system as having been in place which, however crude and unscientific, might as a matter of probability have fulfilled the same function as periodic management accounts.
28. During the period 31st December, 2006 to 17th September, 2008, when no management accounts were prepared and no minutes of board meetings and no evidence that any such were held has been put before the Court, the company, without any form of contract or agreement in writing carried out very extensive works at property owned by the first named respondent. At para. 15(b) of his affidavit sworn in the examinership application on the 19th August, 2008, the first named respondent states that in 2006 he purchased 31 acres of severely waterlogged land, forming part of a flood plane, near the village of Kinlough, Co. Leitrim. Planning permission was obtained for a 120 bedroom hotel, 95 detached dwellings, an office building and a post office to be built in phases. Because of the nature of the site, the first named respondent accepts that the company was obliged to carry out a large amount of excavation and backfill work, emplace piled foundations, carry out a large amount of drainage work and construct a pumping station. The first named respondent states:-
“I engaged the Company to construct and develop the residential houses. However, there is no formal written agreement in place between the Company and me. The Company is owed a sum of approximately €3.6 million by me in respect of the works which the Company has carried out. I believe that in time I would be in a position to deal with this liability.”
29. At para. 40 of his grounding affidavit in this application, the applicant states that he was informed by the receiver (appointed to the company named in the title hereof on the 6th September, 2008, by Bank of Scotland (Ireland) plc.) that he had written to the first named respondent on the 26th November, 2008, requesting clarification of this matter but had received no response and, that he considered that there was no prospect of realising this debt. This debt was not included under the heading, “Current Liabilities” in the Statement of Affairs as at the 17th September, 2008, (commencement of the winding up) sworn by the respondents on the 7th November, 2008. In the draft Balance Sheet as at the 31st December, 2007, under the heading, “Current Assets”, a figure of €19,694,518 is given for work in progress. In the Statement of Affairs forming part of the independent accountants report, dated the 19th August, 2008, in the examinership application, this figure is divided into, “Work in Progress” – €6,968,461 and, “Work in Progress at Kinlough”, – €12,726,120. This latter figure is then written down to €3,698,649 as of the 31st July, 2008, which is said to be a directors’ estimation based on market conditions.
30. I am satisfied that this conduct, by any objective standards and regarding it in the best possible light, was so incompetent as to amount to gross irresponsibility. It could not in my judgment in any reasonable sense be regarded as just a commercial error or an unfortunate misjudgement. Whether regarded as an unsecured and probably now irrecoverable debt of €3.6 million – if that is in fact the correct sum owing – or a major misemployment of company assets and personnel at a time when bank borrowings were increasing, (bank loans other than overdrafts, from €8,077,547 as at the 31st December, 2006, to €9,947,127 as at the 31st December, 2007) and when only 20 of the 53 residential units in Phase 1 of the company’s own development at Stracomer Hill, Bundoran, were completed and sold and the other 33 residential units remained at various stages of completion, I am satisfied on the evidence that it contributed significantly to the insolvency of the company named in the title hereof. The exhibited accounts and statements of affairs show that the company was highly dependent on bank borrowings and that its inability to service existing bank debt and a consequent withdrawal of bank credit was a key feature in bringing about its insolvency.
31. The applicant has pointed at para. 34 of his grounding affidavit to five seemingly very significant discrepancies between the Statement of Affairs as at the 17th September, 2008, (commencement of winding up) filed and verified by affidavit sworn by the respondents on the 7th November, 2008, (hereafter Winding-Up) and the Statement of Affairs as at the 31st July, 2008, contained in the independent accountants report of the 19th August, 2008, submitted to this Court in the examinership application, (hereafter I.A.R.). These are:-
– A net sum of €14,426 representing the early encashment value of an A.C.C. Bank Bond, less deductions is not included in the Winding-Up but is included in the I.A.R.
– The figure given for “work in progress” in Winding-Up is given at €15,497,376, but in I.A.R. the figure given is €8,625,492.
– The figure for “Bank overdraft” in Winding-Up is given as €670,382, but in I.A.R. the figure is €79,935.
– The balance of “Bank loan” in Winding-Up is given at €10,940,512, but in the I.A.R. the figure given, on a winding-up basis, is €11,888,478.
– The figure given for “trade debtors” in the Winding-Up is €338,609 but no figures for debtors is given in the I.A.R.
32. These discrepancies and, the applicants concern that the stated value of “debtors” outstanding to the company may be overstated, may justify the applicant in seeking an order from this Court pursuant to the provisions of s. 245(1) of the Companies Act 1963, as amended, for an examination of the respondents. However, in my judgment, I cannot draw any inference from these seeming discrepancies which would support a finding that the respondents failed to act responsibly in the management of the affairs of the company or, that they dealt with its assets in an improper manner detrimental to the proper distribution of those assets in accordance with insolvency law. For the same reason I do not propose to address the issue, raised by the applicant in his grounding affidavit, of whether or not the respondents or any of them have or has failed to cooperate with the applicant in the conduct of the liquidation or have or has intermeddled with or have or has in their or his/her possession or control any money or other property of the company.
33. I am satisfied that the first named respondent, as managing director of the company, had a duty greater than the other respondents to act responsibly in the conduct and management of its affairs. I find on the evidence that he failed to so act. However, the legislative object of s. 150 of the Companies Act 1990 is not to punish the first named respondent for not so acting. Its purpose is to protect and safeguard persons who, in dealing with any other company which he might promote or form in the future or of which he was a director or secretary, would find themselves dependant in a business and financial sense on his acting in the manner in which he so singularly failed to act in the instant case. In this respect, I am satisfied that the first named respondent represents a serious and continuing danger and risk to such persons. I therefore have no hesitation in granting the declaration sought in respect of him.
34. As regards the second named respondent, for the purpose of an application pursuant to the provisions of s. 150 of the Act of 1990, I am satisfied on the evidence, that though a director of the company, he was a mere cipher in that office. There is no evidence that he played any real role in the day to day management of the affairs of the company and in particular its business and financial affairs. I am satisfied that he occupied a particular niche in the company where he looked after its plant and machinery only.
35. In the audited annual returns of the company for the financial year ended the 31st December, 2006, under the title, “Director Loan Account” the following is disclosed:-
Charles and Daimon Fergus
At 1/1/2006, €1,500,409
Advanced During Year €2,206,370
Repaid during year €3,386,449
At 31/12/206 €319,791
However, in an affidavit sworn on the 14th June, 2012, in the present application the second named respondent states as follows:-
“From time to time my Father in conjunction with the Banks arranged loan agreements to the benefit of the company. But for reasons not known to me they were put in my name, and then showed up as Directors Loans to me from the company. I also borrowed money in my own name to assist my father and other members of my family. I believe it to be a fact that approx. One Hundred and Twenty thousand Euros, is owed to me, by the developments and family members. I did not act dishonestly in any way. I ensured that all banks were repaid. In most cases, the Banks restructured the loans. This was an arrangement between my father and the banks. There is no issue between my family and I in regard to losses I incurred.”
36. It must be a matter for the applicant to decide whether he accepts this account or not. If he does not, or feels he cannot in the proper discharge of his duties as liquidator of the company, he has ample statutory powers under the Companies Acts 1963-2009 to inquire further into the matter. Considering the affidavit evidence solely in the context of s. 150 of the Act of 1990 and, its purpose, I find that while the second named respondent may have failed to act independently and assertively having accepted the office of director of the company he did not, in any but this very limited sense, neglect to exercise an appropriate degree of responsibility with regard to the management of its affairs. I am satisfied, looking at the entirety of the evidence, such as it is, touching the whole period of his tenure as a very nominal director of the company, that the second named respondent on the balance of probabilities does not represent a danger to persons who might chose to do business with any company of which he is a director or secretary which he might decide to promote or form. I will therefore decline to make the declaration sought in respect of this respondent.
37. The function of the third named respondent in the company is described by the first named respondent in para. 6 of his affidavit sworn in the 19th August, 2008, in the examinership application from which I have already quoted. However, what is stated there is entirely at variance with what he stated subsequently in his affidavit sworn on the 14th June, 2012, in the present application, the relevant portion of which I have already quoted. While it may be true that this affidavit, sworn on the 19th August, 2008, is stated to have been made, “for and on behalf of the Company with its authority and consent”, carrying the necessary implication that its contents had been approved by all the respondents and Ms. Marlyn Fergus, at a board meeting, and that the third named respondent had not taken issue with the statement that she was, “charged with taking care of the administrative side of the company’s business, including the maintenance of management accounts”, I consider that it would be unfair and unjust to make a finding that the third named respondent had failed to act responsibly in the management of the affairs of the company solely on the basis of this affidavit.
38. I am satisfied from what is stated in the affidavits sworn by the third named respondent on the 10th February, 2011, and the 14th June, 2012, and in her letter dated the 22nd November, 2009, to the applicant, that the third named respondent was involved as an executive director, with the first named respondent as managing director, in the day to day conduct of the affairs of the company including its financial affairs. On the balance of probabilities I am prepared to accept that the third named respondent did not prepare any accounts herself nor deal with the day to day task of maintaining the books and records of the company. However, in her letter dated the 22nd November, 2009, to the applicant, the third named respondent states that she was assistant marketing manager of the company. She described her functions in this capacity in her affidavits of the 10th February, 2011, and the 14th June, 2012, as having been to deal with the interior design and decoration of completed dwelling-houses, promote sales and, liaise with auctioneers and customers. In her letter of the 22nd November, 2009, the third named respondent stated that she also dealt with secretarial and related duties within the company. In her affidavit sworn on the 14th June, 2012, she stated that she was responsible for forwarding to “tax consultants” George Gannon and Company, any documentation that required their attention. She further stated that at the request of the first named respondent she liaised with banks “for him”, in drawing down and repaying loans to the banks.
39. Regardless of what may or may not have been her accountancy qualifications, I am satisfied that the third named respondent was as an executive director of the company constantly involved in furnishing important financial information concerning the company to its tax advisers, who were also its accountants. In her affidavit she does not say who it was that decided what documentation needed to be sent to George Gannon and Company. Even if I accept her statement that in liaising with the banks – the company had borrowed and was continuing to borrow very large sums of money from banks – she was always acting on instructions from the first named respondent (which might well be so, given that he was managing director of the company) in so acting she was taking an active role in the financial affairs of the company and it is evident that the banks accepted her as having that role. In the absence of facts as distinct from assertions in her affidavits, I am unable to assess the true extent of her involvement in the management of the affairs of the company, but I am satisfied from the foregoing, that it was significant.
40. The onus lies on the third named respondent to satisfy this Court that considered objectively, on the balance of probabilities, she acted responsibly in the management of the affairs of the company. I have already found that this company traded without any or any possibility of proper commercial management for the very long period of nineteen months or more prior to the commencement of the insolvent winding up. As a director active on a day to day basis in the several indicated aspects of the company’s business and affairs, the third named respondent cannot evade responsibility for this lack of proper management simply by claiming, as she does in her affidavit sworn on the 10th February, 2011, that all major functions within the company were under the sole control of the first named respondent. This demonstrates a wholly unacceptable lack of understanding on her part, of the role and the legal obligations of directors, especially executive directors of a company.
41. There is not even one iota of documentary or factual evidence to be found in the affidavits of the third named respondent to show that she had expressed any concerns whatsoever about non-compliance by the company with the obligations imposed by the Companies Acts 1963-2009, the lack of management accounts, the non preparation of annual returns, or the failure to hold board meetings and keep minutes of board meetings, but that these concerns were overruled or disregarded by the first named respondent acting as managing director of the company.
42. Equally alarming, particularly as regards persons doing business with any other company which the third named respondent might promote or form or of which she might be director or secretary, is her apparent attitude to trading and insolvency. In her letter of the 22nd October, 2009, to the applicant declining to complete the questionnaire submitted by him to each of the respondents, the third named respondent stated as follows:-
“As a property development company Fergus Haynes (Developments) Limited was always trading with a healthy balance of liquid investment and supporting assets provided by management and carried the endorsement of several financial institutions who are happy to endorse the activities of the company until they decided to withdraw outside investment which suddenly and inevitably altered the status of a vibrant organisation subjected to the frailties of lending institutions, withdrawal of whose financial support was guaranteed to place people like myself to dependence on social welfare and the company unable to trade. This should all be evident from the books, and the company if assisted through the financial partnership of the institutions responsible, is still asset rich and capable of trading out of the difficulties caused by state supported financial institutions. . . .”
43. This demonstrates in my opinion a serious lack of understanding on the part of the third named respondent of the proper standards to be applied in the management of a company and its business. In my judgment, having actively participated as an executive director in the day to day management of the affairs of the company, including its financial affairs, the third named respondent has not discharged the onus which lies on her of satisfying this Court that she acted responsibly in relation to those affairs. In these circumstances I am required by the provisions of s. 150(1) of the Companies Act 1990, to make the declaration sought by the applicant against the third named respondent.
Derbar Developments Ltd (In Liq) -v- Companies Act
[2012] IEHC 144 (20 April 2012)
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 20th day of April, 2012
1. The applicant (“the liquidator”) is the official liquidator of Derbar Developments Ltd. (in liquidation) (“the Company”), having been appointed by order of the High Court on 15th December, 2009.
2. The respondents were each directors of the Company within the 12 months prior to the commencement of the winding up. The Company is certified by the official liquidator as unable to pay its debts within the meaning of s. 214 of the Companies Act 1963.
3. The liquidator furnished a report to the Director of Corporate Enforcement pursuant to s. 56(1) of the Company Law Enforcement Act 2001, on 31st May, 2010. By letter dated 7th October, 2010, he was notified that he was not relieved of his obligation to make an application pursuant to s. 150 of the Companies Act 1990, seeking a declaration of restriction of each of the respondents. This motion issued on 28th October, 2010.
4. The Company was incorporated on 22nd January, 2001 (initially under the name of Cadomack Ltd.) and commenced trading in June 2002 when it purchased lands at Westport, County Mayo. It was a property development company. It acquired further lands in Westport and at Nenagh, County Tipperary. In 2006, the lands of the Company in Nenagh were sold for €6,600,000 with a resultant gain of €4,182,651 for the Company. Subsequent to this, the Company became a holding company for three subsidiary companies which it acquired with the proceeds of sale, namely: Westport Coursing Club Ltd., Lionbridge Developments Ltd., and Timber Frame Homes Ltd. The Company also acquired with the proceeds of sale 100% of the issued share capital of Derbar Developments (Westport) Ltd. from the respondents.
5. At the time of these acquisitions, Westport Coursing Club Ltd. and Lionbridge Developments Ltd. owned properties and Derbar Developments (Westport) Ltd. also owned sites with houses in the course of construction and nearing completion.
6. The liquidator identifies the cause of insolvency of the Company as the crash in the property market and consequent collapse in the value of the lands owned by the subsidiaries. Related to this was a resultant unwillingness by the banks to extend further facilities to the Company or its subsidiaries and their inability to carry out further development work, and in any event, as the liquidator points out, an absence of any purchasers for the property. The proximate cause of the winding up of the Company was the failure of the Company to pay the outstanding balance of the Capital Gains Tax liability on the sale of the Nenagh lands which was at the centre of this application.
7. The liquidator, in his report to the Director of Corporate Enforcement, assesses and reports on the performance of the respondents as directors of the Company under twelve headings and makes no real complaint about their performance or discharge of their responsibilities, save in relation to one transaction in relation to the Company’s dealing with the Revenue Commissioners. The liquidator takes the view that the failure by the directors to set aside sufficient monies in the summer of 2006 to meet the Capital Gains Tax liability arising on the sale of the Nenagh lands their failure to ensure payment on the due date was irresponsible and such that the Court should now make a declaration of restriction pursuant to s.150 of the Companies Act 1990.
8. The facts relating to the Capital Gains Tax liability and its discharge are not in dispute and in summary were as follows. The sale of the Nenagh lands gave rise to a Capital Gains Tax liability of €836,530. This was due for payment on 31st October, 2006. The Company used all the proceeds of sale for the purchase of subsidiaries and did not make the tax payment on the due date. On 13th March, 2008, it paid €390,831. On 10th June, 2008, it made a further payment of €60,000. The funds to meet these payments were borrowed by the Company from Allied Irish Banks. The borrowings were guaranteed by the respondents personally.
The Law
9. Section 150, insofar as relevant, provides:
“(1) 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 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 meets the requirements set out in subsection (3); and, in subsequent provisions of this Part, the expression “a person to whom section 150 applies” shall be construed as a reference to a person in respect of whom such a declaration has been made.
(2) The matters referred to in subsection (1) are-
(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 …”
10. As appears from the above, the essential question for the Court is whether it can be satisfied that the respondents each 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 either should be subject to the restrictions imposed by the section.
11. On the facts herein, no issue had been raised as to the honesty of either of the respondents by the liquidator. An issue has been raised as to whether they acted responsibly. Further, the liquidator has not raised any other fact which would make it just or equitable that the respondents be subject to the restrictions imposed by section 150. He has, in his report to the ODCE, expressly stated that they cooperated with him in relation to the liquidation.
12. The issue on the facts herein is whether the Court can be satisfied that the directors acted responsibly in relation to the conduct of the affairs of the Company, notwithstanding their failure to procure the discharge of the full Capital Gains Tax liability due by the Company in October 2006.
13. The caselaw relating to s. 150 was reviewed in some detail by Fennelly J. in delivering the judgment in Mitek Holdings Ltd. and the Companies Act [2010] IESC 31, with which Hardiman J. and Finnegan J. concurred. In doing so, he cites with approval passages from the well-known judgments of Murphy J., in the High Court in Business Communications v. Baxter and Parsons (Unreported, High Court, 21st July, 1995) and Shanley J. in La Moselle Clothing Ltd. v. Soualhi [1998] 2 ILRM, 345. In the latter, Shanley J. interpreted s. 150 in the following way:
“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 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.”
Fennelly J., at para. 74, summarises the proper approach of the Court to an application under s. 150 in the following terms:
“It is always appropriate to keep in the forefront of one’s mind the terms of the applicable statutory provision. The question to be considered, in a case such as the present, where no question of honesty arises, is whether the director against whom an application for a restriction order is made ‘has acted responsibly in relation to the conduct of the affairs of the company’. The context is, of necessity, a company which is unable to pay its debts. The court should, in the words of Shanley J. [in La Moselle] ‘look at the entire tenure of the director and not simply at the few months in the run up to the liquidation’.”
14. The above conclusion must be considered in the context of two earlier passages cited by Fennelly J. with approval. The first is from the judgment of McGuinness in Re Squash Ireland Ltd. [2001] 3 I.R. 31 at p. 40, where she stated:
“The question before the court is whether they acted responsibly and this, as was correctly stated by counsel on behalf of the respondent must be judged by an objective standard. In the cases of all companies which have become insolvent it is likely that some criticisms of the directors may be made; but to categorise conduct as irresponsible I feel that one must go further.”
And, secondly, the caution expressed by Murphy J. in Baxter that:
“Of course, one must be careful not to be wise after the event. There must be no single ‘witch hunt’ because the business failed as businesses will.”
15. Fennelly J. also cited with approval from Clarke J. in the High Court in the matter of Swanpool Ltd. McLaughlin v. Lannen [2006] 2 ILRM 217, and in particular, his emphasis on the need for the Court, in each application under s. 150, to take account of the context in which the relevant acts or omissions of the directors need to be considered. In Swanpool Ltd., at issue was a repayment of funds to BES Investors at a time when the directors knew the company was insolvent or facing insolvency. In that decision, Clarke J., at p. 8, having considered certain of the earlier decisions already referred to, stated:
“It does, however, seem to me that the differences in approach identified in those authorities are more apparent than real. The approach of the court in any case under s.150 will necessarily differ depending on the type of acts or omissions which are under scrutiny. In broad terms there would seem to me to be three types of situation which the court is typically required to consider in such applications. They are:
1. Issues involving compliance by the company with its formal obligations under the Companies Acts including keeping books and records, making returns, holding meetings and the like;
2. The commercial management of the company most particularly at the period when the company was insolvent or heading in that direction; and
3. Compliance by the directors with the obligations identified in Frederick 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.”
Fennelly J expressed the view that the above is “a particularly useful classification of the principal settings for consideration of the responsibility of directors in a modern business”. I respectfully agree.
Conclusion
16. On the facts herein, the primary issue raised by the liquidator is the failure by the respondents, as directors, in the summer of 2006, to set aside and retain sufficient of the proceeds of sale to enable the Company discharge the Capital Gains Tax Liability to the Revenue Commissioners in October 2006. This was in excess of 3 years prior to the order for winding up. Undoubtedly, the prudent course of action for the directors in the summer of 2006 was to set aside sufficient of the proceeds of sale. However, in my judgment, that is not the relevant test.
17. On the facts herein, the respondents, in their affidavits, and having regard to the liquidator’s affidavit and his exhibited report to the ODCE, have established that, as directors, they ensured substantial compliance with all the Companies Acts’ obligations. The evidence is that proper books of account were maintained and returns made to the Companies Office, albeit on occasion late. Further, in relation to the financial affairs of the Company, the liquidator expressed the view that the directors ensured that the Company maintained sufficient financial records to keep them informed about the Company’s financial affairs; that proper systems were in place to obtain financial information and that the directors were active in monitoring the Company’s financial affairs. Finally, he stated in his report that the directors recognised the Company’s deteriorating financial situation and that, having regard to the property market collapse, there was little the directors could do to address the Company’s financial difficulties caused by reason of the collapse of the property market. He also states that there is no allegation of any selective discharge of the Company’s debts, any involvement in a phoenix-trading syndrome or any placing of the personal interests of the directors ahead of that of the Company. That assessment is an appropriate matter for the Court to take into account in considering whether it can be satisfied that the directors acted responsibly in the conduct of the affairs of the Company, having regard to their overall tenure as directors of the Company, notwithstanding their failure to retain sufficient monies in the summer of 2006 to enable discharge of the Capital Gains Tax liability.
18. The respondents, in their affidavits, have explained both their use of the entire proceeds of sale for reinvestment and their plan for the discharge of the Capital Gains Tax liability in 2006. They state that it was always their intention that the Company discharge its Capital Gains Tax liability on the due date. They draw attention to the Company’s record of compliance with tax liabilities. The Court accepts such intention of the directors.
19. They explain that with the encouragement of the Company’s then bankers that the directors decided, in the summer of 2006, to immediately reinvest the entire proceeds of sale for the benefit of the Company by the acquisition of the subsidiaries already referred to. Two of those subsidiaries owned lands, one of which was already zoned for development but which required planning, and the other of which required rezoning. The intention was to realise those properties following the obtaining of planning and, where necessary, rezoning, but without carrying out full development. They indicate this would have been completed in the short to medium term, as viewed in the summer of 2006. That plan was interrupted by the collapse of the property market, which, they say, was not envisaged in the summer of 2006.
20. They further explain in their supplemental affidavits in similar terms that the short-term plan for the payment of the Capital Gains Tax, in October 2006, was to be from the proceeds of three houses already completed and actively for sale on the market “at that time” which I take to be the summer of 2006. The advertised sale price for each house was stated to be €560,000 and the site purchase and development cost to be in the region of €750,000. The net profit available to the Company if those sales had been achieved was estimated at €750,000. The directors have also averred that they had the verbal agreement of the regional manager of AIB, the Company’s banker, with whom they had a personal relationship, that the bank would make available funding to meet the balance of the Capital Gains Tax liability. They have referred to the practice at the time, in the context of the rising property market, of developers relying upon oral agreements for funding with bankers. Whilst the liquidator refers to the absence of any written agreement, he does not dispute this practice and the Court is prepared to accept the respondents’ averments.
21. It is important to emphasise that the Court is required to objectively consider the actions of the respondents in the context and at the time when they occurred. It was 2006. On the evidence, it was prior to any knowledge of the downturn in the property market. There is no suggestion that the Company was insolvent or heading towards insolvency in 2006. On the facts, it is very different to the situation considered by Clarke J. in Re Swanpool Ltd., where the payments took place when the company was either insolvent or heading towards insolvency. This was a company which had recently made a profit on the disposal of lands in excess of €4 million. The respondents undoubtedly believed that they could turn to profit the further acquisitions made through the subsidiaries with the proceeds of sale. They believed they had, in the short term, arrangements in place, including if necessary bank funding which would enable the discharge by the Company of the Capital Gains Tax liability. The respondents have satisfied the Court that as a matter of probability it was the collapse of the property market which prevented the carrying out of this plan.
22. The liquidator has drawn attention to the fact that the Company did have €300,000 on deposit with AIB in 2006 but did not use this to discharge the Capital Gains Tax liability. The respondents have explained that this was required to be kept on deposit as a condition of its facilities with AIB. When it became available for use, they did use it to discharge other ongoing liabilities of the Company. However, on the facts, it is not alleged that there was any selective payment of creditors. Further, they draw attention to an important fact in their favour that they did arrange a further facility from AIB in 2008, at a time subsequent to the downturn in the property market, by inter alia, providing their own personal guarantee for the borrowing and and did thereby arrange that the Company discharge at least part of the Capital Gains Tax liability aggregating €450,831. That borrowing, personally guaranteed and those payments support the declared intention by the respondents that the Company discharge its Capital Gains Tax liability, and demonstrate a responsible approach by the directors to the conduct of the affairs of the Company subsequent to the downturn in the property market and at a time when they may have known the Company was facing insolvency.
23. On all of the foregoing facts and for the reasons stated, it appears to me that the Court can be satisfied for the purposes of s. 150, of the Act of 1990 that the respondents acted responsibly in relation to the conduct of the affairs of the Company, taking into account their conduct during their entire period as directors notwithstanding their failure to ensure that the Company discharge in full its Capital Gains Tax liability. As previously stated, no issue arose as to the honesty of the respondents and there is no other reason of which the Court is aware for which it would be just and equitable to make a declaration of restriction.
24. Accordingly, the Court refuses the application for declarations of restriction of the respondents.
Kavanagh v. Delany & Ors
[2004] IEHC 139 (20 July 2004)
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 20th day of July, 2004
This is an application under s. 150 of the Companies Act, 1990 brought by the applicant who is the official liquidator of Tralee Beef and Lamb Limited (“the Company”) having been so appointed by order of the High Court of the 28th January, 2002.
The respondents were each directors of the Company within twelve months of the date of commencement of winding up. It is undisputed that the Company is and was at the date of commencement of the winding up insolvent and accordingly, that
s. 150 of the Act of 1990 applies both to the Company and the respondents.
The liquidator had made his report to the Director of Corporate Enforcement under s. 56 of the Company Law Enforcement Act, 2001 and has not been relieved of his obligation to bring this application.
Background Facts:
The Company was engaged in the slaughter of cattle and lamb, (primarily cattle) which it either deboned and sold in Ireland and the United Kingdom or sent to other deboning halls. Those deboning halls were ones which sold the deboned beef to countries outside the European Union.
The first named respondent, John Delaney, was the only executive director of the Company and the managing director of the Company. He had bought into this Company in 1996. He had experience of working in the meat trade since 1974.
The second named respondent, Mrs. Delaney, is the wife of the first named respondent was never an executive in the Company and became a director at his request.
The third named respondent, Mr. Dunne, was a non-executive director of the Company. He is the managing director of Commodore Holdings Limited which he states is the holding Company for the Garvey Group of companies. Garveys prior to 1996 owned the business subsequently carried on by the Company. In that year or in early 1997 (nothing turns on the differences in this respect stated in the affidavits) it sold the assets of the then business carried on under the name “Tralee Beef and Lamb” to the first named respondent. It appears the first named respondent effected the purchase through a company then controlled by him which subsequently changed its name to Tralee Beef and Lamb Limited and is the Company.
It appears that as part of the sale and purchase deal between the Garvey Group and the first named respondent, Mr. Dunne became a non-executive director of the Company. This was an unremunerated position. Mr. Dunne asserts that the basis upon which he was appointed a director of the Company was that he would have no involvement in the day to day running of the business and that his primary role would be to foster and maintain the business relationship of the Company with both the Garvey Group and the Musgrave Group which operates the Super Valu franchise. It appears that he fulfilled such a role for approximately two years but that in 1999 Musgraves decided to centralise the supply of chilled foods to Super Valu supermarkets and reduced the number of its suppliers of chilled meat to one supplier which was not the Company. Accordingly, there was no business relationship between the Company and Garveys or Musgraves to be maintained. It appears common case that Mr. Dunne had no further involvement in the running of the business of the Company. However, he did not resign as a director and maintains that he continued to discharge his duties as a non-executive director of the Company.
The fourth named respondent, Mr. Coyle is a chartered accountant and insolvency practitioner. He was nominated to join the board of directors of the Company by CF Investment Managers Limited (“CFIM”) which is a company that manages a number of distinct funds vested in Business Expansion Schemes (“BES”) in accordance with part 16 of the Taxes Consolidated Act, 1997 (as amended). It appears that at the time of the acquisition of the assets of the business known as “Tralee Beef and Lamb” there was a capital investment in the Company by BES investors in the sum of £1m. These shares were held as is common for a BES scheme through a nominee trust company. Mr. Coyle was appointed a non-executive director of the Company pursuant to the BES investment agreements. Mr. Coyle asserts in his affidavit that the terms of his appointment as a non-executive director were that he should receive and review financial information from the executives of the Company and attend certain directors meetings as a non-executive director. He was not to play any “active part in the control of the Company”. This was stated to be by reason of the provisions of the Tax Consolidation Act, 1997.
The affidavits sworn by the liquidator and each of the respondents contain many disputed allegations and facts. However, it appears common case that the Company traded successfully until early 2000. It is to the period subsequent to this that the disputes and complaints primarily relate.
At all stages the management scheme of the Company appears to have been that Mr. Delaney was the managing director and only executive director. Whilst Mr. Coyle refers to attending directors meetings and Mr. Delaney refers to holding directors meetings with Mr. Dunne when he was involved in the Company (presumably prior to the cessation of the relationship with Garveys and Musgraves in 1999), it does not appear that, at least, in the final two years of trading any formal or informal board meetings were held. Mrs. Delaney appears to have signed off on annual accounts and attended statutory annual general meetings.
Each of the three non-executive directors, albeit in slightly different ways, state that they relied upon Mr. Delaney to provide them with the financial information in relation to this Company.
In 2000 the BSE crisis lead to a number of difficulties for the Company including the closure of many significant export markets; the consequent reduction in price to the farmers followed by a blockade of certain factories and its resolution by an increase in the price paid by factories to the farmers. There was also litigation against the Company in 2000 as a result of which it is stated that the Department of Agriculture insisted on the Company spending a sum of IR£100,000 on improvements to the plant and at the beginning of 2001 new stricter provisions were introduced in respect of BSE testing which made the Company’s trade more difficult and costly.
Mr. Delaney states on affidavit that he realised by March, 2001, that the Company was in significant financial difficulties. He states that he took various steps subsequent to that to find outside investors to save the Company, but that in early October, 2001, the Company’s auditors who were then auditing the accounts for the year ended 30th April, 2001, indicated that the Company’s position was worse than had been thought. Thereafter, without consulting either the third or fourth named respondents he took steps to have a receiver appointed by Anglo Irish Bank on 10th October, 2001.
Mr. Coyle asserts that throughout 2000 and 2001 he and colleagues in CFIM were seeking financial information in relation to the Company unsuccessfully from Mr. Delaney and the financial controller and others of the Company. He states he spoke with Mr. Delaney on or about the 3rd September, 2001 and was informed in the course of that conversation that the Company had traded at a loss of approximately £200,000 for the year ended 31st March, 2001, whereas the draft accounts for that year, when prepared showed a loss before taxation of just over £1m. Ultimately, subsequent to the appointment of the receiver by Anglo Irish Bank, Mr. Coyle appears to have arranged that CFIM petition for the winding up of the Company.
Applicable Law:
Section 150 of the Act of 1990 imposes a mandatory obligation on this Court to make a declaration of restriction unless the court is satisfied “as to any of the matters specified in subsection (2)”. The most commonly matter referred to in subsection (2) and relevant to this application are those set out in s. (2)(a) which provides:-
“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,”
The onus of establishing that he/she has acted honestly and responsibly rests on the person concerned i.e. the director. The practice direction of the President of the High Court in relation to voluntary windings up, requires a liquidator in an application under s. 150 to put before the court those matters which he considers the court should take into account in determining whether the director has acted honestly and responsibly and also any matter which he considers might be relevant to a determination, as to whether there is any other reason why it would be just and equitable that the director should be subject to the restrictions imposed by s. 150. This practice is also followed in s. 150 applications in a winding up by the court. Whilst, in practical terms therefore, the directors may seek to satisfy the court primarily in relation to the matters raised by a liquidator that he/she has acted honestly and responsibly or that it does not constitute a reason why it would be just and equitable that he/she be restricted, it must be emphasised that the director is not relieved of the general onus established by s. 150 of the Act of 1990. It is of course, also open to a director to bring to the attention of the court any other matter which he/she considers the court should take into account when considering the overall conduct of that person as this Court is required to do in accordance with the decision of the Supreme Court In re Squash (Ireland) Limited [2001] 3 IR 35.
It is important to note that an application brought by a liquidator under
s. 150(4) even pursuant to his obligation under s. 56 of the Act of 2001 is not a normal inter partes adversarial application. The respondent directors must satisfy the court of the matters specified in s. 150(2) of the Act of 1990 if they are to avoid the declaration of restriction. Further, they must deal in the application with any matters arising in the course of the application including, as in this case matters raised by their fellow directors.
In La Moselle Clothing Limited v. Soualhi [1998] 2 I.L.R.M.345 Shanley J. at p. 352 set out the following matters to which the court should have regard in determining the responsibility of a director for the purposes of s. 150(2)(a):-
“(a)The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963-1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the director’s responsibility for the insolvency of the company.
(d) The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.
(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.
These matters were cited with approval by McGuinness J. in the Supreme Court In re Squash (Ireland) Limited [2001] 3 IR 35 where she stated at p. 40:-
“I find this passage of considerable assistance in the instant case and applying the standards set out by Shanley J. to the facts I would say firstly that in speaking of his tenure as a director of the company I would agree with Shanley J. that the court should took at the entire tenure of the director and not simply at the few months in the run up to the liquidation.”
I would respectfully suggest that the above matters need the following amplification when being considered in relation to the respondents herein. Shanley J. at paragraph (a) refers only to the obligations imposed on a director by the Companies Acts. At common law, directors owe duties to the company which are normally divided into duties of loyalty based on fiduciary principles, developed initially by the Courts of Equity and duties of skill and care developed initially by the Common Law Courts from the principles in the law of negligence. There is no suggestion in the above decisions that the courts should ignore those duties. Accordingly, it appears to me that when considering the matters referred to by Shanley J. in La Moselle Clothing Limited v. Soualhi [1998] 2 I.L.R.M.345 under paragraph (a) a court should have regard not only to the extent to which a director has or has not complied with any obligation imposed on him/her by the Companies Acts but also with duties imposed by common law.
On the facts of this case, it is the common law duty of skill and care which is relevant. The general principle is stated in Keane, Company Law, 3rd Ed., (Dublin 2000) at p. 357 in the following terms:- “The directors owe a duty to the company to exercise skill and diligence in the discharge of their functions”. Further, as pointed out by Keane the courts have in a succession of cases broken down this general principle to a number of sub-propositions, most of them tending to limit or modify the extent of the duty owed by the directors. In re Vehicle Imports Limited (in liquidation) (Unreported, High Court, Murphy J., 23rd November, 2000) Murphy J. cited with approval the relatively recent formulation of those duties by Jonathan Parker J. In re Barings plc. and Ors. (No. 5) Secretary of State for Trade and Industry v Baker and Ors. [1999] 1 BCLC 433. I would also respectfully agree with the general formulation of the duty of an individual director as stated by Jonathan
Parker J. at p. 435:-
“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.”
Later at p. 436 Jonathan Parker J. derives three general propositions from earlier authorities in relation to duties of directors which appear helpful:-
(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 form 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.”
Whilst the above are undoubtedly helpful they do not specifically address the potentially differing responsibilities of executive and non-executive directors. Three of the respondents herein were non-executive directors. It is a fact of commercial life which the courts should not ignore that persons are appointed as non-executive directors to act alongside executive directors. It is also a matter of common sense that the duties and responsibilities of each may differ. The non-executive directors normally do not participate in the day to day management of a company. The directors collectively delegate the day to day management of the company to inter alia the executive directors. As appears from the foregoing principles such delegation does not absolve the non-executive directors from the duty to acquire information about the affairs of the company and to supervise the discharge of delegated functions. However under the principle cited at (iii) above the Court should take into account the differing roles of each director.
Again, in practice where board meetings are regularly held it is normally an executive director (often a managing director or chief executive officer or financial controller or financial director) who brings to the board of directors the relevant information in relation to the affairs of the company. That information should in the normal course, be such as to permit all directors, both non-executive and executive, to inform themselves about the affairs of the company and exercise their collective duties and functions of supervising and controlling the affairs of the company.
The duties of non-executive directors were formulated in a slightly different way by the Court of Appeal of New South Wales, Australia, in Daniels v. Anderson [1995] 16 A.C.S.R. 607 ( a case referred to in In re Barings [1999] 1 BCLC 433):-
“In our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the Company.”
The above formulation appears to me similar to that of Jonathan Parker J. In re Barings [1999] 1 BCLC 433 in that undoubtedly it involves an obligation of informing oneself about the affairs of the company and more specifically states the obligation of supervising and controlling the affairs of the company as being one of guiding and monitoring the management of the company.
It also appears important to take into account that non-executive directors from differing backgrounds may be invited to join a board so as to bring a range of skills to the board of directors. It appears appropriate therefore to consider the discharge of duties by such persons in relation inter alia to their particular skills and agreed role on the board.
Notwithstanding this potential consideration of particular facts and circumstances the question of whether a director acted responsibly within the meaning of s. 150 of the Act of 1990 must, as was stated by McGuinness J. In re Squash (Ireland) Limited [2001] 3 I.R. at p.39 “be judged by an objective standard”. That objective standard must include the minimum common law duty imposed on a director of participating in the affairs of the company in the manner described above. It is difficult, therefore, to envisage that a director could establish that he or she has acted responsibly in relation to the conduct of the affairs of a company within the meaning of s. 150 (2) of the Act of 1990, if during a significant period he or she either failed to inform himself or herself about its affairs or if he or she did not take steps to join with his or her co-directors in supervising and controlling the affairs of the company at least in the sense of taking reasonable steps to guide and monitor the management of the company.
It is relevant to the facts of this application to point out that in considering an application under s. 150 the court is confined to considering the respondents conduct in relation to the affairs of the company in liquidation. Section 150 does not appear to give a court any discretion to consider how a respondent acted or acts as a director of any other company. The respondent must satisfy the court he or she acted responsibly as a director in relation to the conduct of the affairs of the company in liquidation in which the application is made.
I propose now applying the above principles for the purpose of considering whether each of the respondents have satisfied the court that he or she acted honestly and responsibly in relation to the affairs of the Company.
Honesty:
Each of the respondents has satisfied the court that he or she acted honestly in relation to the conduct of the affairs of the Company. No issue was raised on the facts which required explanations of the second, third and fourth named respondents. There was one matter which required explanation by Mr. Delaney. It related to a sum of approximately £1m invoiced to the Bank of Ireland under a factoring arrangement without the goods having been delivered and a future to reverse the transaction. I am satisfied that on the affidavits sworn by Mr. Delaney that there was no dishonest intent and the admitted failure to reverse the transaction occurred by reason of the pressure then on him. Mr. Delaney has satisfied the court that he acted honestly in relation to the conduct of the affairs of the Company.
Responsibility :-
Mr. John Delaney
The first named respondent was the managing director of the Company. It is undisputed that the remaining respondents had collectively delegated to him and his subordinate executives the responsibility for the day to day management of the Company. There appears to have been a financial controller of the Company. He was not a director. Therefore the first named respondent must be considered as responsible to his fellow non-executive directors for the production at board level of the relevant financial information pertaining to this Company.
The liquidator in his affidavit raises the inadequacy of the financial information available in the Company; the size of the deficit and the acceleration in same in the last six months of trading. He points in particular to the fact that there is a difference of €6.3 million between the deficit in the statement of affairs in October, 2001 and the net asset position in the draft accounts for the year ended March, 2001. He also draws to the courts attention to the fact that it appears to have come as a surprise to Mr. Delaney in September, 2001, at the time of preparation of the accounts for the year ended March, 2001, that the trading losses in the previous year were so bad. He suggests that this is indicative of the fact that there was no proper financial information available. Whilst Mr Delaney suggests that the deficit should have been approx €1.5 million less the other facts do not appear to be significantly disputed. By way of excuse it is stated that the financial controller left in February, 2001.
Mr. Delaney, in his affidavit sworn herein on the 14th July, 2003, states at paragraph 12:-
“By March 2001, I realised that the Company was in significant financial difficulties. Between March and September 2001, its position got worse. During that time, I attempted to find outside investors in order to save the Company. I should say that the Company employed 80 people and I was doing everything in my power to keep the business going and keep them in employment. In early October, 2001, the Company’s auditors, D.F. Byrne & Associates, which was auditing the Company’s accounts for the year ending 30th April, 2001 indicated to me that the Company’s position was worse than had been thought. In the circumstances, I immediately informed the bank of the Company’s difficulties and a receiver was appointed”.
On the facts of this case, I have concluded that the financial information available to all the directors must have been inadequate. Whilst Mr. Delaney appears to have been aware of significant financial difficulties in April 2001 he does not appear to have been aware of the full extent of same. Also Mr. Delaney was the director responsible for providing to his fellow directors financial information in relation to the Company. Whilst there is some dispute as to the information given, it appears to me, common case on the affidavits that Mr. Delaney did not inform either Mr. Dunne or Mr. Coyle his fellow directors of such “significant financial difficulties” prior to August or September 2001. Applying the general principles stated above, Mr. Delaney, as the managing director and the person with the relevant financial information must be considered to have been under an obligation as part of his duty to exercise skill and diligence to inform his fellow directors of the financial difficulties and to arrange for the holding of board meetings in order that the directors could collectively seek to discharge their duties of supervising and controlling the affairs of the Company at least during this crucial period for the Company.
Further, Mr. Delaney requested the appointment of a receiver by the bank without informing his fellow directors and without holding a board meeting. Likewise this appears to have been inconsistent with his general duty to join with his fellow directors in controlling and supervising the affairs of the Company.
There are two further serious matters raised in relation to the responsibility of Mr. Delaney as a director. The first relates to the fact that a very significant sum of approximately £1m was invoiced to the Bank of Ireland under a factoring arrangement whereas the goods were not delivered. It is accepted that these matters should have been reversed and this was not done in September, 2001. Further at a time undoubtedly when he was under significant pressure Mr. Delaney purported to enter into a lease which he had no authority to do so.
Mr. Coyle asserts that he was unable to obtain through Mr. Delaney as the managing director the appropriate financial information for approximately two years prior to the liquidation of the Company. Mr. Dunne states that he now believes he was given what was effectively misleading financial information upon enquiry. Without the necessity of adjudicating on the detail of facts disputed between them and Mr. Delaney, I have concluded that he did not furnish his fellow directors with relevant information, including financial information about the affairs or the Company.
I have concluded that by reason of the above facts the first named respondent has not established to the satisfaction of the Court that he acted at all times responsibly in relation to the conduct of the affairs of this Company.
Mrs. Patricia Delaney
The second named respondent became a non-executive director at the request of the first named respondent. She appears to have understood her role in the Company to be extremely limited. It is not suggested that she had any particular skills to bring to bear to the Company. She did fulfil the obligations of signing off the accounts when audited and attending annual general meetings when requested. In the last six months of the Company when her husbands accepts he knew the Company was in financial difficulties he indicates that she advised him to seek outside assistance and advice.
On balance I have concluded that the second named respondent has failed to discharge the onus imposed on her of establishing that she acted responsibly in relation to the affairs of this Company. As indicated above it appears to me that I must consider the onus placed on her in the context of her personal skills in the agreed role as a non-executive director of the Company. It appears to have been agreed that she should have a limited involvement. She was not paid any remuneration. I note that she does appear to have discharged certain duties by joining with her husband in approving accounts and placing them before annual general meetings and informing herself about the affairs of the Company through her husband. It is stated in both her affidavit and the first affidavit of her husband that she was aware of the trading situation of the Company. It is also stated that she did not attend directors meetings of the Company.
On these facts I must conclude that Mrs. Delaney was aware, as was her husband in March, 2001, of the significant financial difficulties in the Company. Even as a non-executive director, without any special business expertise, unremunerated and an agreed limited role it appears to me at minimum, that having become aware of the difficult financial situation and as she must have been aware of the fact that there were two other non-executive directors of the Company, both of whom had relevant skills and experience, that she cannot be considered to have acted responsibly in failing to take any step to bring that information to the attention of her fellow two non-executive directors or to insist that a board meeting of the Company be held. She appears simply to have permitted her husband to continue single handed to attempt to resolve matters within the Company. Whilst, I am sure as his spouse she attempted to give him support through this very difficult period, by agreeing to become a director of the Company, she undertook a separate and distinct role which imposed on her certain obligations and which I cannot be satisfied she discharged in a responsible manner.
A consideration of the other matters identified by Shanley J. in La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM 345 does not assist Mrs. Delaney.
Mr. Terry Dunne
As previously indicated Mr. Dunne agreed to become a non-executive director of the Company for a specific purpose namely to maintain and foster the commercial relationship with Garveys and Musgraves. It appears that he did participate in the supervision and control of the Company with the managing director at least during the period when there was a commercial relationship maintained with those companies. Mr. Delaney refers at paragraph 31 of his affidavit of 14th July, 2003, to holding regular directors’ meetings with Mr. Dunne “when he was involved in the Company”. Mr. Delaney then states however “. . . from early 2000, onwards I was effectively the only director involved in the Company and accordingly no such meetings were held”.
Subsequent to the decision of Musgraves Mr. Dunne appears to have had very little contact with the Company. As indicated Mr. Delaney’s view was that he was effectively the only director involved in the Company. Whilst, Mr. Dunne in his two affidavits, seeks to assert that he acted responsibly in relation to the conduct of the affairs of the Company, does not state what he did as a director in the final two years. His only connection with the Company appears to have been some conversations with Mr. Delaney during which he asserts Mr. Delaney painted a positive financial picture of the Company.
Mr. Dunne’s obligations to the Company must be considered upon the basis that he was an unremunerated non-executive director. The court must also take into account the fact that Mr. Dunne was an experienced businessman and his special agreed role namely to foster the commercial relationship of the Company with the Garvey and Musgrave groups. This special role ended in 1999 with the Musgrave decision. Mr. Dunne did not resign. He chose to remain a director.
In remaining a director in 2000 and 2001 he was under an obligation to discharge the minimum obligations already referred to of informing himself about the Company’s affairs and joining with his co-directors in supervising and controlling such affairs in the sense of being in a position to offer guidance and to monitor the management of the Company. I cannot be satisfied that Mr. Dunne discharged this duty to inform himself about the affairs of the Company by simply having some conversations with Mr. Delaney over a period of approximately two years. Further he appears to have taken no step to discharge the duty of joining with his co-directors in supervising and controlling the affairs of the Company during this period.
I am obliged to consider Mr. Dunne’s role as a director of the Company in relation to the conduct of the affairs of the Company throughout his entire tenure as a director pursuant to the decision of the Supreme Court In re Squash (Ireland) Limited [2001] 3 I.R.. Having regard to the above failure by Mr. Dunne in his responsibilities during the years 2000 and 2001 (and given the importance of this period for the Company more fully set out below) notwithstanding his earlier activity as a director I cannot be satisfied when considering Mr. Dunne’s entire tenure as a director of the Company that he has discharged the onus of satisfying the court that he acted responsibly in relation to the conduct of the affairs of the Company.
As with Mrs. Delaney a consideration of the other matters identified by Shanley J. in La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM 345 does not assist Mr Dunne.
Mr. Simon Coyle
The facts of this case in relation to Mr. Coyle emphasise a difficulty for the High Court in the legislative scheme established by s. 56 of the Act of 2001. The official liquidator both in his s. 56 report and in his affidavit to this court states that he has been satisfied by Mr. Coyle that he acted honestly and responsibly. The official liquidator was not relieved by the Director of Corporate Enforcement of his obligation to bring the application under s.150 of the Act of 1990 in respect of Mr. Coyle. Hence it appears the Director does not agree with the view taken by the liquidator. Section 56 of the Act of 2001 does not expressly oblige the Director to state his reasons for refusing to relieve an official liquidator of his obligation to make an application under s.150 of the Act of 1990 where (as in this case) he so requested. No application was made to the Director to state his reasons. The Director is not a party to this application. The onus is on Mr. Coyle to satisfy the court under s.150 (2) of the Act of 1990. Mr. Coyle asserts he acted honestly and responsibly as a director in relation to the conduct of the affairs of the Company. By reason of the attitude of the official liquidator there is no formal legitimus contradictor to Mr. Coyle in this application.
However, Mr. Delaney is in dispute with Mr. Coyle on many factual issues which pertain to their respective responsibilities as directors including the extent of Mr. Coyle’s involvement in the Company as a director. Mr. Coyle addresses these disputed facts on affidavit and was aware that the court was taking into account affidavits sworn by other respondents, including Mr. Delaney in considering the application against him.
Mr. Delaney in his affidavit sworn on the 14th July stated at pars. 25 and 26:-
” 25. . . . I heard nothing from Simon Coyle for an eighteen month period up to September 2001, save for when he wrote to me in January, 2001, thanking me for a Christmas gift of lamb. If he had any concerns in relation to the Company, he could always have telephoned me.
26. Indeed, I would have welcomed contact and assistance from Simon Coyle. With the benefit of hindsight, if he had played an active role, his accountancy experience would have been of assistance to his co-directors. While Simon Coyle has complained about the fact that no board meeting was held with him to discuss the appointment of the receiver, in a context where he had made only one telephone call to me in the previous 22 months and visited the premises only once after his appointment in March 1997, the omission of calling a directors meeting with him is not surprising”.
In his subsequent affidavit, Mr. Coyle did not dispute this lack of contact from him personally but did refer to attempts by employees of CFIM to obtain financial information from the Company.
In considering whether Mr. Coyle has discharged the onus of satisfying the court that he acted responsibly it is important to recall that the court in considering this application under s. 150 is only considering whether Mr. Coyle acted responsibly as a director of the Company i.e. Tralee Beef and Lamb Limited (In liquidation). The Court is not considering whether Mr. Coyle acted responsibly as director of any other relevant company such as CFIM. Mr. Coyle was appointed a non-executive director of the Company on the 14th March, 1997, pursuant to the BES investment agreements. He was appointed to represent the interests of the BES investors in the Company. It is not clear on the affidavits whether Mr. Coyle was personally remunerated as a non-executive director of the Company. Whilst, there are references to certain monies being paid, there is a lack of clarity in the affidavits as between Mr. Coyle personally and CFIM and on balance it appears to me probable that the monies referred to were monies paid by the Company to CFIM pursuant to the BES Investment Agreement. Hence, Mr. Coyle should be considered as an unremunerated non-executive director, but also on the basis that he is a professional person with specific skills to bring to a board of directors both in the accounting and financial area and that he was representing the interests of BES investors.
The issue to be decided is whether Mr. Coyle can establish that he acted responsibly in the sense of discharging what might be considered even the minimum duties imposed on a non-executive director by the common law duties referred to above to inform himself about the affairs of the Company and to join with his co-directors in supervising and controlling them.
In relation to the first aspect of this duty namely to inform himself about the affairs of the Company both the official liquidator and Mr. Coyle rely heavily upon the allegedly unsuccessful attempts from January, 2000, to obtain financial information in relation to the Company. It appears from the affidavits that pursuant to the BES Investment Agreements, CFIM had a contractual entitlement to receive from and the Company had a contractual obligation to supply to CFIM quarterly management accounts and annual audited accounts. Mr. Coyle deposes to the fact that until January, 2000, he received and reviewed financial information communicated to him. There is considerable dispute between Mr. Coyle and Mr. Delaney as to communications seeking financial information which occurred after January, 2000. From Mr. Coyle’s perspective the furthest it can be put is that there were certain written communications and certain oral communications from executives of CFIM to executives of the Company requesting both the management accounts and audited accounts. Insofar as those communications were in writing and have been exhibited they appear to have been made pursuant to the contractual arrangements under the BES Investment Agreements. The first occasion upon which Mr. Coyle sought to make direct communication with his fellow director and the managing director Mr. Delaney was on the 3rd September, 2001. It does not appear that Mr. Coyle had any direct communication with Mr. Delaney nor anyone else within the Company between January, 2000 and September, 2001.
It must also be added that all the above requests related to accounts. Whilst financial information is very important it is not the only relevant information in relation to the affairs of a trading company such as this. There is no evidence Mr. Coyle sought to inform himself about any other aspects of the affairs of the Company.
In considering the second aspect of the duty namely to join with his co-directors in supervising and controlling the affairs of the Company, Mr. Coyle’s affidavits do not disclose any steps taken by him prior to October, 2001, following the appointment of a receiver to the Company other than the general statement at paragraph 8 of his first affidavit:-
“On behalf of the BES investors I attended certain Directors’ meetings and reviewed the financial information communicated to me by the Company. Due to the provisions of the Taxes Consolidation Act, 1997 I played no active part in the control of the Company. I pursued a watching brief over the interest of the BES investors and their investment limited by the constraints of the Taxes Consolidation Act.”
As already stated there were no directors meetings in 2000 and 2001. Mr Coyle does not state the dates of any such meetings attended. I have concluded they must have been prior to 2000.
He also appears to have attended a meeting with Bank of Ireland Commercial Finance in 1998 with Mr. Delaney and subsequently arranged for staff from CFIM to spend some time in the Company assisting the management in preparing meaningful financial information and financial forecasts. It appears from para. 9 of Mr. Coyle’s second affidavit that that took place at the end of 1998. Mr. Delaney at paragraph 24 of his first affidavit refers to an accountant from Mr. Coyle’s office spending approximately two weeks in the Company’s premises “in or about 1999”. I am not clear whether this was the same event referred to or two separate events but nothing turns on this.
Counsel on behalf of Mr. Coyle firstly submits that the court must consider his position as a non-executive director appointed pursuant to a BES Investment Scheme and having regard to the restrictions imposed by part 16 of the Taxes Consolidation Act, 1997. I accept this submission. However, counsel on his behalf did not refer to any section of the Taxes Consolidation Act, 1997 which precluded Mr. Coyle from discharging what might be considered to be the normal duties and obligations of a non-executive director as set out above. I have since the hearing considered part 16 of the Act of 1997 and it does not appear to me that there is any such provision. Section 493 contains certain restrictions in relation to the appointment of directors but once a person is appointed as a director in accordance with those provisions (as I assume Mr. Coyle was in this case) there does not appear to be any statutory provision which would interfere with the normal duties and obligations of a non-executive director.
Counsel on behalf of Mr. Coyle also referred to s.150(2)(c) of the Act of 1990. As has previously been pointed out by Murphy J. In the matter of Cavan Crystal Group Ltd. (In Receivership) (Unreported, the High Court 26th April 1996) it is difficult to make sense of this provision. However counsel accepted that he could not rely on its terms as CFIM is not a “venture capital company” within the meaning of the sub-section. As already indicated I accept that the court in considering Mr. Coyle’s actions or inactions as a director of the Company should also take into account the fact that he was appointed to this position by CFIM and for the purpose of safeguarding the interests of the investors in the BES scheme.
The difficulty faced by Mr. Coyle is his apparent inability to demonstrate to the court that at least in the period commencing at latest January, 2000 and lasting until September, 2001, that he sought in any way to discharge his obligations as a non-executive director of the Company, to inform himself about its affairs and to join with his co-directors in supervising and controlling them. I have concluded that Mr. Coyle has offered no convincing evidence to the court that between January, 2000 and September, 2001, he joined with his co-directors in supervising and controlling the affairs of this Company. In using the term “supervising and controlling” I do so by reason as it is the phrase used by Jonathan Parker J. in In re Barings Plc. [1999] 1 BCLC 433 but do not wish to suggest in any way that Mr. Coyle was under an obligation to personally control the Company. He was under an obligation to participate with his fellow directors in collectively controlling and supervising the affairs of the Company at least in the manner stated by the Court of Appeal of New South Wales, in Daniels v. Anderson [1995] 16 A.C.S.R. 607 “to take reasonable steps to place [himself] in a position to guide and monitor the management of the Company”.
Even applying this possibly lesser test, Mr. Coyle has not satisfied the court that he took reasonable steps to place himself in a position to “guide and monitor” the management of the Company during 2000 and 2001.
Directors normally collectively discharge these duties through the holding of regular board meetings. It appears common case that no board meetings were held in this Company during 2000 or 2001. Whilst, I accept that the primary responsibility to arrange for the holding of board meetings did not lie with Mr. Coyle, I cannot conclude that the court could be satisfied that Mr. Coyle acted responsibly within the meaning of s. 150 in circumstances where he was one of four directors; one director only was an executive, namely the Managing Director; the Company had in the year ended March, 2000, a turnover of approximately IR£20 million; the Company was operating in a difficult business environment afflicted in the year 2000 by the BSE crisis; a subordinate of Mr. Coyle appears to have written as early as 17th April, 2000, in what Mr. Coyle describes in his first affidavit as “the strongest possible terms” seeking financial information relating to the Company pursuant to the contractual BES investment agreements and no such information was forthcoming. In all those circumstances I cannot conclude that Mr. Coyle, who personally does not appear to have taken any steps even to make contact with Mr. Delaney until 3rd September, 2001, can be considered to have acted, at least during this period, responsibly as a director of the Company.
In accordance with the decision of the Supreme Court In re Squash (Ireland) Limited [2001] 3 I.R. I am obliged to consider Mr. Coyle’s role as a director of the Company in relation to the conduct of the affairs of the Company throughout his entire tenure as a director. Mr. Coyle was appointed in 1997. He appears to have played a minimal role as a director of the Company between 1997 and the end of 1999. As already indicated, there is a reference to attending one meeting with the bank; he deposes to attending directors’ meetings without specifying the number or dates of same and he arranged for staff of CFIM to work in the Company for a limited period on a remunerated basis at the end of 1998 (or possibly 1999).
Following the appointment of the Receiver on 6th October, 2001, undoubtedly Mr. Coyle took more active steps in relation to the Company. He ultimately arranged for CFIM to petition to wind up the Company in early 2002. It is unclear to me in this period whether Mr. Coyle was taking steps as a director of the Company or as a director or executive of CFIM.
Considering Mr. Coyle’s overall tenure as a director of the Company and taking into account the steps taken by him as a director up to the end of 1999 and even assuming that the steps taken post October, 2001, were taken as a director of the Company, it appears to me that by reason of the almost total inactivity of Mr. Coyle as a director of the Company between January, 2000 and September, 2001, I cannot be satisfied that he acted responsibly in relation to the conduct of the affairs of the Company. This was a lengthy period and a crucial one for the Company and a time that Mr. Coyle knew or ought to have known was a difficult period for the meat industry and that therefore the Company was operating in a difficult business environment.
As with the other directors a consideration of the other matters identified by Shanley J. in La Moselle Clothing Limited v. Soualhi [1998] 2 ILRM 345 does not assist Mr Coyle.
Conclusion
For the reasons stated above I am obliged to make a declaration of restriction pursuant to s. 150 of the Act of 1990 in respect of each of the directors. Under the terms of the section the court has no discretion to take into account the performance or position of a respondent as a director of any other Company. The court is obliged to confine itself to the respondent’s conduct as a director of the Company in liquidation in respect of which the application is brought.
Colm O’Neill Engineering Services (In Liquidation), Re
[2004] IEHC 83 (13 February 2004)
MS. JUSTICE FINLAY GEOGHEGAN: This is an application brought under Section 150 of the Companies Act, 1990 by the liquidator of Colm O’Neill Engineering Services Ltd (“the Company”) for a declaration of restriction of the four named Respondents, each of whom were directors of the Company. It is not disputed that the Company is insolvent; nor is it disputed that each of the respondents was a director of the Company within twelve months of the commencement of the winding up. Accordingly, Section 150 applies to the Company and the respondents.
Having regard to the terms of Section 150, it imposes a mandatory obligation on this Court to make the declaration of restriction unless the Court is satisfied that the director 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 Section 150. It is well established on the authorities that the section places the onus on the directors of establishing to the satisfaction of the Court that he or she has acted honestly and responsibly if they are to escape the declaration of restriction.
In accordance with the practice direction of the President of the High Court, the liquidator is required to set out before the Court the matters which the liquidator considers, having regard to the investigations which he has carried out in the Company, should be considered by the Court under the section. That has been done very clearly by the liquidator in this instance. Whilst the liquidator sets out the matters, the onus remains on the directors in relation to those matters to satisfy the Court that they have acted honestly and responsibly.
In considering the matters raised by the liquidator in relation to the four respondent directors, I think it is necessary just briefly to consider the legal framework which has been established by S.150 and the authorities on the section. Firstly, it is well established that the purpose of the Section is to protect the public against the future supervision and management of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors and others. It is also established that it is not the purpose of the Section to punish the individuals concerned.
It is also, it appears to me, established on the authorities that, as it was put, by Murphy J. in Business Communications Limited, that ordinary responsibility of directors will entail compliance with the principal features of the Companies Acts and maintenance of the records required by those Acts. That conclusion of Murphy J. was following a citation by him in that judgment of an extract from a judgment of Henry LJ in Grayan Building Services Limited [1995] 3 WLR 1 where in relation to the English provisions on disqualification, he stated:
“The concept of limited liability and the sophistication of our corporate law offers great privileges and great opportunities for those who wish to trade under that regime, but the corporate environment carries with it the discipline that those who avail themselves of those privileges must accept the standards laid down and abide by the regulatory rules and discip1ines in place to protect creditors and shareholders.”
I think it fair to observe that the present corporate environment as set out in the current companies legislation is an environment of strict obligations on persons who are to be directors of companies with limited liabilities. It is also, I think, correct to observe that the responsibility which must be established by directors goes beyond the simple compliance with Companies Act obligations or regulatory obligations, and this is clear from the well known matters set out originally by Shanley J. in the decision in La MoseLLe Clothing ltd. -V- Soualhi [1998] 2 ILRM 345 and cited with approval by the Supreme Court in Re Squash Ireland Ltd. [2001] 3 IR 35.
It is clear from those matters to which the Court must have regard that there may be circumstances in which directors have acted so incompetently as to amount to irresponsibility. Also, that directors who have displayed a lack of commercial probity or want of proper standards may not be considered to have acted responsibly, and that is in addition to compliance with the Companies Acts.
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 Courts’ perspective, not to view the matter with the inevitable benefit of hindsight which arises in the course of the liquidation. This latter obligation is sometimes difficult to observe and practice as the actions or inactions of the directors which it is being suggested may indicate a lack of responsibility are inevitably being 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. It appears to me that the actions of the directors must be looked at on the basis of the companies being a going concern and insofar as it is possible, for the Board to conduct that artificial exercise to consider the alleged actions or inactions in the context of the company as a going concern and prior to the commencement of a winding up.
On the facts of this case, the liquidator has, essentially, raised two separate matters for consideration, two entirely distinct matters for consideration in relation to the responsibility of the four Respondents prior to the date of commencement of the winding up. The first relates to the possibility that the directors failed to obtain sufficient financial information for consideration by the Board from the executives of the company and, effectively, failed to recognize in due time the deteriorating financial situation of this company and failed to take appropriate steps.
The second and quite separate matter relates to the establishment by the directors in 1999 of an associated company, referred to as “Complete”, and the investment of monies by this company in Complete and the adequacy of the recording of financial transactions between this company and Complete.
There is a third matter then raised by the liquidator which goes to the second matter which a Court must consider as to whether there is any other reason why it would be just and equitable that the directors should be subject to the restriction imposed by the Section and there is an allegation of non-effective cooperation in the course of the liquidation against certain of the directors.
This company was established in 1974 and it provided general mechanical services in relation to heating, plumbing and ventilation, in particular. The brief facts pertaining to the four directors are as follows:
Mr. Colm O’Neill was the Managing Director from the outset of the company and it is quite clear on the facts that he was the prime mover and the company bears his name. Unfortunately, in June 2000 he was diagnosed with cancer and underwent treatment during the following year. He states on affidavit that his cancer was, in June 2001, unfortunately, deemed to be incurable and he was thereafter given certain treatment to provide him with comfort and an extension of life. He indicated in November 2001 that he proposed resigning as an executive director, with effect from the beginning of 2002, and remained as a non executive director.
Mr. Ruari O’Neill, who is his son, joined the Board in October 1999, initially for a time as an executive, but for some considerable period prior to the commencement of the winding up he had been a non executive director of this company. He was an executive, and still is an executive, of the company Complete. I think it is fair to say that in the final period of the company by reason of his father’s illness he did attempt to take over certain of the burden of his father.
Mr. Oliver Reddy joined the company in 1990 as a director. He was an executive director and he was the contracts administrator of this company.
Dr. Patrick Galvin joined the Board as Chairman and non executive director in October 1999 pursuant to an agreement which is exhibited. Dr. Galvin is a person with considerable corporate governance, experience and, in particular, experience as both executive and non executive directors of a number of well known PLCs in this country. He joined the Board by reason of the fact that he had had an association as a mentor with Ruari O’Neill at the time Ruari O’Neill was studying in the Smurfit Business School, and he joined at a time of the establishment of Complete, to which I will refer.
I think the last factual matter against which the matters raised for consideration were considered by me relates to the undisputed averment of the liquidator both that this company had complied with its statutory obligations and that the books and records kept by the company were reasonable. Against that factual background, in relation to the first matter raised by the liquidator and pursued – there were other matters, I should say, raised on the affidavits, but pursued at the hearing relating to the inadequacy of the financial information and, effectively, the alleged incompetent manner in which the Board considered financial information in the last year or 18 months of the life of this company, I have concluded that insofar as there may have been any inadequacy, such inadequacy of the actions of the Board could not be considered to be either incompetent, as such, or certainly not incompetent so as to amount to irresponsibility.
Any consideration of those facts must be viewed on the basis, firstly, there was no executive director who was the direct financial controller of the company, and it is clear from the Board meetings that Mr. Reddy in the last periods of time brought the financial information to the Board. Notwithstanding that there wasn’t a financial director as such, it is also clear that the Board took steps to strengthen the financial reporting to the Board in the last period of the company. On the advice of their auditors, they appointed one individual. They were unsatisfied with that individual. They had him replaced by Mr. Bob Scott in the latter period of the company, but Mr. Scott, whilst the financial controller, was not a member of the Board. I am satisfied that there was no incompetence and certainly not irresponsibility in respect of that matter by the directors.
Insofar as the second matter, which are all matters surrounding the establishment of Complete, are concerned, I have formed the view that, firstly, it could not be said to have been an irresponsible act by these directors to have established Complete in 1999. It appears to me that they have well established on their affidavits that they went about this in a careful way. They brought in Dr. Galvin as a very experienced, independent non executive person into the Board of this company, partly for the purpose of considering the establishment of Complete.
Secondly, insofar as it is suggested that these directors were irresponsible in diverting monies of this company to Complete, on the facts it would appear that the net investment of this company was in the order of €240,000 over the period between 1999 and the date of commencement of the winding up, which was in May 2002. During that period, Mr. Colm O’Neill introduced additional loan monies to the company and also left behind pension contributions to which he was entitled and I think that the total figure from Mr. Colm O’Neill is in the order of €230,000. In the same period, Mr. Oliver Reddy left behind pension contributions which he was due from the company for a considerable period of time in the order of €126,000. So that the total monies introduced by the directors, even if I am slightly wrong in those figures, I am satisfied on the affidavits, and it was common case, well exceeded the net investment in Complete.
The third matter related to the adequacy of the recording of transactions between Complete and this company, and this is a matter which goes to the additional matter raised by the liquidator as to the post liquidation co-operation. On the facts, I have reached the following conclusions: Firstly, I must consider it against the liquidator’s views that there were reasonable books and records in this company. Secondly, insofar as the inadequacy has been raised by the liquidator, it appears to relate to the back-up documentation and clarity of the entries made in relation to these transactions.
As far as the directors of this company are concerned, it is established that they had organised that there be kept proper books and records of this company. The detailed recording in those books and records and the manner in which the detailed information is recorded and kept is, it appears to me, an executive matter. Insofar as responsibility rests with a senior executive of the company, that would have rested with the financial controller who, in the latter days, was Mr. Bob Scott. I am satisfied that the directors cannot be said to have been in any way irresponsible in relation to that matter. Therefore, in terms of the four directors’ conduct as directors of the company up to the date of liquidation, I formed the overall view that they have discharged the onus placed on them of establishing that they have acted responsibly.
I now turn to the other matter raised by the liquidator for consideration as to the alleged lack of effective cooperation. Whilst the liquidator maintained the claim against all the directors, I think it is fair to say that the claim against Dr. Galvin was not seriously pursued and I am satisfied on the facts that there can be no suggestion that Dr. Galvin did not, when requested, cooperate with the liquidator. I am also satisfied on the facts that insofar as Mr. Oliver Reddy was asked to provide information in the early days that he did make himself available. He assisted, in particular, in relation to the debtors of the company and that he made himself and left himself available to the liquidator and was, after the initial stages, effectively not contacted again.
The primary dispute in this matter is between the liquidator and Mr. Ruari O’Neill and it appears to me that it is an unfortunate dispute on the facts of this case. The submission made on behalf of the liquidatior in relation to Mr. Colm O’Neill is that it was accepted that by reason of his illness that he was not in a position to give substantial assistance to the liquidator. But the contention made was that as his son, Mr. Ruari O’Neill, voluntarily sought to relieve his father from that obligation and give in his place assistance to the liquidator, that if he failed, that such failure must be regarded as the responsibility of Mr. Colm O’Neill. I cannot accept that submission as a matter of law on the section and, therefore, it seems to me that there can be no suggestion that in relation to Mr. Colm O’Neill on the facts of this case, where he was prevented by serious and terminal illness from providing effective assistance, it could be considered just and equitable to make the declaration of restriction.
So that leaves Mr. Ruari O’Neill, and whilst it is undisputed and must be undisputed that there has been considerable delay in the provision of or in the identification of the precise balance between Complete and this company at the date of commencement of the winding up, it appears to me that there are faults on both sides, of the liquidator and Mr. Ruari O’Neill, in relation to the manner in which this manner has been dealt with over the period. I wouldn’t seek to attribute the relative proportions of blame, but insofar as Mr. Ruari O’Neill is concerned, I am satisfied that he was a non executive director of the company. He undertook to try and provide assistance in relation to matters about which he did not have detailed knowledge by reason of his father’s illness. He, together with his fellow directors of this company, took a step that appears to me to have been totally consistent with acting responsibly — namely, they retained at the expense of Complete Mr. Scott, the financial controller, for a period of three months so as that he would be able to provide the liquidator with detailed information such as he sought.
The detailed information was not sought within that three month period by the liquidator, but at a much later time when Mr. Scott had left. Whether it was made entirely clear to the liquidator that he had this three month window of opportunity, I am not clear and this may have to some extent contributed to the subsequent unfortunate wrangle. But I am satisfied on the facts that there is no other reason for which it would be just and equitable to make the declaration of restriction in respect of Mr. Ruari O’Neill.
Therefore, I have dismissed the application as against all four directors.
Fitzpatrick -v- Connaughton & anor
[2016] IEHC 533 (09 September 2016)
JUDGMENT of Mr. Justice David Keane delivered on the 9th September 2016
Introduction
1. This is an application for a declaration of restriction against the second named respondent under s. 150 of the Companies Act 1990, as amended.
Background
2. Laragh Civils Limited (“the company”) was incorporated on the 27th April 2010. During its brief existence, the company carried on the business of civil engineering contractors. On the 14th August 2012, the first respondent certified to the Companies Registration Office that, at an extraordinary general meeting on the same date, the members of the company had resolved to wind it up. By resolution made at a meeting of the company’s creditors, also on the 14th August 2012, the applicant was appointed liquidator.
3. Then and at all other material times, the two directors of, and shareholders in, the company were the respondents, a married couple, each of whom was appointed director with effect from the 27th April 2010, the date of the company’s incorporation.
4. On the 27th May 2014, the applicant certified that, on the 14th August 2012, the date of his appointment, the company was insolvent in that it was unable to pay its liabilities as they fell due for payment.
5. On the 25th January 2013, the applicant furnished a report on the conduct of the respondent directors to the Director of Corporate Enforcement who received that report on the 28th January 2013. On the 30th April 2013, the Office of the Director wrote to inform the applicant that he was not relieved of his obligation under s. 56(2) of the Company Law Enforcement Act 2001 to apply to this court for the restriction under s. 150 of the Companies Act 1990 of each of the respondent directors.
6. By motion filed on the 20th May 2013, the applicant sought various reliefs against the first named respondent only. The first named respondent did not enter an appearance in response to that motion. On the 1st July 2013, this Court (per Cooke J.) made orders in the following terms:
(i) That four separate payments made by the company to the first respondent on the 21st December 2011, the 22nd December 2011, the 17th March 2012 and 30th April 2012, amounting in total to €76,200 were a fraudulent preference of the first respondent over the company’s creditors and were invalid;
(ii) That the said payments in the said amount were a disposal of the company’s property the effect of which was to perpetrate a fraud on its creditors;
(iii) That the first respondent was liable to repay the said sum to the applicant as liquidator of the company;
(iv) That the first respondent was further liable to pay to the applicant as liquidator of the company the further sum of €98,055, pursuant to provisions of s. 298 (2) of the Companies Act 1963, as amended, whereby the Court is empowered to examine the conduct of a director and compel him contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or other breach of duty as the court thinks just.
(v) That, pursuant to the provisions of s. 297A (1) of the Companies Act 1963, as amended, the first respondent, as a person knowingly a party to the carrying on of the business of the company with intent to defraud creditors of the company, was declared personally responsible for certain debts of the company amounting to the sum of €265,282; and
(vi) That the first respondent was liable to repay the said sum to the applicant as liquidator of the company.
7. The present application is brought by motion issued on the 14th June 2014, originally made returnable for the 28th July 2014. The application was heard on the 27th April 2015.
8. On that date, I made a declaration of disqualification as a company director against the first named respondent under s. 160 of the Companies Act 1990, as amended (“the 1990 Act”), for a period of five years, being satisfied that the jurisdictional requirements of s. 160 (2) (b), (c) and (d) had been established and that, on the evidence before me, that respondent’s past conduct makes him presently unfit to act in that, or any related, capacity as envisaged under that section. Although the first named respondent had not entered an appearance in response to the application against him, I was satisfied, on the evidence adduced at the commencement of the application, that he had been properly served with the originating notice of motion, and accompanying motion papers, in accordance with the Rules and the previous orders of this Court.
9. Having heard argument in relation to the application pursuant to s. 150 of the 1990 Act, to restrict the second named respondent as a company director, I reserved my decision on that aspect of the motion.
10. Before doing so, I ruled ex tempore against the second named respondent’s submission that the application against her should not be permitted to proceed on grounds of delay.
11. In that regard, it is undoubtedly the position that, having submitted his report to the Director of Corporate Enforcement in January 2013, the applicant failed to comply with the requirement under s. 56(2) of the Company Law Enforcement Act 2001 (“the 2001 Act”) that he bring restriction proceedings within five months of that event i.e. no later than June 2013. The present motion was not brought until June 2014, some twelve months later.
12. The applicant has averred that, during that period, he was obliged to devote significant time and resources to the pressing claims of fraudulent preference and breach of duty that squarely arose as between the company and the first named respondent. In addition, the applicant has averred that he received no co-operation from the respondents in the conduct of the liquidation. While the second named respondent disputes the applicant’s claim that she has failed to co-operate with him, averring that she received no communication from him prior to the issue of the present motion, little turns on the point since, as we shall see, her position is that, despite her status as a director of the company, she had no knowledge of the company’s affairs to offer, rendering her professed willingness to co-operate of no practical assistance to the applicant in advancing the liquidation.
13. Indeed, the defence relied upon by the second named respondent is she should be considered to have acted responsibly as a purely passive or token director of her husband’s company, entirely uninvolved in, and ignorant of, its management and with no role in its corporate governance. It follows that her defence is not hampered by lapse of time in the way that it might be if she were seeking to make the case that she had acted honestly and responsibly while engaged in the conduct of the company’s affairs but was now prejudiced in her efforts to assemble the appropriate witnesses and evidence required to discharge the onus on her to establish that fact due to the applicant’s delay in bringing the present application. While any lapse of time prior to trial is prejudicial to a respondent, indeed to any litigant, in as far as it entails a commensurate period of worry or anxiety prior to the determination of that person’s rights or obligations, I did not consider that the lapse of time in this case, given the circumstances in which it occurred, was such, in and of itself, as to warrant, much less require, the dismissal of the restriction application against the second named respondent.
14. For those reasons, I ruled that the application should proceed. I also made an order, pursuant to the terms of s. 56(2) of the 2001 Act, extending the time for bringing it.
The issue on the application to restrict the second named respondent
15. The second named respondent does not dispute that the company was unable to pay its debts at the commencement of its winding up. Nor does she deny that she was a director of the company at the material time or that the Director of Corporate Enforcement has not relieved the applicant of the obligation otherwise incumbent on him under s. 56 (2) of the 2001 Act to bring the present application against her in respect of the company.
16. It follows that the Court is obliged to make a declaration of restriction under s. 150 of the 1990 Act in respect of the second named respondent unless satisfied that her position comes within one of the circumstances set out in sub-s. (2) of that section. The applicant accepts that there is no question of any dishonesty on the part of the second named respondent in the conduct of the affairs of the company. The application therefore turns on whether that respondent acted responsibly in that regard, since it is not suggested that there is any other reason why it would be just and equitable to make a declaration of restriction against her.
The evidence
17. Much of the evidence on this application is not in dispute. In addition to what has already been set out above, the following is the position.
18. The applicant has established from his enquiries subsequent to his appointment as liquidator of the company that, at all material times, the first named respondent was the managing director of the company and the person in control of its bank accounts, cheque books, records and finances.
19. In addition to the fraud upon the company’s creditors and misfeasance in office of the first named respondent, the applicant has drawn a number of other aspects of the conduct of the company’s affairs to the attention of the Court. They include:
(a) A complete failure to keep or maintain proper books, records and accounts in respect of the company’s business.
(b) Numerous instances of deliberately misleading entries in the limited books and records that were maintained.
(c) A complete failure to maintain a proper accounting system to monitor the company’s financial position.
(d) A complete failure to prepare any accounts whatsoever – whether monthly or quarterly accounts or any trading statements – from the company’s commencement of trading in December 2010 to its cessation of trading in August 2012, which failure precluded the respondent directors from forming any sensible view concerning the company’s solvency at any time during that twenty month trading period in which, according to the company’s statement of affairs, signed on the 14th August 2012 by the first named respondent, the company incurred a deficit of almost €360,000.
(e) The presentation of a statement of affairs to the meeting of the company’s creditors that was grossly misleading and untrue, understating the company’s deficit by almost €100,000.
(f) The payment by the company of a net annual salary of €23,700 to the second named respondent in 2011, while the company’s wages records for that year recorded her gross annual salary as €21,242, suggesting a net annual salary of €15,603.
20. In the two replying affidavits that she has sworn in opposition to the application for a declaration of restriction against her, the second named respondent avers to several matters that she contends are relevant to the central issue of whether she has acted honestly and responsibly in relation to the conduct of the company’s affairs.
21. The second named respondent avers that she did indeed work for the company and was paid €300 per week. Her pay slips and P60s were ‘done by the lady in accounts’, though she did not receive them. Her job involved running errands and performing menial tasks. At ‘around’ that time, the first named respondent was banned from driving and the second named respondent acted as his driver and performed other ‘general non-accounting duties.’ She ceased working for the company in March 2011 because she had to look after her seriously ill son. Her lack of knowledge concerning the company and its affairs was contributed to, if not caused by, the breakdown of her personal relationship with the first named defendant and the resulting breakdown in communication between them.
22. The second named respondent goes on to aver broadly as follows. She first learnt of the ‘enormous financial difficulties’ of the company when she was served with the present motion papers. The first named defendant ran the company alone as he saw fit, as was acknowledged by the applicant in his report to the Director of Corporate Enforcement. Naively and through lack of experience, the second named respondent saw her role in the company as ‘a silent one.’ She understood that a book keeper was employed to manage the company’s books on a day to day basis. It was her ‘reasonable expectation’ that accountants were to attend to the company’s annual accounts and ‘that appropriate experts were dealing with matters.’ She was not made aware of ‘very fast developing and catastrophic events’ that befell the company. She does not explain what she understands those fast developing and catastrophic events to have been. She was not aware of demands by the company’s creditors for overdue payments.
The law
23. The applicant suggests that the starting point for the Court’s consideration of what the requirement to have acted ‘responsibly in relation to the conduct of the affairs of the company’ entails is the following passage from the judgment of Fennelly J. in the Supreme Court in the case of Re Mitek Limited; Grace v Kachkar [2010] 3 IR 374 IESC 31 (at para. 79):
“In one sense, it is obvious that a director must behave responsibly. In order to discharge his duties, he must, in the first instance, inform himself about the business and affairs of the company and about his own duties as director. Circumstances will inform the nature and extent of these duties. Even non-executive directors of companies must be conscious in the times we live in that they cannot be mere cyphers or purveyors of votes at the whim of management. There was a time when even such a distinguished text as Gower’s The Principles of Modern Company Law (3rd ed. Stevens, London, 1969) could state at p. 549: ‘public opinion has come to recognise that directorships are little more than sinecures, requiring, at the most, attendance at occasional board meetings.’ The Act of 1990 itself evinces public concern that directorships involve real responsibility and that persons who do not conform at least to some generally acceptable minimum standards either should not, in the public interest, be permitted or should be restricted in regard to future holding of directorships.’
24. In the face of that authority, very able Counsel on behalf of the second named respondent pointed to the uneasiness expressed by Hardiman J. in Re Tralee Beef & Lamb Ltd: Kavanagh v Delaney et al [2008] 3 IR 347 at any suggestion that the position of a non-executive director be assimilated to that of an executive one, an approach that Hardiman J. felt might derive some support from the decision of Murphy J. in Vehicle Imports Ltd (in liquidation) (Unreported, High Court, 23rd November 2000) which, in turn, had adopted the exposition of the duties and responsibilities of a company director set out by Jonathan Parker J in Re Barings plc et al (No 5); Secretary of State for Trade and Industry v Baker et al (No 5) [1999] 1 BCLC 433.
25. However, it seems to me that the question in each of those cases concerned the permissible degree of delegation of specific tasks and functions – whether by a board of directors generally or by a specific director in particular – that is consistent with the responsibilities or duties of each as such. In that context, it is perfectly understandable that Hardiman J. was wary of any suggestion of a ‘one size fits all’ answer to that question, contrasting the position of the ‘vast corporation’ the subject of the Barings case and the ‘small meat company in rural Ireland run effectively by one man’ in Tralee Beef & Lamb. The appellant in the latter case was a non-executive director of the company concerned, having been appointed to that role at the instance of a company which managed funds that had been invested in it under a business expansion scheme.
26. Whatever the variation in the level of permissible delegation may be between different sorts of director in various kinds of company, and that point has yet to be definitively considered, it is difficult to see how any director – executive or non-executive – can escape any of the following basic responsibilities: first, to inform himself or herself about the nature of his or her duties as director; second, to acquaint himself or herself with the affairs generally of the company concerned; and third, to exercise appropriate supervision or oversight at board level in respect of the execution or discharge of whatever tasks or functions have been properly and appropriately delegated to others.
27. More fundamentally, in my view the present case raises the issue of ‘abdication of responsibility’, rather than that of ‘delegation of responsibility.’ I did not understand Counsel on behalf of the second named respondent to argue other than that, on the evidence before the Court, the second named respondent was a ‘token’ or ‘passive’ director who agreed to assume that position at the behest of her spouse, the first named respondent and did not purport to discharge any responsibility whatsoever thereafter in relation to any aspect of the conduct of the company’s affairs or the supervision of that conduct.
28. As long ago as 1984, in Re Hunting Lodges Ltd [1985] ILRM 75, Carroll J. stated:
“The day has long since passed since married women were classified with infants and persons of unsound mind as suffering from a disability in so far as responsibility for their acts was concerned, or since a married woman could escape responsibility on the grounds that she acted under the influence of her husband. Mrs Porrit cannot evade liability by claiming that she was only concerned with minding her house and looking after her children. If that was the limit of the responsibilities she wanted, she should not have become a director of the company or, having become one, she should have resigned.
Any person who becomes a director takes on responsibilities, particularly where there are only two. The balance sheet and profit and loss account and director’s report for each year should have been signed by her. A director who continues as a director but abdicates all responsibility is not lightly to be excused. If she had reasonably endeavoured to keep abreast of company affairs and had been deceived (and there is no such evidence) it might be possible to excuse her.”
29. At the hearing of the application, Counsel for the second named respondent submitted, with disarming directness, that the Court should simply prefer and apply the very different approach of Palmer J. in the Supreme Court of New South Wales decision in Southern Cross Interiors Pty Ltd & Anor. v Deputy Commissioner of Taxation &Ors. [2001] 188 ALR 114. Having considered that submission carefully, I am satisfied that I cannot do so for a number of reasons.
30. The first and most obvious is that, as Parke J. pointed out in Irish Trust Bank Ltd v Central Bank of Ireland [1976]7] ILRM 50 and Clarke J. reiterated in Re Worldport Ireland Ltd [2005] IEHC 189, as a matter of judicial comity, a judge of first instance should normally follow the decision of another judge of the same court unless there are substantial reasons for believing that the initial judgment was wrong. In this instance, I believe that the analysis of Carroll J. in Re Hunting Lodges was correct and that the decision of Palmer J. in Southern Cross Interiors is readily distinguishable from the present case.
31. The latter decision does indeed, at first glance, appear to encapsulate a starkly different approach to the question of the degree of responsibility in relation to the conduct of a company’s affairs borne by a ‘token’ or ‘passive’ director who agrees to act as such due to ‘the ties of affection’, when compared to that assumed by company directors generally. The passage from that judgment upon which the second named respondent relies is the following (at para. 137):
“I hold that Mrs Clark accepted appointment as a director of [the company] with no understanding of all of the duties and responsibilities which that office entailed. That lack of understanding was not due to any fault on her part. Her husband failed to explain to her anything of the responsibilities which directorship involved and did not suggest that she seek advice of further information. She accepted the appointment at his request because of the trust and confidence which she had in him, believing, at his suggestion, that the appointment was only a formal requirement. She did not participate in the management of the company because she did not believe that she was required to do so. That belief was induced by her husband’s statements at the time he requested her to become a director and by his subsequent conduct in not discussing the company’s affairs with her. She acted upon that belief because of the trust and confidence she placed in her husband and because she thought that he was knowledgeable in such matters. Nothing was brought to her attention during her directorship which should have put her on enquiry as to [the company’s] financial position or as to her responsibilities as director.”
32. The significant point of distinction between the two cases is that Southern Cross Interiors does not address the question whether the relevant respondent there had ‘acted responsibly in relation to the conduct of the affairs of the company’ at issue in that case. Plainly, she hadn’t. Instead, it addresses the quite different question of whether the respondent had a ‘good reason’ for failing to participate in the management of the company, which question forms the test in that jurisdiction for the application of a statutory defence to a claim by the tax authorities for an indemnity against the directors of a company, in the face of a claim by the liquidator of that company for a rebate, as an ‘unfair preference’, of a payment that the company had previously made to those authorities.
33. It was just such a claim for an indemnity in Southern Cross Interiors that, in the view of Palmer J. on the facts presented, brought into play long established legal principles, such as that of unconscionability, whereby a person may be excused from the legal consequences of his or her acts where the terms of the relevant bargain are so lop-sided or so unjust as to be contrary to good conscience, and which prompted a discussion of the manner in which the potential incurring of any such liability by an unsuspecting or incautious spouse had recently acquired in that jurisdiction the provocative tag of ‘sexually transmitted debt.’
34. The question addressed in the context of the defence available to the relevant respondent in Southern Cross Interiors was not whether she had acted responsibly as a director of the company concerned but, rather, as the passage quoted above demonstrates, whether, in failing to do so, she was ever conscious of those responsibilities. It is the former question, not the latter one, that the Court is required to address under s. 150 of the 1990 Act (and, in respect of more recent cases, under s. 819 of the Companies Act 2014).
35. One further point must be made about the decision of the Supreme Court of New South Wales in Southern Cross Interiors. It is that Palmer J. prefaced the paragraph of his judgment quoted above with the observation that it would be ‘a comparatively rare case in which a wife is able to establish such a defence on the facts.’ I take that to imply that unsupported assertions of inexperience; naivety; lack of awareness of the responsibilities of company directorship; trust and confidence in a spouse who describes the appointment as a formality and who says that the management of the company may be left entirely to him; and so forth, would be closely scrutinised by the courts in that jurisdiction when required to adjudicate on any assertion of the statutory defence.
36. In my view, such close scrutiny is particularly necessary where a court is presented – as this Court has been in a significant number of s. 150 applications subsequent to the decision in Southern Cross Interiors – with bare recitals on oath by respondents who have acted as ‘token directors’, borrowing, in whole or in part, or closely paraphrasing, the precise language that Palmer J. used when giving an example of the kind of circumstances in which a spouse may have ‘good reason’ for not participating in the management of a company. Such terse averments are then invariably used, as they have been in this case, in support of the contention that the respondent concerned has acted responsibly in relation to the conduct of the relevant company’s affairs by playing no part whatsoever in the conduct of those affairs or in the supervision of that conduct.
37. As the Court of Appeal recently confirmed in the case of Director of Corporate Enforcement v. Walsh [2016] IECA 2, it would be contrary to the whole notion of proper corporate regulation to exonerate token directors from liability or relieve them from restriction on the basis of the passive nature of their role. To limit the test for irresponsibility to cases where the evidence demonstrates, in addition, “some real moral blameworthiness” by reference to the decision of Carroll J. in Re Hunting Lodges, would be to conflate the test for fraudulent trading under s. 297 of the Companies Act 1963 (which was at issue there) with that for irresponsible conduct under s. 150 of the 1990 Act or, as is now the position, under s. 819 of the Companies Act 2014 (‘the 2014 Act’).
38. Against that background, insofar as the decision of O’Neill J. in Re Lynrowan Enterprises Ltd (31 July 2002, unreported, High Court) [2002] 7 JIC 3119 cannot be reconciled with the earlier decision of Carroll J. in Re Hunting Lodges (or the subsequent decision of the Court of Appeal in Director of Corporate Enforcement v Walsh), I must decline to follow it as a decision reached per incuriam. The apparent acceptance by the Court in that case of the proposition that a de jure director of a company who takes no part whatsoever in the affairs of a company, and is not expected to do so, is not thereby irresponsible in relation to the conduct of the affairs of the company, appears to have occurred in circumstances where the decision in Re Hunting Lodges was not drawn to the Court’s attention; it was certainly not cited in the Court’s judgment, which is more particularly concerned with the role of another respondent in that case as a de facto or shadow director.
39. I am reinforced in that view by a consideration of the following passage from the judgment of Cooke J. in the more recent case of Mannion v Connolly & Anor [2013] IEHC 544 concerning the position of a respondent director who, while “not indifferent” to the proper management of the Company, became a co-director of the company with her husband only to fulfil the legal requirement for two directors:
“It is well settled, however, that inactivity or non-involvement on the part of a director is no answer to an application for restriction under s.150. An individual who accepts a position of director of a company even if only to fulfil the legal requirement must accept the responsibilities and potential consequences that go with it. A director who has played no part whatsoever in the conduct of the affairs of an insolvent company cannot claim to have acted responsibly in relation to them.”
40. There is one feature of this case that has given me pause in applying the law as I have just identified it. That is the subsequent commencement in force of the 2014 Act, abolishing the minimum two director requirement under s. 174 of the Companies Act 1963 and replacing it with a single director requirement under s. 128 of the new Act.
41. This was foreshadowed in Courtney, The Law of Companies, 3rd ed. (Dublin, 2012) in which, at p. 898, having addressed the decision in Southern Cross Interiors, the learned author expressed the view that ‘rather than operate as a defence to negligently acting as a second statutory director, the fact that some spouses are prevailed upon to meet a statutory minimum of two directors should instead cause us to consider whether private companies should be required to have two directors.’ Indeed, the Company Law Reform Group, of which Dr Courtney was the chairman, in its First Report of the 31st December 2001 (para. 11.8.7), had recommended the relevant change on the basis that the practice of appointing a second ‘token’ director serves ‘only to devalue and trivialise the office of director of a company’.
42. While it is possible to speculate that, had the relevant provision of the 2014 Act been in force at the material time, the second named respondent might never have been called upon to accept appointment as a director of the company and might never have done so, the reality is that it was not then in force and she did accept appointment as a director of the company. I cannot approach this case on the basis of the law as it is now but rather I am constrained to deal with it on the basis of the law as it stood at the material time.
43. The submission was made on behalf of the second named respondent that it would be ‘unjust and inequitable’ to restrict her from ‘being involved in business’, because of her particular personal circumstances. Those circumstances are asserted to be that her home has been repossessed; that she has separated from her husband who is undergoing a process of bankruptcy in Scotland; and that she is a qualified foot health practitioner who would like to set up a small business, as such, to support herself and her young son, which – she contends – would ‘necessitate’ setting up a limited company through which that business could operate.
44. There are three fundamental difficulties with that submission, quite apart from the failure of the second named respondent to provide any evidence beyond her own bare averments to corroborate any of the assertions of fact that underpin it. The first is that it assumes that the Court has a discretion, irrespective of any failure on her part to establish that she acted responsibly, to refrain from making a declaration of restriction against her on ad misericordiam or other grounds. The Court has no such discretion. Where an application is brought in the appropriate circumstances and where the defences in s. 150(2) are found not to apply, the making of a restriction order is mandatory; so much is clear from the decision in Business Communications Ltd v Baxter and Parsons (21 July 1995, unreported) HC, Murphy J.
45. The second difficulty is that the submission equates a declaration of restriction under s. 150 of the 1990 Act with a ‘restriction on being involved in business.’ A declaration of restriction under s. 150 of the 1990 Act, now s. 819 of the Companies Act 2014, does not restrict a person from being involved in business. In essence, it restricts the person concerned from being a director of a private limited company with an allotted share capital of less than €100,000. It does not prevent a person from being a director of a private limited company that meets that share capital requirement. More significantly for the second named respondent, in view of her straitened financial circumstances as she describes them, it does not restrict a person from engaging in business in partnership, or as a sole trader or as an employee of another individual, partnership or company.
46. The last observation leads directly to the third difficulty, which is that the second named respondent has done nothing to explain, much less corroborate, her assertion that she can only work as a foot health practitioner through the medium of her own private limited company.
Conclusion
47. For the reasons I have given, in circumstances where the second named respondent has failed to establish a defence under s. 150(2) of the 1990 Act, the Court is obliged to make the appropriate declaration of restriction under s. 150(1) of that Act against the second named respondent and I will do so.
Newcastle Timber (In Liquidation), Re
[2001] IEHC 146 (16th October, 2001)
JUDGMENT of Mr. Justice McCracken delivered the 16th day of October, 2001
1. These are applications by George Maloney, the Official Liquidator of each of the companies named in the title hereof (hereinafter called the “the Liquidator”) for Orders under Section 160 of the Companies Act, 1990 or alternatively under Section 150 of the Companies Act, 1990 restricting or disqualifying George Smullen and Madeline Smullen as company directors. Both of the companies in the title hereof named (and hereafter called respectively “Newcastle” and “Abwood”) are being wound up by the Court, the Liquidator is Liquidator of both companies and George Smullen and Madeline Smullen are Directors of both companies, and accordingly these applications have been heard together by the consent of all parties. Counsel for the Liquidator has made it quite clear that he is primarily seeking an Order of disqualification pursuant to Section 160.
2. Newcastle was incorporated on 9th October, 1987 and its primary business was operating a sawmill from a property in Glenealy, Co. Wicklow. By Order of the High Court dated 2nd November, 1998 made on the application of the Collector General, Newcastle was wound up and the Liquidator was appointed official Liquidator. At the date of the winding up the company had virtually no assets, as its premises had already been sold to satisfy a secured creditor, and had liabilities amounting to some £230,000. By far the largest creditor was the Revenue and trade creditors amounted to less than £24,000.
3. Abwood was incorporated on 16th October, 1989 and its principle business was the manufacture and sale of garden sheds and fencing. By Order of the High Court dated 1st November, 1999 Abwood was wound up and the Liquidator was appointed official Liquidator. According to its statement of affairs it had assets of some £17,700 and liabilities of almost £175,000, of which just over £50,000 was due to George Smullen and just over £120,000 was due to the Revenue. A sum of £3,600 was due to trade creditors.
Section 60(2) of the Companies Act, 1990, so far as it is relevant to these applications, reads:-
“Where the Court is satisfied in any proceedings or as a result of an application under this Section that:-
(b) A person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any breach of his duty as such promoter, officer, auditor, receiver, liquidator or examiner, or
(d) The conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company.
The Court may, of its own motion, or as a result of the application, make a Disqualification Order against such a person for such a period as it sees fit”.
Section 150 of the same Act, so far as it is relevant, reads:-
“(1) 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 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 or formation of any company unless it meets the requirements set out in subsection (3)……
(2) The matters referred to in subsection (1) are:-
(a) That the person concerned has acted honestly and responsibility in relation to the conduct of the affairs of the company and that there is not other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section”.
4. A very important distinction between these two sections is that under Section 160 where, as in the present case, an application is made by a Liquidator for a Disqualification Order, the onus is clearly on the Liquidator to satisfy the Court that the conditions of the section have been complied with, while on the other hand, under Section 150, the Court must make a Restriction Order unless it is satisfied that the person acted honestly and responsibly, and therefore the onus is on the Director concerned to satisfy the Court as to his honesty and responsibility. It is probably also relevant to note that Section 150 applies only to Directors and secretaries of companies, while Section 160 applies to a much wider range of persons connected with a company. Even more rellevant in the present case is that the use of the word “may” in Section 160 gives the Court a discretion which does not exist under Section 150.
5. The Liquidator has identified five matters in respect of which he claims that the Directors did not act honestly and responsibly, and I would propose to deal with them individually.
(1) They failed to keep proper books and records of accounts.
6. The Directors claim that they employed a full-time bookkeeper and full and proper records were maintained, but that they were destroyed in a fire in Newcastle’s premises after it ceased trading but before it was wound up. They also point out that there were a number of inspections of the records of the company by the Revenue during its period of trading. There is no doubt that such a fire did take place, and there is no suggestion that this fire was caused by anything other than vandalism. It is now really impossible to say what books and records did exist.
(2) They failed to lodge the required returns to both Revenue and to the Companies Office on time.
7. There is no doubt that annual returns were not filed in the Companies Office by either company for many years, and indeed Abwood was struck off for failure to make returns. There was a clear default on the part of the Directors in this regard. With regard to Revenue returns, it is clear that at least some returns were made, and although there certainly would appear to be discrepancies in relation to these returns, these do not appear to be unduly serious.
(3) They traded while being unable to discharge their liabilities, in particular the Revenue liabilities.
8. In my view this is by far the most serious allegation against the Directors, and in effect it is conceded by the Directors that for the years 1992 to 1995 inclusive Newcastle did trade insolvently without discharging liabilities to the Revenue Commissioners, and indeed by implication a similar admission appears to be made in relation to Abwood for the years 1993 and 1994. The Directors blame the downfall of the company on a fire in the company’s premises in 1991, and the fact that the premises were under insured, and really only seek to justify the insolvent trading by averring that they believed the company’s problems were not insuperable and that its trading performance could be turned round. I am inclined to the view that this was a genuine, although highly unrealistic, belief, in that the Directors do appear to have invested some £60,000 of their own money in the company during this period, all of which has been lost. The fact remains that the trading losses were of a considerable magnitude and the clear implication is that there was a deliberate policy not to discharge the Revenue debts.
(4) They exercised preference in the payment of debts to certain trade creditors in preference to the Revenue Commissioners when the company ceased to trade.
9. It is again conceded by the Directors that comparatively small sums were paid to trade creditors from money that came in from debtors after the company ceased to trade, and that again the Revenue liabilities were completely ignored. While the amounts involved were not great, it was clearly in the Directors’ interest to keep trade creditors happy so that they could continue in the same kind of business in the future.
(5) Irregularities existed with regard to the sale of the property at Glenealy Village, Co. Wicklow with the purchase of the property by Mr. Smullen himself from the company.
10. The property in Glenealy was mortgaged to Lombard and Ulster Bank and Ulster Bank, and when the company ceased trading, the Banks threatened to appoint a Receiver. The banks agreed to accept the sum of £127,000 in full and final settlement of the liabilities to them, which liabilities in fact amounted to over £200,000. Accordingly, Mr. Smullen assumed the liability for the £127,000 and in effect purchased the property from the company for this sum. Before doing so he took the precaution of obtaining two valuations, one of which was for £95,000 and the other for £100,000. It should be said that Mr. Smullen was in any event bound to discharge this money as he had given personal guarantees to the Bank. However, while the procedures which were followed may have been somewhat irregular, the net effect was that Mr. Smullen discharged the debts due to both Banks, and the Banks agreed not to make any further claim as unsecured creditors for the balance against the company. It seems to me that, however unusual the arrangement, it has not in any way prejudiced the rights of any creditor, and may indeed be said to have been for the benefit of the creditors. I think the only possible criticism is that the Revenue, as by far the largest creditor, were not informed by the Directors of their actions. However, I do not think that there was any irresponsibility involved.
11. To sum up, therefore, insofar as the proceedings under Section 160 are concerned, the Liquidator has discharged the onus on him in relation to the failure by the company to make company office returns, the fact that the company traded while insolvent for some 4 years and the fact that after the company ceased to trade, they discharged trade creditors in priority to the Revenue.
12. The primary questions remains as to whether these actions on the part of the Directors amounted to a breach of duty or were actions which made the Directors unfit to be concerned in the management of a company, and secondly, whether, if so, I should exercise the undoubted discretion given by making an Order under the section.
13. The approach to be taken by the Court has been very clearly set out by Browne-Wilkinson V. C. in In Re: Low-line Motors Limited (1988) B.C.L.C. 698 in a passage which has been approved and applied by the late Shanley J. in La Moselle Clothing Limited (in Liquidation) and Anor. -v- Soualhi (1988) 2 ILRM 345, by McGuinness J. in the Supreme Court in Re: Squash (Ireland) Limited (unreported 8th February, 2001) and by Smyth J. in C.B. Readymix Limited (unreported 20th July, 2001). This passage reads:-
“What is the proper approach to deciding whether someone is unfit to be a Director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past record as Directors of insolvent companies have shown them to be a danger to creditors and others. Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case the conduct complained of must display a lack of commercial probity, although I have no doubt that in the extreme case of gross negligence or total incompetence, disqualification could be appropriate.”
14. While these comments were made in the context of slightly different legislation in the United Kingdom, I, like my colleagues, have no doubt that it is the proper approach to be taken both under Section 150 and Section 160. As I have already said, many faults can be found in the conduct of the Directors in the present case. I have no doubt that they acted incompetently, and, particularly in relation to insolvent trading and preference of trade creditors, I think they behaved irresponsibly. However, the Liquidator has not satisfied me that the Directors were so much in breach of their duties, that they are unfit to be concerned of the management of a company, particularly in view of the undoubted discretion which I have in this regard. The Liquidator did rely to a considerable degree on the fact that the Revenue debts remained unpaid, and cited a number of authorities as to the importance of this aspect of the case, but taking the overall behaviour of the Directors I do not think it could be said that a Disqualification Order is necessary to protect the public against their future conduct. I say this particularly as it is now some six years since Newcastle ceased trading, during which time George Smullen has been intimately concerned in the management of another company, which appears to be trading successfully and is complying with its obligations to the Revenue. Accordingly, I will refuse an Order under Section 160.
15. I do feel, however, that the Directors have been sufficiently irresponsible to warrant a Restriction Order being made under Section 150. To trade while insolvent for 1 year, or perhaps 2 years, in the hope that the company may trade out of its problems is understandable, but to have kept Newcastle trading insolvently for some 4 years, and allowing Revenue debts to build up, appears to me to be totally irresponsible. I do not have the same discretion under Section 150 as I have under Section 160, and the Directors have not satisfied me that they acted responsibly, and accordingly I think I am bound to make an Order under Section 150. I would point out, of course, that this is not an absolute disqualification from acting as a Director, provided the company concerned has a sufficient capital to satisfy this section. I should say that, while I realise that Mrs. Madeline Smullen played little or no part in running these companies, I think that the Order must in the circumstances of this case be made against her as well.
Gasco Ltd. (in liquidation), Re
[2001] IEHC 20 (5th February, 2001)
JUDGMENT of Mr. Justice McCracken delivered the 5th day of February, 2001.
1. This is an Application by Liam Dowdall (hereinafter called “The Liquidator”), the Official Liquidator of Gasco Limited (hereinafter called “The Company”) pursuant to Section 150 of the Companies Act 1990. Section 150(1) reads:-
“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 any way, whether directly or indirectly, as a Director or Secretary or be concerned or take part in a promotion or formation of any company unless it meets the requirements set out in subsection (3) …..”
2. As far as this Application is concerned, the relevant provision of Section 150(2) is:-
“(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 not other reason why it would be just and equitable that he should be subject to the restrictions imposed by this Section”
3. The persons to whom the chapter applies are set out in Section 149(2) of the Act as follows:-
“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 its winding up”.
Section 149(5) provides:-
“This chapter applies to shadow Directors as it applies to Directors.”
4. The Order in this case is being sought by the Liquidator against three persons, namely Richard Berney and Thomas Doyle, both of whom clearly were Directors of the company within the 12 months preceding the liquidation, although both had resigned before the actual date of the liquidation , and David Rooney, against whom the relief is sought on the basis that he was a shadow Director. Mr. Rooney denies that he was a shadow Director, and his position must be determined as a preliminary issue before considering whether an Order should be made against him.
5. The company has an issued share capital of 100,002 shares. 50 per cent of these shares are in the name of Mr. Doyle, but would appear to be held by him in trust for Mr. Rooney. The other 50 per cent are in the name of a company and it is not clear who is the beneficial owner. The company commenced trading in October, 1993 as a heating and plumbing supplies company and it appears from the returns in the company’s office that Mr. Berney was appointed Secretary and a Director on 1st October, 1995 and that Thomas Doyle was appointed a Director on the same date, although both claim in their Affidavits not to have been appointed Director until 1996. Mr. Berney is described as Financial Controller and Mr. Doyle as Managing Director. Sometime about the year 1995 the company expanded its business to include the supply of kitchen units.
6. There are serious disputes on the Affidavits between the three Respondents as to the management of the company. Mr. Berney says that the company traded profitably for the financial year ending 31st August, 1997, but as there are no accounts in existence either for that year or for the previous year it is impossible to verify this statement. However, it seems extremely unlikely that this was so in view of the financial situation of the company on 27th April, 1998, the date of the winding up Order. It is also unlikely because it appears that the need for a substantial injection of capital was realised by everybody much earlier than this, and indeed Mr. Berney states that a business plan was drawn up in 1996, but that he refused to contribute any capital on the basis he did not think that the proposed injection of £200,000.00 was sufficient.
7. It is clear that the side of the business which was concerned with gas fittings was very closely tied in with a company called Hutchinson and Rooney Limited, which traded as Gazview. This company was also controlled by Mr. Rooney and purchased large quantities of equipment from the company. One of the reasons given by Mr. Berney for the failure of the company is the large and extended credit given by the company to Gazview, and it would appear that by the end of October, 1997 Gazview was indebted to the company in the sum of some £213,000.00.
8. Mr. Berney resigned as a Director on 26th September, 1997 although he claims that he was excluded from management meetings of the company from 15th May, 1997, and this claim is not denied either by Mr. Rooney or by Mr. Doyle. Mr. Doyle remained as Managing Director until December, 1997, when he obtained employment abroad and also resigned as a Director. It is notable that neither Mr. Berney nor Mr. Doyle were replaced as Directors, and in effect the company operated from December, 1997 until its winding up without any Directors.
9. I propose now to turn to examine the position of each of the Respondents.
David Rooney
10. Mr. Rooney was never a Director, but he was certainly a 50 per cent shareholder and possibly a 100 per cent shareholder beneficially. The company had very close trading relationships with Hutchinson and Rooney Limited. He claims that he was not involved in the day to day management of the company, but this is contradicted by the evidence of both Mr. Berney and Mr. Doyle. Mr. Berney says that the management of the company was in effect controlled by Mr. Rooney, and Mr. Doyle says that all decisions in respect of the affairs of the company were made collectively by all the shareholders and directors, and further says that a decision taken in late 1997, after Mr. Berney had left, to move to new premises was taken jointly by the shareholders and directors of the company, including Mr. Doyle and Mr. Rooney. Mr. Rooney was a signatory on the company’s cheques, which Mr. Berney was not. Finally, after Mr. Doyle left in December 1997, Mr. Rooney, although the controlling shareholder, chose not to appoint new directors, but instead, in his own words:-
“Following the resignations of both Directors of the said company two persons were put in place to help alleviate the problems with the said company, namely Mr. Dermot Maloney and Mr. Joe Flood. With their assistance the outstanding debts and problems regarding credit facilities were brought under control.”
11. Clearly, therefore, Mr. Rooney effectively employed two persons to run the company, one of whom, Mr. Joe Flood, had previously been an employee of Hutchinson and Rooney Limited. There is no doubt that from December, 1997 Mr. Rooney effectively ran the company on his own. In these circumstances, he was clearly a shadow Director and therefore his position falls to be considered under Section 150 of the Companies Act 1990.
12. In the circumstances where Mr. Rooney was the controlling shareholder of both Hutchinson and Rooney Limited and of the company, and was a signatory on the cheques of the company and took part in the decision making in the company, he must have been aware of the level of credit being afforded to Hutchinson and Rooney Limited, and he acknowledges that at least from the middle of 1997 he was aware of the cash flow problems and of the business plan being proposed. Notwithstanding this, the high level of credit afforded to Hutchinson and Rooney Limited continued certainly into February 1998. Mr. Rooney has sought to show that Hutchinson and Rooney Limited made very substantial payments to the company in 1997, but I am far from satisfied that the reality of the balance between the two companies changed very much, at least until a very late stage.
13. One of the serious difficulties for the liquidator in this case is that, when he took possession of the assets after his appointment, he found virtually no books and records. Mr. Berney has sworn that when he left the company there were basic monthly accounts showing profit and loss and monthly debtors and creditors balances and statements. The Liquidator has been unable to locate any monthly accounts for 1997 or 1998 and there are a number of gaps in the invoice files. Mr. Doyle confirms that monthly management accounts were prepared, but again he left the Company some four months before its liquidation. The clear implication is that either these records never existed, or they were in some way destroyed during the last few months of the life of the company when Mr. Rooney was effectively in charge. By this stage the company was in serious difficulties, and if only for the purpose of collecting in as many debts as possible, it was very important that the company should have kept proper records. However, the liquidator avers that this lack of records in respect of many of the Company’s debtors have contributed to the poor recovery of debts by him.
14. It should be said that, according to the statement of affairs, Hutchinson and Rooney Limited only owed the company £13, 514.00 at the date of the winding up, and Mr. Berney states the sum owing is £15,000.00. However, because of the lack of records, the liquidator has been unable to find evidence of substantial payments to the company in the last few months of its existence. One would expect that if such substantial payments were made to reduce the debt to these sort of figures, Mr. Rooney would have been very careful to keep records to demonstrate that Hutchinson and Rooney Limited had paid off most of their debt. The fact that no such records exist may make me suspect many things, but certainly is clear evidence of serious irresponsibility by Mr. Rooney during the last few months of the trading life of the company.
15. In addition to that act of irresponsibility, Mr. Rooney was aware according to his own affidavit by June 1997 at the latest of serious cash flow problems and of the existence of a business plan. I think it is clear from the other affidavits that he must have been aware of these matters sometime before that. Nevertheless, he allowed credit which had been extended to his own company, Hutchinson and Rooney Limited, to remain at a level of over £200,000.00 at least until mid-February 1998. To have done so in the knowledge of the cash flow problems of the company was again gravely irresponsible.
16. For these reasons I would propose to make a restriction order under Section 150 against Mr. Rooney.
Mr. Berney
17. Mr. Berney was called the Financial Controller of the company. He was effectively the in-house Accountant to the company. He has sworn that monthly management accounts and profit and loss accounts were kept during his time. This has been confirmed by Mr. Doyle and certainly has not been denied by Mr. Rooney, and therefore I must accept that this was so. I also accept his averment that he was effectively excluded form the management of the company from May 1997, that is for almost a year before the winding up, as again this is not denied by Mr. Rooney. He saw the difficulties that the company was in at a fairly early stage and in conjunction with Mr. Doyle drew up the business plan. However, he appears to have disagreed with Mr. Doyle and Mr. Rooney as to the amount of capital necessary, and refused to make any contribution himself. Ultimately, having been excluded from management, he resigned as a Director in September 1997.
18. There is one provision of Section 149 of the Companies Act 1990 which in my view is of considerable importance, and assists in indicating the purposes and scope of the part of the Act dealing with restrictions on directors. Section 149 (2) applies the restriction provisions to any person who is a director of the relevant company at the date of, or within twelve months prior to, the commencement of its winding up. I think it is quite significant that no restrictions can attach to somebody who ceased to be a director of the Company more than twelve months before the winding up. This seems to me to indicate that the primary aim of Section 150 is to deal with directors who have behaved irresponsibly or dishonestly during the last twelve months of the life of the Company, and that the actions of a director who is subject to Section 150 are to be looked at primarily in the light of his actions during that period. This indeed has a considerable practical logic, as it is presumably intended to focus attention on the behaviour of the directors in the period leading up to the winding up, and to try to ensure that they deal responsibly with creditors when a company is in difficulties. In my view, therefore, there should be particular scrutiny of the actions of directors during the final months before winding up.
19. Applying that to the present case, Mr. Berney recognised serious problems in the company more than twelve months before it was wound up, he assisted in drawing up a business plan, but when it did not meet what he considered the necessary requirements, he refused to go along with it, and possibly for that reason was excluded from management. He then resigned within a few months. In my view he did act honestly and responsibly in his actions in relation to the Company and I would not propose to make a restriction order against him.
Thomas Doyle
20. Mr. Doyle was termed the Managing Director of the company, and he was clearly in charge of sales and technical matters. It appears that he was aware at all times that the company had difficulties, and indeed was primarily responsible for ensuring that the company entered into an agreement with the revenue to reduce its revenue debt in an orderly manner, and which agreement appears to have been adhered to a considerable degree. When the business plan was prepared, he believed that the proposed introduction of £200,000.00 would be sufficient, and this is clearly so in that he himself advanced £25,000.00 to the company out of monies he borrowed in August 1997. He confirms that there were monthly management accounts, and says that these accounts did not show that the Company was unable to pay its debts as they fell due. I certainly accept that he believed in August 1997 that the Company could be saved, and that, even if his belief was mistaken, it was genuinely held. I also accept that he believed, whether correct or otherwise, that from mid 1997 Mr. Rooney was trying to reduce the debt owed to the company by Hutchinson and Rooney Limited.
21. I think that undoubtedly Mr. Doyle was somewhat naive in relation to the financial affairs of the company, and probably did not concern himself as much as he ought to have in this regard. However, in considering the application of Section 150 to individual directors, regard must be had to the area of management in the company for which that director was personally responsible. This does not mean, of course, that a director can disclaim responsibility altogether on the basis that financial matters were the responsibility of another director, but nevertheless one of the matters to be considered in assessing whether he acted responsibly was whether his reliance on the actions of another director was itself responsible. In this case, my impression is that Mr. Doyle initially relied upon Mr. Berney, and latterly relied on Mr. Rooney with an optimism that certainly was not justified, but which perhaps was understandable. While I think Mr. Doyle’s position is somewhat borderline, on balance he did act honestly and responsibly and no order will be made against him.
Worldport Ireland Limited (In Liquidation) v Companies Act
[2005] IEHC 467 (16 February 2005)
JUDGMENT delivered by the Honourable Mr Justice O’Leary on the 16th day of February, 2005
Background facts
The Court by order dated 21st October 2002 appointed one David M Hughes as Official Liquidator of Worldport Ireland Limited. As part of the process the liquidator has applied to the court for orders restricting the right of involvement of three entities in limited liability companies within the state under the provisions of Section 150 of the Companies Act 1990 as amended. Two of those in respect of whom orders are sought are natural persons in respect of whom the court will in due course consider evidence and adjudicate on the application. These persons are not parties to this preliminary application.
The third entity is a corporate entity Worldport Communications Inc. 2626 Warrenville Road Suite 160, Downer’s Grove IL 60515 USA. The basis of the liquidators application in respect of this entity is that it acted as a shadow director of the liquidated company and therefore falls within the class of persons and/or entities in respect of which the restrictions envisaged by the Companies Act, 1990 can be applied.
Worldport Communications Inc (herein after called the respondent), without prejudice to its other rights herein has requested adjudication on the following points:
1. Whether a body corporate can be a shadow director for the purposes of an application for restriction under Section 150 of the Companies Act 1990 (as amended).
2. Whether a body corporate, incorporated outside the jurisdiction, can be a shadow director for the purposes of an application for restriction under Section 150 of the Companies Act 1990 (as amended).
The Court has consented to consider these matters by means of a preliminary application. In so doing the court has confined itself to the terms of the above questions and has in no way entered into the merits of this particular case. In the event of the questions being answered in the positive the application can proceed on its merits in tandem with the other applications in respect of natural persons outlined above. Therefore for the purpose of this application the court acts on the presumption that circumstances exist which would ground an application in this case if Worldport Communications Inc were a natural person.
Submission of Respondent
The respondent submits that as it is disqualified from appointment as a director of the company it cannot be a shadow director as this status is only attainable by those who have the capacity to be appointed directors.
Submission of Applicant
The applicant submits that the term shadow director is not a class of directorship but an entirely separate status. He therefore submits that the rules, which forbid the appointment of certain categories of persons and entities as directors e.g. a bankrupt person or a corporate body, do not apply to shadow directors.
The Law and matters arising therefrom
Section 11 (d) Interpretation Act 1937 provides as follows:
Person. The word “person” shall, unless the contrary intention appears, be construed as importing a body corporate (whether a corporation aggregate or a corporation sole) and an unincorporated body of persons as well as an individual.
The law relating to the prohibition of a body corporate from the post of director of a company is to be found in Companies Act 1963 S I76 as follows:
S. 176 (1) – A company shall not, after the expiation of 3 months from the operative date, have as a director of the company a corporate body.
It is noteworthy that the legislature provided a short transitional period during which a body corporate could act as a director. This demonstrates that the provision exists as a matter of policy rather than demonstrating an inherent lack of capacity.
The law relating to shadow directors is set out in Companies Act 1990 S 27 as follows:
S. 27 – Subject to subsection (2), a person in accordance with whose directions or instructions the directors of a company are accustomed to act (in this Act referred to as a “shadow director”) shall be treated for the purposes of this part as a director of the company unless the directors are accustomed to so act by reason only that they do so on advice given by him in a professional capacity.
It is of significance that in establishing the status or office of ‘shadow director’ the legislation was enacted in a manner, which uses the formula that the person who falls within the definition shall be treated as a director, rather than providing, for example, that the person so appointed shall be deemed to be a director. The concept of treating a person in a particular way is well known in ordinary life and its natural and ordinary meaning is well understood. If one chooses to treat a domestic employee as a ‘member of the family’ that does not mean that by that action one confers the status of member of the family on that person. It appears to the court that this section is highly suggestive of a meaning of shadow director that is independent of the office of director rather than categorising shadow directors as a particular sub-class of director.
There are other indications within the Companies Acts of the nature of shadow directors.
Part VII of the Companies Act 1990 sets out the restrictions that can be imposed on directors of insolvent companies. These are enumerated in Chapter 1 commencing at section 149.
In Section 149 (5) the following is enacted
(5) This Chapter applies to shadow directors as it applies to directors.
Similar words are used in Section 166(2) of the same Act.
The use of this formulation indicates that the legislature intended to convey that the two categories were separate and distinct. If shadow directors were merely a subcategory of directors this would surely have been conveyed by the use in an appropriate place of an expression such as ‘This Chapter applies to directors (including shadow directors)’.
The separate status of shadow directors is also indicated by S 172 3(b)(ii) which defines officer for a particular purpose as a person connected, within the meaning of Section 26 of the Companies Act 1990, with a director, and a shadow director.
Primary Conclusion
The only conclusion open to this Court on the nature of the status enjoyed by shadow directors is that they are a separate entity than directors. The legislation makes the distinction clear. Specifically it appears to the court that shadow directors are not a subset of the office of directors but entirely separate (though of course connected).
Prima facie therefore Section 176 (1) Companies Act 1963 which does not mention shadow director has no application to shadow directors and there is no reason based on this provision why a body corporate cannot be a shadow director for the purpose of a restriction under Section 150 Companies Act 1990.
Subsidiary Submissions
Section 150 Companies Act, 1990 provides a mechanism for the imposition of restrictions on directors and shadow directors. The restrictions prevent, for a period of 5 years, the director or shadow director from acting, directly or indirectly, as a director or secretary or from being concerned or taking part in the promotion or formation of any company (subject to certain exceptions).
It was submitted by the respondent that as the nature of the restriction imposed by a Section 150 order includes restrictions on the appointment of the person in question as a director (for 5 years) and as a corporate entity cannot in any event be a director, the section was never intended to apply to corporate shadow directors.
This submission is wrong, in the view of the Court, for two reasons.
Firstly, the restrictions under the section go far beyond the mere prohibition on the person acting as a director. A section 150 order also prevents the affected party from direct or indirect involvement in the promotion or formation of a company. The fact that some of the provisions have no effect in an individual case does not render the section redundant in such cases. The remainder of the restrictions have both a purpose and an effect. In the present instance the restriction, if imposed, will prevent the respondent from involvement in the promotion and formation of an Irish company for a 5-year period except under the exceptions provided in the legislation.
Secondly, the law is replete with penalties and restrictions that are applied one on top of another. Examples are imprisonment of a person already serving a sentence and disqualification of a motor vehicle driver already disqualified for another offence. Further these examples are not limited to cases where the sentence is just lengthening the term of a previous decision but frequently are applied concurrently. The making of a Section 150 order would add a further reason for disqualification to the already existing ban but would not be in conflict with any existing statutory provision.
There is no reason why the limited nature of the application of the restriction, if applied, should be a bar to the implementation of a provision that will have a significant effect on the capacity of an entity to promote Irish companies.
The respondent made a separate submission as follows. As section 150 permits those restricted under the Act to be involved in companies which fulfil the requirements of 150 (3) it was submitted this would allow a disqualified corporate shadow director (who fulfilled the requirements of 150 (3)) to be a company director contrary to Section 176 of Companies Act 1963.
This submission is rejected. Any person who wishes to take the benefit of the provisions Section 150 (3) must of course also fulfil the general requirements for appointment as a director. As an example if a person disqualified under Section 150 was also adjudged a bankrupt he/she could not become a company director based on the Section 150 (3) exception as he/she is otherwise disqualified.
The lifting of any restriction imposed by a Section 150 order (whether by the use of section 150 (3) or otherwise) cannot guarantee that the person in question is thereby eligible to be appointed a director. He/she must of course fulfil the other requirements for appointment. The inclusion of corporate entities among those eligible for restriction will not create a problem as these entities will remain disqualified for appointment as directors under S 176 Companies Act 1963.
Having considered the foregoing the court is of the view that a body corporate can be a shadow director both generally and for the purpose of S 150 Companies Act 1990.
The second matter to be determined is whether a body incorporated outside the State can be a shadow director for the purposes of S 150 Companies Act 1990.
This arises from the combined effect of S176 Companies Act 1963 as set out above and the definition of ‘body corporate’ in S 2(3) of the same Act. This provides as follows:
(3) Reference in this Act to a body corporate or to a corporation shall be construed as not including a corporation sole but as including a company incorporated outside the State.
It is clear that a body corporate (including a company outside the State) is covered by the Section 176 prohibition and Section 150 makes no distinction between the way in which Irish based company promoters and foreign-based ones are dealt with. There appears to be no reason why the conclusion on the eligibility of bodies corporate to be shadow directors should not apply equally to Irish and foreign entities
Conclusion
For the purposes of this application the Court answers in the affirmative the two preliminary points raised.
Cost to be dealt with at the hearing of the substantive application.
Mitek Holdings Ltd & The Companies Acts
[2010] IESC 31 (13 May 2010)
JUDGMENT of Mr. Justice Fennelly delivered the 13th day of May 2010.
1. On 10th May 2005 the High Court on foot of the judgment of Finlay Geoghegan J of 21st February 2005 made an order (“the restriction order”) pursuant to section 150(1) of the Companies Act 1990 that the above named appellants be restricted for a period of five years from acting as directors of any company. The application for the restriction order had been made by the respondent as liquidator of the five companies, in Liquidation, named in the title to this appeal. I will describe him as the liquidator. The appellants have appealed to this Court against the making of the restriction order.
2. The companies were formerly part of the Irish Antigen group of companies. Following examinership, a scheme of arrangement was approved by the High Court. The Antigen companies and the Antigen business were sold out of the examinership near the end of 2001. Part of the group represented by four of the above companies became part of the Canadian Miza Group. The appellants were made directors of the companies. The companies did not trade successfully.
3. The applicant was appointed as official liquidator on 11th December 2002. In his application to the High Court for the making of the restriction order, he contended that the appellants had failed to act responsibly as directors of the companies under four headings. The learned trial judge found that the appellants had failed to satisfy her, the burden being upon them, that they had acted responsibly in respect of two of these headings. They appeal to this Court against these findings.
4. A proper appreciation of the discharge by the appellants of their responsibilities as directors necessitates an account of the background to the former Antigen group, the scheme of arrangement which emerged from the examinership and the particular acts which most concerned the liquidator.
5. The Antigen group was a niche manufacturer of branded and non-branded generic pharmaceutical products. In the year 2000, the group was required to upgrade its manufacturing processes in order to comply with the requirements of the Irish Medicines Board. For that purpose, it had to cease production in July 2000. These and related events caused financial difficulties for the group. In May 2001, the companies were placed in examinership.
6. The examiner formulated a scheme of arrangement, which he proposed to the creditors in August 2001. It provided that all creditors would be paid in full the principal sums due to them over a specified period.
7. The High Court approved the scheme of arrangement on 8th November 2001. The shareholdings and assets of the group were acquired in a joint venture between Goldshield, a United Kingdom group, and the Canadian corporation, Miza Inc. Each of the participants was to contribute equally to the total investment of IR£24 million. The principal shareholder in Antigen was to be paid IR£6.7 and IR£17.3 million was to be provided to discharge the creditors of the group companies.
8. The plan under the scheme of arrangement and related agreements was that the manufacturing part of the Antigen group consisting of the four companies named in the title, namely Mitek Holdings Limited, Mitek Pharmaceuticals Limited, Castleholding Investment Company Limited and Mitek Limited were purchased by Miza Ireland Limited. The last-named company was a shelf company incorporated for the purpose of giving effect to the scheme of arrangement and is a wholly owned subsidiary of Miza Inc. Three other companies of the former Antigen group, which had been responsible for the worldwide sale and distribution of the Antigen pharmaceutical products, were purchased by a subsidiary of Goldshield called Startville Limited. Thus, manufacturing assets went to the Miza group and sales and marketing went to Goldshield through its subsidiary, Startville.
9. On 3rd November 2001, a Sale and Purchase Agreement was entered into providing for the sale, in effect, of the manufacturing part of the Antigen group to Miza and of the sale and marketing part to a subsidiary of Goldshield. That agreement also provided that the two purchasers would invest sufficient funds to enable the companies to comply with the obligations under the scheme of arrangement and to facilitate the companies continuing to trade as going concerns.
10. Under a manufacturing and supply agreement dated 28th November 2001, Mitek Pharmaceuticals Limited, the manufacturing company, was obliged to sell virtually all its products to Goldshield Group plc, a United Kingdom public company, which had acquired the relevant product licences and authorizations. Dr. Kachkar claims that the price was intended to cover all manufacturing costs plus a premium or fixed profit of IR£0.4p per ampoule, which would enable the Miza group to meet all of its costs as well as payments to creditors under the scheme of arrangement.
11. A crucially important aspect of these arrangements was that all Antigen group creditors were to be paid in full the principal sums due to them. Payments were to be made over a period of time ranging from three months in some cases to thirty months in others. Furthermore, the investor envisaged by the scheme of arrangement was to be willing to invest sufficient money in the companies to facilitate compliance with the proposals and to enable them to continue to trade as going concerns. Under an associated sale and purchase agreement an assurance was provided that the two purchasers under the agreement, namely Miza Inc. and Goldshield would invest sufficient funds to enable the companies to comply with their obligations under the scheme of arrangement and to facilitate their continuing to trade as going concerns.
12. The appellants were appointed as directors of each of the five relevant companies in November 2001. It is not disputed that they were directors at least until October 2002 when they purported to resign. The liquidator questions the validity of these resignations. It is sufficient that they were directors at the date of or within twelve months prior to the commencement of the winding up each of the companies.
13. Dr. Jack Kachkar was the majority shareholder, president and chief executive officer of Miza Inc., a privately held Canadian pharmaceutical manufacturing consulting and holding company. Mr. Robert McClellan Carrigan was executive vice-president of that corporation with responsibility for operations. It appears from Dr. Kachkar’s own affidavit that the various arms of the Miza group in the UK, USA and Canada had variously been placed in administration, sold or ceased to be active by the middle of 2003.
14. Dr. Kachkar became a director of the companies in order to assist management on business and corporate development matters. Being based in Canada, he was not involved in the day-to-day affairs of the companies, but saw his role as being to bring to a successful conclusion the acquisition of the Antigen group of companies, and to give effect to the business and commercial agreement with the Goldshield group.
15. The scheme of arrangement and associated agreements were structured in a way which left the companies under significant pressure from the outset. An important part of the scheme as carried out was that Startville Limited acquired the product licences, authorisations, goodwill and finished stock of the former Antigen Pharmaceuticals Limited thus diminishing the asset base of the companies. Startville paid IR£6.7, but this money was used to fund the purchase of the shares of the ultimate shareholder in the Antigen group, Mr. George Fasenfeld. Thus the liquid assets available to meet the commitments to creditors under the scheme of arrangement had been substantially depleted. In addition, the gross margins provided under the exclusive sale agreement whereby the Miza group companies sold product to Goldshield were substantially lower than what had obtained prior to November 2001. At the same time, the Miza group assumed the liabilities.
16. In these circumstances, in the absence of any new injection of funds, the companies were simply unable to discharge the payments due to the former Antigen creditors. The first such payment, which fell due in February 2002, was to have been €2,206,966. The companies were in a position to pay only €1,217,651. In the view of the liquidator, it was then apparent that the group was insolvent. The companies continued, nonetheless, to trade and to incur further liabilities.
17. The liquidator swore in his grounding affidavit that all of the companies were unable to pay their debts within the meaning of section 214 of the Companies Act, 1963. This is not disputed. The core of the liquidator’s complaint against the appellants is that they permitted Miza Inc. (the Canadian parent) to diminish the asset base of the companies by extracting fixed assets and working capital to the value of approximately €2.8 million. Against this background, the companies were unable to pay the creditors the monies due under the scheme of arrangement. Neither Miza Inc. nor Goldshield was willing to make any direct investment in the companies.
18. The liquidator complains, in addition, that the appellants did not act responsibly in the granting of security in September 2002 to CCL Industries.
19. Consequently, on 29th October 2002, the principal creditors, Bank of Ireland and Bank of Scotland (Ireland) Ltd petitioned for the appointment of an examiner. Mr. Tom Grace (the liquidator) was appointed as examiner prior to the liquidation. By that time, creditors had increased from IR£17.3 million (€21.9 million) to IR£22.5 million (€28.6 million). A total of €4.9 million had been paid to scheme creditors up to 29th October 2002 as against €10 million, which, in accordance with the scheme of arrangement should have been paid by that stage. No new investor could be found. It was not possible to formulate a new scheme of arrangement and Mr. Grace was appointed as Official Liquidator on 11th December 2002.
20. Dr. Kachkar says that there were delays in establishing a proper commercial relationship with Goldshield, which failed to purchase and resell the Miza group production during the first quarter of 2002. He claims that Goldshield did not comply with its payment and pricing obligations. There were extensive disputes with Goldshield and the Miza group faced declining cash flow relative to the needs of the business. During 2002, the group used the resources and personnel of its sister companies in Canada to improve the operation, quality systems and working conditions of the former Antigen group.
22. Dr. Kachkar refers extensively to attempts to finance the Miza group as a whole from late 2001 and into 2002. The financial negotiations were complex and fraught with difficulties. In the end, the principal proposed financier withdrew. In the interim, however, a shareholder in the parent Canadian company provided interim finance in the sum of US$3 million to the Miza Group. A part of this amount, a sum of less than US$1 million was provided by way of loan to the Irish companies but the lender required security over those companies’ assets. In addition, less than a month after this money was provided, Miza Inc. extracted €501,526 in cash from the Miza group for the use of its own operations and those of its UK subsidiary.
23. The liquidator has provided a schedule showing that that between 28th February 2002 and 20th August 2002 a total of €2,836,381 was transferred out of the Irish Miza Group. In round figures €922,000 went to Miza Pharmaceuticals USA, Inc, €1,211,000 went to Miza Pharmaceuticals (UK) Ltd and €703,000 went to Miza Pharmaceuticals Inc (the Canadian Company). One item related to the transfer of a fixed asset valued at less than €50,000. It is unnecessary to consider it in detail. An item of €185,000 related to the collection by Miza Pharmaceuticals Inc. of a debt due to Mitek Pharmaceuticals Ltd.
24. The liquidator was informed by the financial controller of Mitek Pharmaceuticals Ltd. that these cash extractions were justified as being management charges, although no justifying documentation was provided. There was no agreed structure of intra-company and corporate overhead allocations or transfers between the Irish companies and Miza Inc. and other companies in the group. In a letter of 2nd December 2002 Mr. Carrigan wrote to the Group Financial Controller in Ireland stating that:
“ all said funds transferred between the Miza Group of Companies consisted of inter-company and corporate allocations and overhead recoveries. Consequently, said funds were transferred without any terms or conditions.”
On 6th June 2003, Dr. Kachkar said in a letter to the liquidator:
“there were no material transfers to any person during the period commencing 12 months prior to December 11th 2002 other then inter-company and corporate allocations and/or transfers as was normal company practice in the Miza group of Companies.”
25. In his affidavit in reply to the liquidator’s application, Dr. Kachkar repeated this justification in different words. He said that the company charges were fully reflected in group accounts and referred to what he described as sample correspondence regarding the group’s “corporate policy of accounting for inter-company transfers and allocations.” The exhibited correspondence does not include any document describing any group policy. It seems to show sums amounting to a total of almost US$800,000 deducted from the Irish companies up to April 2002. These figures do not appear to correspond with the list of transfers exhibited by the liquidator. In any event, they are not quantified, in any way, so as to reflect the value of any services supposedly provided to the Irish companies.
26. At a telephonic meeting of the board of directors of Miza Ireland Ltd on 10th September 2002, Dr. Kachkar indicated that it would not be possible to continue to trade in the event that Goldshield did not support the specific requirements to improve the performance of the business.
27. The liquidator brought this application in the High Court by notice of motion dated 6th November 2003. He had reported to the Director of Corporate Enforcement pursuant to section 56 of the Company Law Enforcement Act, 2001. The Director did not relieve him pursuant to that section of his obligation to make application to the High Court pursuant to section 150 of the Companies Act, 1990.
The High Court Judgment
28. The learned judge stated that no question arose relating to the honesty of the appellants in relation to the conduct of the affairs of any of the five companies of which they were directors. She pointed out that the liquidator had raised matters for consideration under four headings. The following is an abbreviated version of those complaints:
1. That the appellants had taken part in the scheme of arrangement when funding had not been provided by Miza Inc.; this was not upheld by the learned judge and is now not relevant, though it remains as part of the background;
2. The liquidator’s allegation that the appellants permitted or directed the payment of sums and assets to the value of some €2.8 million is central to the appeal. It was contended that these transfers were made on the basis of inter-company charges but without any real basis, legal or otherwise, that the companies were insolvent at the time and were unable to make payments due to the scheme creditors;
3. The allegation that the appellants procured arrangements for the Irish companies to give security at a time when the companies were insolvent also remains an issue. At this stage, the relevant security is a composite guarantee and mortgage debenture dated 13th September 2002.
4. The allegation that the appellants permitted the Irish companies to continue to trade while insolvent was not upheld by the learned judge and is no longer relevant.
29. The learned judge referred to the following authorities: La Moselle Clothing Limited v Soualhi [1998] I.L.R.M. 345; Re Squash (Ireland) Limited [2001] 3 IR 35; Re Barings plc. and others; Secretary of State for Trade and Industry v Baker and others (No. 5) [1999] 1 BCLC 433; 360 Atlantic (Ireland) Limited (in receivership and liquidation) [2004] 4 IR 266. In particular, the learned judge recalled her own decision in Tralee Beef and Lamb Limited (In Liquidation) of 20th July, 2004), [2005] 1 ILRM 34, where she had “concluded that the court……should also have regard to the duties imposed on a director at common law.” The judgment of this Court on appeal from her judgment in Tralee Beef and Lamb Limited (in Liquidation), now reported at [2008] 3 IR 347 had not yet been decided.
30. Recalling her own judgment in 360 Atlantic (Ireland) Limited (in receivership and liquidation), she said:
“The fact that the Company is a wholly owned subsidiary within a worldwide group does not appear to alter the legal principles applicable to the duties of directors but rather to create a particular factual scenario which must be taken into account when considering the discharge of those duties.”
Thus she accepted that:
“. . . it would appear totally permissible and indeed a proper exercise of the duties of directors in the interests of the [Irish] Company for the directors to fully take into account and indeed even to follow the policies adopted for the entire group when managing the business of the Irish Company.”
31. She explained her general approach to considering whether a director had acted responsibly as follows:
“whether a director of the wholly owned Irish subsidiary company acted responsibly in the sense of discharging the minimum common law duties, he must be able to establish at a minimum that he did inform himself about the affairs of the Irish subsidiary company as distinct from any other company within the group and together with his fellow directors that he did take real steps to consider and take decisions upon at least significant transactions to be entered into or projects undertaken by the Irish subsidiary company. There must be evidence of a real consideration by the directors of whether significant transactions or operations to be undertaken were desirable in the interest of the Irish subsidiary company or could be said to be for the benefit of the Irish subsidiary company. I readily recognise that in many instances the interests of the Irish subsidiary company may be so intertwined with the affairs of the group as a whole that the answer may be obvious. However, the fact that the answer is obvious does not appear to absolve the directors from at least addressing the question.”
32. She took into account the fact that the appellants were the only executive directors of other companies within the worldwide Miza Group who were also directors of the Irish companies. She accepted that they were under obligations to all the companies within the Miza Group. She also took into account the fact that they were appointed as directors of the Irish companies at a time when they were coming out of examinership and had obligations under a scheme of arrangement which had been put to and approved by the High Court with their support. She commented on the “straitened financial circumstances” of the companies in the context of the directors’ common-law duty of care.
33. She said that she could not be satisfied that the appellants had acted responsibly as directors in relation to the control and supervision of the financial affairs of the companies in particular relating to the intra-group corporate charges and transfers out of Ireland to other Miza Group companies and the granting of security in September 2002 to CCL Industries. She commented:
“Dr. Kachkar and Mr. Carrigan as directors of the companies in the Irish Miza Group do not appear between February 2002 and August 2002 to have taken steps to supervise and control the financial affairs of the Irish Miza companies particularly in relation to transfers of monies from it to other companies within the Miza worldwide group. There is no evidence that Dr. Kachkar and Mr. Carrigan as directors of the Irish companies took any decision in this period as to the appropriateness of the transfers being directed having regard to the then financial situation of the Irish companies.”
34. Having noted various factors which may have contributed to the difficult financial situation of the Irish Miza group, she observed that “if anything this increased the obligations on Dr. Kachkar and Mr. Carrigan as directors of the Irish companies to control and supervise the financial affairs of those companies.” With regard to the work done by executives of other Miza companies for the benefit of the Irish group, she questioned the appropriateness of the Irish companies making payments to meet such charges at a time when they were unable to pay the amounts due to creditors under the scheme of arrangement as well as being under considerable financial pressure from their own suppliers. She noted the absence of any evidence that the appellants considered or made any decision as to whether these payments were appropriate in the interest of the Irish Miza Group.
35. Finally, she observed that from the beginning of September 2002 the appellants were properly concerned about the ability of the Irish Miza Group to continue trading. Nonetheless, on 13 September 2002 a debenture was created over its assets in favour of CCL Industries Inc. She considered that no real explanation had been offered as to how it was proper to issue a debenture, given the financial condition of the group.
36. Accordingly, she was not satisfied that the appellants had acted responsibly as directors in relation to the conduct of the affairs of the companies.
The Appeal
37. The appellants, in their notice of appeal, mount a broad challenge to the conclusions of the learned trial judge that they had failed to act responsibly in either of the two principal respects in which she had made adverse findings. They cite, in particular, firstly, the responsibilities and duties owed by them to the entire Miza Group and, secondly, the fact that the Irish Miza Group had been in examinership between May and November 2001.
38. The points made by the parties on the appeal may be summarised as follows:
1. In accordance with the decision of this Court in Re Tralee Beef & Lamb Limited [2008] 3 IR 347, the reliance by the learned trial judge on claimed breaches by the appellants of their common law duties as directors entailed an erroneous amplification of the legal principles applicable to a restriction application. The appellants maintain that this case is governed by the decision in Re Tralee Beef & Lamb. The respondent points out that at the date of the hearing in the High Court, the Court had already, on 20th July 2004, in Tralee Beef and Lamb, amplified the La Moselle criteria. The Tralee Beef and Lamb decision was referred to by Counsel for one of the other directors, Mary Buckley and had been opened to the Court. Thus, any amplification of the La Moselle criteria did not occur after the hearing, which was a principal reason underlying the judgment on appeal in Tralee Beef and Lamb.
2. When due account is taken of the obligations of directors acting within the context of a group of companies, there was no breach by the appellants of any common law duties as directors. The respondent emphasises that the appellants were the executive directors of the Miza Companies and importantly they were also directors of Miza Pharmaceuticals Inc. (“Miza Inc”) a Canadian Corporation and the parent company of Miza Ireland Limited.
Consideration and Conclusions
39. The judgment of this Court in Tralee Beef and Lamb and, in particular, the judgment of Hardiman J in that case looms large in the appellants’ submissions, from, firstly, a substantive and, secondly, a procedural point of view.
40. It is best, prior to any consideration of the case law, to commence by setting out the statutory basis of the exercise of the jurisdiction to restrict persons from acting as directors of companies.
41. Section 150(1) of the Companies Act 1990 appears in Chapter 1 of Part VII of that Act. That Chapter applies, by virtue of section 149 to any company where it is proved that, at the date of commencement of its winding-up, it is unable to pay its debts. The Chapter applies to any person who was a director of such a company at the date of or within 12 months prior to the commencement of its winding-up. Section 150(1) provides:
1) 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 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 meets the requirements set out in subsection (3); and, in subsequent provisions of this Part, the expression “a person to whom section 150 applies” shall be construed as a reference to a person in respect of whom such a declaration has been made.
(2) The matters referred to in subsection (1) are—
( 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, or
( b ) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a financial institution in connection with the giving of credit facilities to the company by such institution, provided that the institution in question has not obtained from any director of the company a personal or individual guarantee of repayment to it of the loans or other forms of credit advanced to the company, or
( c ) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a venture capital company in connection with the purchase of, or subscription for, shares by it in the first-mentioned company.
42. As can be seen, sub-paragraphs (b) and (c), which are to be read in the light of the definitions set out in sub-section (5), exempt directors to whom their provisions apply. Subsection (3) very significantly limits the effect of a restriction under the section. A restriction order does not apply to participation as a director in a company which meets certain minimum nominal and allotted share capital requirements. Following amendment by section 41 of the Company Law Enforcement Act, 2001, these minimum capital requirements are the euro equivalent of £250,000 in the case of a public limited company and of £50,000 in the case of any other company. Nonetheless, the section is mandatory, where it applies. The disqualification must be for a fixed period of five years.
43. Section 56 of the Company Law Enforcement Act, 2001 imposes an obligation on the liquidator of an insolvent company. Within a specified period after his reporting to the Director of Corporate Enforcement, he is obliged to “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.” As already stated, he was not relieved of his obligation in the present case.
44. The essential question for the court, in a case such as the present is whether “the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company.” The question is further narrowed, in this case, by the express acknowledgement by the learned High Court judge that there was no question touching or affecting in any way the honesty of the two directors. It is fair to say that the liquidator had not made any allegation casting doubts on their honesty.
45. Thus, what they were required to show, the burden being on them, was that they had acted “responsibly in relation to the conduct of the affairs of the company.” The section does not qualify any further the aspects of “the affairs of the company” in respect of which the directors must be shown to have behaved responsibly.
46. Murphy J, in his judgment of 21st July 1995, (still unreported) in Business Communications Limited v. Baxter and Parsons examined the restriction provisions of the Act of 1990 in considerable detail. Like all the observations of that great exponent of company law, his opinions concerning section 150 are deserving of particular respect. He considered that these provisions were “of the utmost importance to the commercial community generally and in particular to those who have undertaken or propose to undertake the duties of a director of a company.” It is apparent that Murphy J did not regard the purpose of the section to be limited to protection of the interests of the company itself. He said at page 15:
“Since the introduction of legislation permitting people to incorporate with limited liability, it has been recognised that the protection which this conferred on those taking advantage of the privilege had to be counterbalanced by statutory provisions to protect and safeguard the interests of those dealing with them.”
47. He compared the circumstances in which restrictions might be imposed under section 150 and those in which directors might be disqualified under chapter II (in effect, section 160) of the same Part of the Act. In the latter case, he considered that there was a “substantial burden to be discharged before the Court has jurisdiction to make the appropriate order.” This led him to conclude that “the comprehensive nature of a disqualification order…… is seen as constituting an appropriately severe sentence for conduct which is manifestly more blameworthy than merely failing to exercise an appropriate degree of responsibility in relation to an insolvent company in liquidation of which the person was a director.” He continued:
“ It is hardly unreasonable to require a person who was a director of a failed company in respect of which he committed no misconduct but for which he neglected to exercise an appropriate degree of responsibility from resuming such an office in another company, again with the privilege of limited liability except on condition that a stipulated and not excessive sum was provided for the paid-up capital thereof.”
48. Murphy J did not, it appears, consider the restriction order in itself to represent a particularly severe sanction, but he observed: “it would seem that the more serious penalty which the restraining order imposes is the stigma which attaches as a result of the making of the order and its filing in the Companies Office.” With regard to the application of section 150, he thought that all that was required was “the exercise of a suitable degree of responsibility.” He continued:
“Ordinarily responsibility would entail compliance with the principal features of the Companies Acts and the maintenance of the records required by those Acts. The records may be basic in form and modest in appearance. But they must exist in such a form as to enable the directors to make reasonable commercial decisions and auditors (or Liquidators) to understand and follow the transactions in which the company was engaged.”
49. While that passage might give the impression that the learned judge intended to restrict consideration of responsibility by directors to the quality of the record keeping by the company, it is quite apparent from the concluding passages of the judgment that that would be a misreading. He cautioned that:
“Of course, one must be careful not to be wise after the event. There must be no ‘witch hunt’ because the business failed as businesses will.”
50. He ultimately refused the directors’ applications for exemption following expressions of opinion that continuing to trade in circumstances which he described was “imprudent in the extreme,” and that, in a particular period, the conduct of the affairs of the company and the making of such payments was “of questionable commercial morality.” These matters went far beyond mere considerations of record keeping.
51. More recently, consideration of the application of section 150 have generally commenced with the judgment of Shanley J in La Moselle Clothing Ltd. v. Soualhi [1998] 2 ILRM 345. The learned judge, like Murphy J, commented on the lacuna in the Act arising from the absence of any provision imposing an obligation on any particular party to bring an application before the court for the restriction of a director. This deficiency has now been corrected in section 56 of the Act of 2001.
52. Shanley J referred extensively to the judgment of Murphy J in Business Communications Limited v Baxter, before stating that “ there are three hurdles that a director [faced with such an application] has to surmount:
(a) he must establish that he has acted honestly in relation to the affairs of the company.
(b) he must establish that he has acted responsibly in relation to the affairs of the company.
(c) he must satisfy the court that there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by the section.”
53. He referred to the absence, in England and Wales, of any provision comparable to section 150. He then referred to section 300 of the [English] Companies Act 1985, providing for disqualification of directors found “unfit to be concerned in the management of a company.” In this context, he quoted, an oft-cited passage from the judgment Browne-Wilkinson V.C. in In re Lo-Line Motors Ltd. [1988] B.C.L.C 698 concerning unfitness of directors. That is a question which may arise, in our law, under section 160 of the Act of 1990, but is not precisely the same as whether the director has acted “responsibly.” Nonetheless, the dictum of Browne-Wilkinson V.C. has been found to be of assistance. It is as follows:
‘What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors and others … Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.’
54. Shanley J proceeded to interpret section 150 in the following way:
“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 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.”
55. McGuinness J, in her judgment, with which the other members of this Court agreed, in Re Squash Ireland Limited [2001] 3 I.R. 31 at 40 said that she found this “passage of considerable assistance in the instant case…” McGuinness J expressed herself as follows regarding the inquiry as to whether a director had acted responsibly:
“The question before the court is whether they acted responsibly and this, as was correctly stated by counsel on behalf of the respondent must be judged by an objective standard. In the cases of all companies which have become insolvent it is likely that some criticisms of the directors may be made; but to categorise conduct as irresponsible I feel that one must go further.
56. She added that she agreed with Shanley J that “the court should look at the entire tenure of the director and not simply at the few months in the run up to the liquidation.” She proceeded to examine the behaviour of the directors under a number of headings. Only one of these related to whether the director had complied with the Companies Acts.
57. It does not appear to me that either the decision of Shanley J or its approval by this Court limits consideration of the responsibility of directors’ behaviour to the first of the headings mentioned by Shanley J, namely the extent of compliance with the requirements of the Companies Acts. As I have already remarked, the judgment of Murphy J in Business Communications Limited v Baxter, while also referring to maintenance of the records required by the Acts, cannot properly be interpreted as limiting consideration of “responsibility of directors” to that issue. It may be, however, that the passage has been interpreted in that way. For that reason, it is necessary to consider the decisions of the High Court and of this Court in Tralee Beef and Lamb.
58. Finlay Geoghegan J in her judgment in that case, reported as Kavanagh v Delaney, delivered on 20th July 2004, cited briefly from the judgments in La Moselle and In re Squash (Ireland) Ltd. She continued, however, at page 41:
“I would respectfully suggest that the above matters need the following amplification………………Shanley J at paragraph (a) refers only to the obligations imposed on a director by the Companies Acts. At common law, directors owe duties to the company which are normally divided into duties of loyalty based on fiduciary principles developed initially by the courts of equity and duties of skill and care developed initially by the common law courts from the principles of the law of negligence. There is no suggestion in the above decisions that the courts should ignore these duties. Accordingly, it appears to me that when considering the matters referred to by Shanley J…………………… under paragraph (a) a court should have regard not only to the extent to which a director has or has not complied with any obligation imposed on him/her by the Companies Acts but also with duties imposed by common law.”
59. Finlay Geoghegan J cited extensively from authority in support of this formulation of the duties of directors. The general principle had been stated in Keane, Company Law (3rd Ed. Dublin, 2000). I will come back to this matter later. The learned author wrote as follows:
“ the directors owe a duty to the company to exercise skill and diligence in the discharge of their functions.”
60. In addition, Finlay Geoghegan J cited the decision of Roderick Murphy J in In Re Vehicle Imports Ltd. (in liquidation), [2000] IEHC 90 of 23rd day of November 2000, in which he had approved the summary of directors’ duties given in the judgment of Jonathan Parker J in Re Barings plc (No. 5) Secretary of State for Trade and Industry v Baker [1999] B.C.L.C. 433; [2000] 1 WLR 634. Finlay Geoghegan J cited the following parts of that judgment as approved by Roderick Murphy J:
• 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.
• Directors had, both collectively and individually a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.
• Whilst the directors were entitled (subject to the articles of association of the company) to delegate particular functions to those below them in a management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation did not absolve a director from the duty to supervise the discharge of the delegated functions.
• No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it had been discharged, depended on the facts of each particular case, including the director’s role in the management of the company. (As summarised on page 436)
61. The Barings Bank case concerned a disqualification order under English legislation. The Bank had famously collapsed as a result of the unauthorised trading activity of an employee, one Nick Leeson.
62. Finlay Geoghegan J, in Tralee Beef and Lamb, made restriction orders pursuant to section 150 in respect of a number of non-executive directors of the company.
63. An appeal was taken to this Court by one of the persons in respect of whom a restriction order had been made. Hardiman J delivered the unanimous judgment of this Court. He pointed out that it was undisputed that the company was, at that time of the commencement of the winding-up, unable to pay its debts. He noted the very large excess of liabilities over assets disclosed at that date. The appellant, a chartered accountant and partner in a well-known firm, had been nominated as a director solely to represent the interests of participants in a business expansion scheme. He was not expected to play any active part in the management of the company.
64. It was an important feature of the case that the liquidator of the company had unsuccessfully petitioned the Director of Corporate Enforcement to be relieved of his statutory obligation to apply for a restriction order. Hardiman J was particularly concerned that the Director of Corporate Enforcement had given no reasons for his decision and had not attended or sought to be heard either in the High Court or in this Court, a result which Hardiman J described as “unfortunate.” The result was, of course, that the liquidator accepted that he had formed the view that the appellant in that case “ had acted honestly and responsibly in relation to the affairs of the company…”
65. Hardiman J commented at page 354: “ this lends an air of unreality to the circumstances of the present case: the applicant has positively concluded that the fourth respondent [the appellant] did act in an honest and responsible manner in relation to the company.”
66. Hardiman J noted that the section had been interpreted as placing the burden of proof on the respondent director to show that he had acted “ responsibly and honestly in relation to the company.” While expressing some doubt as to the compatibility of such a provision with fundamental fairness and constitutional justice. he also noted a passage from Keane, on Company Law, the authoritative Irish work to the effect that “the burden of proof rests on the director to satisfy the court that the order should not be made…” In any event, the appellants have not, on this appeal, invited the Court to depart from its established jurisprudence to the same effect.
67. Hardiman J. in his review of the applicable case-law, cited La Moselle and Re Squash Ireland, before citing the passage from the High Court judgment under appeal in that case, where she referred to “amplification” of the criteria set out by Shanley J. At p[age 357, he described the passage as “central to the result arrived at” and said that the “judgment of the High Court judge [had] discussed common law duties of directors at great length,” describing this amplification of the criteria as the “engine of the finding” against the appellant. It seems to me that the decisive passage in the judgement is the following at page 358:
“ Having regard to the need to respect the [appellant’s] Constitutional rights, not only to fair procedures to his good name and the associated right to earn a living by the practice of his profession, I do not consider that it was appropriate to “amplify” the criteria for restricting a director after the hearing. Furthermore, I do not consider that the findings against the [appellant] which were in fact made could have been made without such amplification.”
68. It is apparent from this passage that Hardiman J was predominantly concerned to emphasise the need to observe fair procedures insofar as the appellant was concerned. He was at pains ( page 357) to emphasise that he was “in agreement with these propositions of law enunciated by the High Court Judge,” especially as they were endorsed by a citation from Keane, Company Law (3rd Ed. Dublin, 2000). This discussion might, therefore, be “of the greatest use in future cases under the relevant sections.”
69. I have found it necessary to discuss the decision in Tralee Beef and Lamb because of the special reliance placed upon it by the appellants. There is a crucial procedural difference between the two cases. At the time of the High Court decision in Tralee Beef and Lamb, it had been assumed, rightly or wrongly, that the criteria adopted by Shanley J in La Moselle, understood as being limited to compliance with obligations to observe the provisions of the Companies Acts, applied unmodified. Hardiman J was concerned that an unheralded departure from or amplification of these criteria would be unfair to respondent directors. Clearly, the present case is distinguishable. The High Court judgment of Finlay Geoghegan J in Tralee Beef and Lamb had been delivered before, even if only the day before, the hearing in the present case and it was referred to in the course of argument at the hearing.
70. The passage from the third edition of Keane on Company Law in Ireland, is repeated in the Fourth Edition (Tottel publishing, Dublin 2007) at page 374. It is that:
“The director’s owe a duty to the company to exercise skill and diligence in the discharge of their functions.”
71. The learned author says that this general principle has been broken down in a succession of cases into a number of sub-propositions, “most of them tending to limit or modify the extent of the duty owed by directors.” He cites the leading case of City Equitable Fire Insurance Ltd [1925] Ch 407, where Romer J reviewed the authorities regarding the standard of care expected of directors. Firstly, he said at page 427:
“In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company’s business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. In discharging the duties of his position thus ascertained a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence. To the question of what is the particular degree of skill and diligence required of him, the authorities do not, I think, give any very clear answer.”
72. Romer J proceeded to identify “one or two other general propositions that seem to be warranted by the reported cases.” They were as follows and are discussed in the ensuing passages in Keane:
1. “A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician…………………..It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment….
2. A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so.
3. In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.”
73. It seems to me that these passages and much of the supporting citations reflect the more relaxed standards of business in another age. City Equitable concerned an action on negligence on behalf of the company against the directors, where huge losses had been suffered as a result of the fraudulent behaviour of a managing director. It is certainly of assistance to consider the scope of the duties of a director, but section 150 is not concerned with the breach of duties to the company alone. It is broader.
74. It is always appropriate to keep in the forefront of one’s mind the terms of the applicable statutory provision. The question to be considered, in a case such as the present, where no question of honesty arises, is whether the director against whom an application for a restriction order is made “has acted responsibly in relation to the conduct of the affairs of the company.” The context is, of necessity, a company which is unable to pay its debts. The court should, in the words of Shanley J “look at the entire tenure of the director and not simply at the few months in the run up to the liquidation.”
75. The respondent has referred the Court to a passage from the judgment of Clarke J in In Re Swanpool Ltd. McLaughlin v Lannen [2006] 2 ILRM 217 at page 224, as follows:
“One of the most important obligations of any director is to ensure that when a company is facing an insolvency situation, its assets are dealt with in accordance with law. For the reasons identified by McCracken J. in Gasco the actions taken at such a time must be subject to particular scrutiny. While understanding the pressures, which may have been on the directors it does have to be noted that all directors in insolvent circumstances are likely to be subjected to significant pressure. It is their job to resist such pressure and to ensure that the company’s assets are properly dealt with. Any significant failure in that regard has to be taken as demonstrating a level of irresponsibility sufficient to warrant making an order under the section.”
76. Earlier in the same judgment, Clarke J had made remarks which rightly emphasied the need, above all, to consider the responsibility of directors in their context. He thought that, in broad terms there were three types of situation with which the court is typically concerned:
1. “Issues involving compliance by the company with its formal obligations under the Companies Acts including keeping books and records, making returns, holding meetings and the like;
2. The commercial management of the company most particularly at the period when the company was insolvent or heading in that direction; and
3. Compliance by the directors with the obligations identified in Frederick Inns [ reported at [1994] 1 I.L.R.M. 387] 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 want to find it but the went.”
77. In my view, this is a particularly useful classification of the principal settings for consideration of the responsibility of directors in a modern business. It concentrates correctly on the essential question raised by section 150 in a case, such as the present, where no issue of honesty arises. It does not concern itself with formal definitions of the scope of directors’ duties which predominantly concerned the obligations owed by directors to the company itself. The concern of the legislation is wider. The further passage the judgment of Clarke J, like that already cited from Murphy J in Business Communications, demonstrates that directors should also be aware of the interests of persons dealing with the company.
78. Clarke J went on to make a number of comments which further demonstrate the need to take account, in every case, of context. He said:
“ The considerations that will apply will necessarily be different depending on the sort of issues that the court is considering. In the first category it is of course particularly important to have regard to the entire history of the involvement of the directors concerned with the company. For the very reasons identified by Murphy J in Costello Doors [High Court unreported 21st July 1995] it would be difficult to make a finding of irresponsibility where there is a relatively short-term failure to comply with formal obligations in the light of an historical compliance with such obligations over a much longer period. On the other hand a failure to comply with formal obligations which might be said to have contributed either to the insolvency or to the knowledge of parties dealing with the company of the likelihood of that insolvency will necessarily be regarded more seriously.”
These passages from the judgment of Clarke J rightly concentrate on the need to identify the issues which are important in the particular case.
79. I would not be disposed to limit the matters to which regard should be had or to substitute standardised judicial criteria for the general words of the statute. The judgments of Murphy J, Shanley J, McGuinness and Clarke J show that compliance with statutory requirements may be relevant. On the other hand, whether in that respect or in respect of common law duties, it is not every criticism that enables one, in the words of McGuinness J, “to categorise conduct as irresponsible.” In one sense, it is obvious that a director must behave responsibly. In order to discharge his duties, he must, in the first instance, inform himself about the business and affairs of the company and about his own duties as a director. Circumstances will inform the nature and extent of these duties. Even non-executive directors of companies must be increasingly conscious in the times we live in that they cannot be mere ciphers or purveyors of votes at the whim of management. There was a time when even such a distinguished text as Gower (The Principles of Modern Company Law 3rd Ed. Stevens, London 1969 page 549) could state: “ public opinion has come to recognise that directorships are little more than sinecures, requiring, at the most, attendance at occasional board meetings.” The Act of 1990 itself evinces public concern that directorships involve real responsibility and that persons who do not conform at least to some generally acceptable minimum standards either should not, in the public interest, be permitted or should be restricted in regard to future holding of directorships.
80. There will usually be a real difference between the duties of executive and non-executive directors. The latter will usually be dependant 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. Tralee Beef and Lamb was a notable example of a non-executive director with little role or influence in the company. As, in the present case, the inter-relationships of companies in a group may affect the extent of a director’s responsibilities. In the light of these considerations, I turn to the present case.
Application to the present case
81. The appellants were, in effect, the controlling directors of the companies from the moment of the implementation of the scheme of arrangement. There was only one other director of four of the companies, namely Ms. Mary Buckley. As the liquidator swore in his affidavit, the appellants were much more actively involved in the affairs of the companies than she. The appellants represented the interests of the Canadian Miza group of which the Irish group was, in effect, a wholly owned subsidiary. As already stated, Dr. Kachkar was the majority shareholder, president and chief executive officer of Miza Inc., and Mr. McClellan Carrigan was executive vice-president of that corporation with responsibility for operations.
82. An outstanding feature of the situation facing the appellants from the beginning was that the Irish group was emerging from examinership burdened with the obligation to repay IR£17.3 million to the creditors of the former Antigen group. It would be unable to meet these payments in the absence of a combination of the subscription of new capital and/or successful trading.
83. Dr. Kachkar has described his own role as being “to bring to a successful conclusion the acquisition of the Antigen group of companies, including a business and commercial agreement with the Goldshield Group of Companies.” He describes receiving reports from management with regard to the sales, financial, business and technical affairs of the subsidiaries. He received reports from Mr. Carrigan, who was in touch with and visited the Irish manufacturing facilities. He says that there were telephonic conference calls and telephonic board meetings during 2002. Dr. Kachkar explains, in his affidavit, the steps taken to improve the manufacturing and quality systems of the former Antigen companies and describes the persistent difficulties in getting Goldshield to honour the terms of the agreement under which they were purchasing all of the product.
84. It is quite apparent that Dr. Kachkar was deeply involved in the development of the business and fully aware of its problems. Equally, Mr. Carrigan was directly engaged in detail in the operations of the Irish companies. He also expressed concern about the failure of Goldshield to perform its obligations. He said that in the months from March to June 2002 “the companies failed to generate sufficient cash flow to meet the obligations of operations as well as scheme payments.”
85. The appellants did not perform the role of being merely non-executive directors. They were fully conscious of the terms of the scheme arrangement and the payments due thereunder. They were aware of and concerned about the failure of the business to perform. They appear to have placed all their faith in Goldshield and attribute the financial problems of the companies to that group. Like the learned trial judge, I find it unnecessary to resolve issues of responsibility between Goldshield and the Miza group. What is relevant is that, to the knowledge of the appellants, the companies were in severe and growing financial difficulties. They do not respond to the liquidator’s complaints regarding the failure of either of the joint-venture purchasers to invest in the companies. The fact is that, whoever was responsible, no new capital was subscribed.
86. The result is that, from as early as February 2002, the companies were simply unable to meet their obligations under this scheme of arrangement. Nonetheless, from February through to late in August 2002, the Miza parent group caused sums amounting to more than €2.8 million to be extracted from the Irish companies and transferred to the US (€922,000), UK (€1.2 million) and Canadian (€703,000).
87. I have quoted, earlier in this judgment, the terms of the replies of each of the respondents to this complaint. They say, using identical language, that these payments were “inter-company and corporate overhead allocations and/or transfers as was normal practice in the Miza group of Companies.” Mr. Carrigan also said that the funds “were transferred without any terms or conditions.” This remark is interesting when considering the affidavit of Dr. Kachkar, which I have mentioned above. The small number of accounting documents proffered seem to show a monthly charge in US dollars, but there is no reference to terms or conditions. It should be noted that the appellants are not saying that they were unaware of these payments. Given their important executive positions in the Canadian parent company, they could scarcely say so and their explanation is referable to claimed normal group practice.
88. The appellants, in putting forward this argument, appear to ignore entirely the separate corporate existence of the Irish companies and their entitlement to their own property. The learned trial judge accepted that the position of the Irish companies in a worldwide group could “create a particular factual scenario which must be taken into account when considering the discharge of those duties.” She rightly pointed out, however, that:
“There must be evidence of a real consideration by the directors of whether significant transactions or operations to be undertaken were desirable in the interest of the Irish subsidiary company or could be said to be for the benefit of the Irish subsidiary company.”
89. The appellants have provided no evidence of independent consideration of the rights and property interests of the Irish company. It may indeed be normal and permissible, within a group of companies, to take account of group policy. That does not mean that the property of one company can simply be transferred, at the behest of the parent, to another company in the group. That would be to ignore entirely the separate existence of each company. The expression “inter-company and corporate overhead allocations and/or transfers” used by the appellants is meaningless in the absence of some form of objective and lawful justification. Even if there were proper documented and quantified justification, a large question would arise as to whether the Irish companies were in a position to make corporate group contributions when they were unable to meet their basic obligations to normal creditors under the scheme of arrangement. Dr Kachkar has sworn that “Goldshield’s delay or refusal to make payments caused the scheme payments to be delayed.” He makes no attempt to explain how, in these difficult circumstances, the companies were, nonetheless, in a position to make payments to other group companies. Two payments are striking: on 28th February 2002 a sum of €185,000 was debited as relating to “the collection by Miza Pharmaceuticals Inc of monies due to Mitek Pharmaceuticals Limited from their sale of tablet equipment to Pharma Machines Limited;” on 28th April €487,751, described as “cash” was transferred to Miza Pharmaceuticals UK Limited, no reason being given.
90. I am satisfied that the learned trial judge was quite correct to hold that the appellants had not acted responsibly in this respect.
91. I am also satisfied that she was correct to hold that they had not acted responsibly in the granting of security in September 2002 to CCL Industries. There is no doubt that, by 10th September at the latest, as expressed in the clearest terms in the record of a telephonic board meeting of that date, the appellants were concerned, not to say alarmed about the financial state of the Irish companies and their ability to continue trading. On 9th September 2002 Dr. Kachkar received a letter by fax from Matheson Ormsby Prentice, who had been the Miza solicitors, warning him that “the directors will need to consider whether entering into this security arrangement is in the best interests of the Irish companies (as opposed to only the interests of MPI [Miza Pharmaceuticals Inc.])” Notwithstanding this, on the 13th September, 2002, a debenture creating security over the Irish Miza Group was given in favour of CCL Industries Inc. The learned trial judge noted that the appellants sought to justify this as being based on an earlier contractual commitment. If so, it was a commitment by Miza Inc. She considered that no real explanation had been offered by the appellants as to how it could be proper to issue a debenture in favour of CCL Industries Limited on the 13th September, 2002, in the light of the state of the companies, as disclosed at the telephonic meeting of 10th September.
92. I am in full agreement with the learned trial judge. It was not responsible to allow security to be created over the assets of the companies at a time when it was becoming very apparent that they were insolvent.
93. I would dismiss the appeal and affirm the order of the High Court.
Stafford v. Higgins & Ors
[2004] IEHC 82 (6 May 2004)
JUDGMENT of Ms. Justice Finlay Geoghegan given on the 6th day of May, 2004.
The applicant is the liquidator of Xnet Information Systems Limited (in voluntary liquidation) (“Company”), having been so appointed by resolution of the 19th July, 2002.
The respondents were all directors of the Company within 12 months of the date of commencement of the winding up. The third named respondent resigned on the 17th April, 2002 and the other respondents remained directors.
The applicant seeks a declaration of restriction of each of the respondents under s. 150(1) of the Companies Act, 1990 (as amended). The application is brought pursuant to the provisions of s. 56(2) of the Company Law Enforcement Act, 2001, the applicant not having been relieved of his obligation to bring such application by the Director of Corporate Enforcement.
It is undisputed that the Company was, at the date of commencement of the winding up, unable to pay its debts within the meaning of s. 214 of the Companies Act, 1963. Accordingly s. 150 of the Act of 1990 applies to the Company and all four respondents.
The law.
Section 150(1) of the Act of 1990 obliges the court to make the declaration of restriction sought unless it “is satisfied as to any of the matters specified in subsection (2)”. Insofar as relevant subsection (2) provides:
“(2) The matters referred to in subsection (1) are
(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…”
The applicant having established that s.150 of the Act of 1990 applies to the Company and the respondents, the onus shifts to each of the respondents to satisfy the court that he 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 declaration of restriction if he is to escape the mandatory declaration of restriction provided for in s. 150(1).
In this case each of the respondents, on the affidavits sworn, has satisfied me that he acted honestly in relation to the conduct of the affairs of this company and within the meaning of subsection (2) 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.” The more difficult issue is whether each of the respondents has satisfied me that he acted responsibly in relation to the affairs of the Company and I therefore propose setting out the law in relation to the appropriate consideration by this court of such issue. The matters to be considered by this court have been set out by the Supreme Court in Re Squash (Ireland) Ltd [2001] 3 IR 35 approving those set out by Shanley J. in La Moselle Clothing Ltd (in liquidation) and Rosegem Ltd (in liquidation) v. Soualhi [1998] 2 ILRM 345.
These are:
(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963 – 1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the director’s responsibility for the insolvency of the company.
(d) The extent of the director’s responsibility for the net deficiency in the assets of he 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 addition, the Supreme Court stated that this court should look at the entire tenure of the director and not simply the few months in the run up to the liquidation.
Finally, it appears clear from the judgment of McGuinness J. (with whom the other members of the court agreed) in Re Squash Ireland Limited that in having regard to the factors identified above the court should do so in the context of the purpose of s.150 namely to protect members of the public, creditors and others from persons whose past conduct as directors of a company have shown them to be a danger.
The onus placed on directors by the express wording of s.150(2) of the Act of 1990 is wide ranging. The practice direction of the President of the High Court requires a liquidator to set out the facts which he considers should be brought to the attention of the court for the purposes of determining the matters relevant to s.150(2) of the Act of 1990. The liquidator prior to bringing an application under s.150 has normally had an opportunity of examining the affairs of the Company. Accordingly, in practice and as in this case it is in respect of those matters which the respondents must satisfy the court that they acted responsibly. Exceptionally, in the course of an application, new matters may come to light which require justification or explanation from respondents.
In this case the matters drawn to the courts attention by the liquidator primarily relate to the conduct of the respondents surrounding the move of the company to new premises in June 2001 and the financing of same.
The facts.
The Company was incorporated on the 22nd November, 1995. The first and second named defendants were the initial shareholders and initial directors and promoters of the Company. The Company specialised in the supply and installation of data storage systems and service backup. It traded from a rented property in Dun Laoghaire, Co. Dublin. The Company became successful and turnover increased rapidly. The first named respondent states that by March 2001 the Company employed 26 people and had a turnover of €4.3m. Further, the Company was in the top ten fastest growing technology companies in Ireland for two years running. It won the Deloitte and Touche Award for results achieved for the years ended March 2000 and March 2001. It also made the top 100 European technology companies and received the “Excellence Through People” award and “Investors in People” award.
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.
The third named respondent was appointed a non-executive director and the chairman of the board on 1st June, 2000. He was appointed by reason of his prior experience and, in particular, as managing director of Cable and Wireless Ireland and a director of other companies within that group and broad management experience in the technology and communications sector. He states that over the relevant period he attended by-monthly formal board meetings each year and also attended additional meetings and provided advice and guidance as appropriate.
The fourth named respondent was employed by the Company in January 1999 as a technical consultant. In January 2000, he was promoted to technical director and became a director of the Company.
In December 2000 accordingly the first, second and fourth named respondents were executive directors of the Company and the third named respondent a non- executive director and the chairman of the board. Whilst there is some dispute between the first and second named respondents on the one hand and the third and fourth named respondents on the other as to the precise circumstances in which the property was acquired and, in particular, the knowledge of the third and fourth named respondents in relation to same, I have concluded that, as a matter of probability, the factual position in relation to the purchase of the property is as set out by the third named respondent at paragraph 7 to 11 inclusive of the first Affidavit sworn by him on the 13th October 2003. 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 remortgage 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 loan.
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.
Conclusions
The positions of the respondents in this application are different. On the facts it appears appropriate to consider the position of the first and second named respondents jointly and that of the third and fourth named respondents jointly.
Insofar as the first and second named respondents are concerned, it is submitted that the facts surrounding the financing of the purchase of the property in the spring of 2001 and the increase in rent in August 2001 is not such that it should preclude this court holding that they have acted responsibly in relation to the conduct of the affairs of this company. The first and second named respondents were directors from the commencement of the Company until it’s winding up. It is submitted that these are the only matters which raise issues about their responsibility.
On their behalf it is submitted that at the time the financing for the purchase of the property was arranged the prospect for the Company was good; the loans were intended as a temporary measure; it was anticipated that they could be repaid within six months. It was further submitted that the directors did not take legal advice at the time and were unaware that the making of such loans was or could be considered to be illegal.
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.
In relation to the third and fourth named respondents, I am satisfied that they have discharged the onus of satisfying me that they have at all times acted responsibly as directors of the Company. As already indicated, I have concluded that they were not aware of the financial transactions in the spring of 2001 or the increase in rent in August 2001. Further, I am satisfied that when they did become aware of these matters they took such steps as they could to procure the repayment of the loans and ameliorate the perceived damage caused to the Company by the making of the loans. Accordingly, I will refuse the application under s. 150 of the Act of 1990 as against the third and fourth named respondents.
Vehicle Imports Ltd. (in liquidation), Re
[2000] IEHC 90 (6th December, 2000)
Judgment of Mr. Justice Roderick H. Murphy dated 23rd day of November 2000.
ISSUES
The issues which arise in this case are the following:
Whether a director has acted honestly and responsibly in relation to the conduct of the affairs of a company which at the commencement of its winding up is unable to pay its debts where the liquidator received no books of account or other records of the company that would be of assistance to him in establishing how the company traded.
Whether where a second director, the wife of the director above referred to, has acted honestly and responsibly in relation to the conduct of the affairs of the same company in circumstances were she says that she took no part in the management of the said company and/or in relation to the maintenance of records of the said company and/or direction of the said company. She was just, she says, a named director.
Whether a third Respondent, to whom the first director advised the liquidator that all books of account and company records were kept by him and who, according to the first director, controlled 75% of the business, was a shadow director.
If a shadow director, whether the third named Respondent had acted honestly and responsibly in relation to the conduct of the affairs of the company.
BACKGROUND
1. The company was incorporated on the 6th of November 1995 and, as the name suggests, was involved in the importation of motor cars through Mototec Limited.
2. On the 31st of July 1998, two years and nine months later, Mr. David M. Hughes was appointed as liquidator under a winding up Order on the petition of Guinness & Mahon Ltd..
3. The Court required a statement of affairs to be filed by the first named Respondent within twenty one days from the date of the winding up. On the 12th of March 1999, over six months later, a statement of affairs was filed showing a deficit of £171,202. I understand that a copy of the statement of affairs was, in fact, sent to the liquidators’ solicitors in February of 1999.
4. In the absence of records, the liquidator estimates, from records from the Revenue Commissioners Vehicle Registration Tax Unit that a total of 230 vehicles were imported at a cost of £1,196,000.
5. The reconstructed bank accounts further show lodgements of £836,000 leaving a shortfall of £360,000.
6. It would appear that trade continued after the appointment of the liquidator until the 18th of September 1998.
7. During a fourteen month period from June 1996 to August 1997 Mr. Delaney, the third named Respondent, received £105,000 from the Company. Mr. Brady, the first named Respondent, can offer no explanation as to losses. He says he received a gross payment of between £400 and £500 per week from the company in respect of which no PAYE or PRSI was paid.
Mr Brady’s Evidence
8. A meeting between the first named Respondent, Mr. Brady, and the liquidator was held on the 19th of October 1998. Mr. Brady, who was the only signatory in respect of the cheques, stated that he “ would not have seen bank statements ”. He could not believe that Guinness & Mahon were owed £160,000. He said the trading ceased in May 1997.
9. Mr. Brady swore two Affidavits one on the 28th of January 1999 with the statement of affairs (filed, as referred to above on the 12th of March 1999) and another Affidavit on the 9th of March 2000.
10. In the first Affidavit Mr. Brady says that the company accountant was Mr. Tom Delaney, the third named Respondent herein in whom he had placed particular trust and reliance to carry out the necessary functions of the company in the relation to the handling of monies, the making of lodgements and the keeping of records. He says that he was unable to obtain full access to all of his records which had been formally held by Mr. Delaney when Mr. Delaney ceased practising. Some documentation was, however, retrieved from a member of Mr. Delany’s staff and given to the liquidator on the date of the swearing of that Affidavit.
11. With regard to the statement of affairs Mr. Brady refers to three vehicles which were traded in valued at £3,400. One of these, at £2,000, was retained by a customer who claimed compensation in respect of the repair of her own vehicle. While the Gardaí indicated where the vehicle was parked Mr. Brady could not locate it and now knows nothing about it.
12. Mr. Brady says that he does not know at this stage whether or not any of the furniture referred to in the statement of affairs is available since a Notice to Quit was served on the company.
13. The liabilities in respect of that, PRSI and PAYE are at present unascertainable and are matters, Mr. Brady says, which were handled by his accountant Mr. Delaney, the third named Respondent.
14. Mr. Brady’s background is detailed in his second Affidavit sworn on the 9th of March 2000. He had been employed as a shipping purchasing manager with a large motor company for fourteen years and subsequently became chairman of International Vehicle Imports were he was director and shareholder between 1989 and 1991. That company had large qualified personnel dealing with all regulatory matters and company accounts. He was not involved in the day to day work in relation to that aspect of the business.
15. From 1991 to late 1995 he was a director of Ridlie Trading Limited which was engaged in car repair and sales. The books of that company were maintained by his sister.
16. Some trading of the company, the subject matter of this Application began in the premises occupied by Ridlie Trading Limited and subsequently in premises which were owned by Mr. Delaney the third named Respondent who, from 1996 to 1997, also carried out business in the same premises.
17. Mr. Brady says he ceased trading from that premises in or about the month of April 1998 and commenced trading under his own name in association with another company Silview Trading Limited but as a sole trader under his own name.
18. Mr. Brady says that he had been introduced to Mr. Delaney early in 1996. He says that Mr. Delaney offered to make himself available as his accountant if he took the premises in which Mr. Delaney practised at a rent of £300 per week. Mr. Brady says that Mr. Delany’s practice, Delaney and Associates commenced taking over the accounting affairs of the company in or about April 1996 and were given by him old documents books and records then available. He believes that the business of the company initially operated through a bank account at the Ulster Bank in Camden Street. He has made enquiries with that bank in relation to any records they may hold in respect of company affairs but had not, at the time of the swearing of the Affidavit, received any reply.
19. Mr. Brady avers that it was a term of the agreement between the company and Delaney and Associates and, in particular, with Mr. Delaney, that they and he would look after the financial affairs of the company and carry out the preparation of all accounts and make all necessary VAT returns and keep the books of the company. All correspondence, including bank statements, were directed to the premises of Delaney & Associates.
20. Fees were paid to Delaney & Associates by way of loans form Smurfit Finance in the sum of £3,221 on the 24th of October 1996 and £4,618 on the 20th of January 1997. Repayments were made to Smurfit Finance from the company by way of regular direct debits. In addition , Mr. Brady says that Mr. Delaney opened a bank account for the company at the National Irish Bank branch at Swords under Mr. Brady’s personal guarantee. He says that Mr. Delaney advised him as to what cheques to write and payments to make. Furthermore he signed blank cheques which allowed Mr. Delaney to determine himself, as part of his auditing role according to Mr. Brady, which suppliers of cars were to be paid. He says that it was part of the function of Mr. Delaney and his firm to be substantially in control of all financial lodgements made on behalf of the company for the bank. However, it is also clear that Mr. Brady made lodgements on behalf of the company to Guinness & Mahon after the company experienced difficulties in operating its account with National Irish Bank.
21. Mr. Brady says that, while he has no recollection of ever having signed a guarantee with Guinness & Mahon (which account operated from the 3rd of February 1997), he was advised by Mr. Delaney to sign a personal guarantee in the sum of £15,000 and is currently repaying £750 per month in respect of the said guarantee.
22. While the Guinness & Mahon account operated from the 3rd of February 1997 it would appear that by June of that year the overdraft had reached £150,000. Mr. Brady says he was informed of that fact, without explanation, by Mr. Delaney.
23. In December of that year, together with Mr. Delaney, he met with Guinness & Mahon to discuss extra finance involving the re-mortgage of his family home. Mr. Delaney reassured him that the company was operating successfully.
24. Mr. Brady says he was further advised by Mr. Delaney that it was proper to make a further mortgage with Guinness & Mahon in the sum of £190,000. He was prepared to do so but his wife, the second named Respondent herein, adamantly refused to do so. The offer was never taken up.
25. Notwithstanding the reference to the meeting in December 1997 with Guinness & Mahon, it would appear from Mr. Brady’s Affidavit that the account with that bank had been closed on the 31st July 1997 and that no further cheques could be drawn on the account. Indeed Mr. Brady avers that from October 1997 he was unable to contact Mr. Delaney. He says he then became aware that Mr. Delaney was no longer carrying out the day to day supervision of the accounts. He became aware late in 1997 that only one VAT return had been completed for the company. In December 1997 he received a Notice to Quit which expired on the 11th of January 1998.
26. Mr. Brady believes that Mr. Delaney acted in such a manner as to grossly prejudice the company by failing to keep proper books and records as required in respect of which he had received a substantial level of fees.
27. Later that month, 24th of January 2000, he was able to obtain a file of documents from the security personnel at his former premises. In Mr. Bradys description these appeared to be detailed accounts and working papers of the company. However what is exhibited (and deposed to in the Affidavit of John Kelly, Chartered Secretary), are cash receipts, cheques journal and analysis and summaries together with bank account reconciliation and stock take all in respect of the period July 1996 to December 1996. There are no primary records in these papers which would appear to be working papers of Delaney & Associates.
28. While Mr. Brady comments on the liquidators Affidavit he is unable to give an explanation in respect of the monies paid to Mr. Delaney. He was never informed by Mr. Delaney that the company was insolvent. The company had ceased trading in March 1998. He had delegated accounting matters and matters of record to Delaney & Associates whom he says did not honour their obligation. He is unaware of the extent of the liabilities to the Revenue Commissioners.
29. Mr. Brady admits that the company was issued with a trading account number (TAN) number issued by the Custom and Excise Commissioners and that this number continued to be used by him after the winding up order.
30. Mr. Brady agrees that he just did not refer to the bank account with Ulster Bank which existed prior to the retention of Delaney & Associates and which did not come into his mind until the preparation of the Affidavit.
31. Mr. Brady concludes his affidavit by reference to an Application to the Court for the purpose of obliging Mr. Delaney to assist the liquidator. There follows a request for five specific Orders against Mr. Delaney, Guinness & Mahon and against officers of Guinness & Mahon.
32. This request was, however, not pursued by Mr. Brady.
Mr. Delaney’s Evidence
33. The Notice of Motion in this matter was originally returnable for the 24th of January 2000. Mr. Delaney appeared in person. Counsel for John and Philomena Brady requested time to file Affidavits.
34. Following three adjournments a Peremptory Order was made requiring Affidavits to be filed by the 15th of May 2000.
35. On that date there was no appearance for Mr. Delaney. However the liquidator had been furnished with a hand-written draft Affidavit dated the 12th of May which was subsequently typed and sworn on the 2nd of June 2000. However, Mr. Delaney did not appear on the adjourned date of the 24th of July 2000. On that date the matter was fixed for hearing on the 5th of October 2000.
36. On that date Michael Mulcahy BL, instructed by Ferris & Co. Solicitors for Mrs. Delaney, out of courtesy informed the Court that Mr. Delaney, for whom he could not act, wished to oppose the Application. Counsel informed the Court that he believed that Mr. Delaney was in Germany.
37. The Court, having been satisfied as to the Affidavit of Service of Neil Cloake sworn the 14th of January 2000 that Mr. Delaney had been served by prepaid registered post on the previous day, directed that the trial continue.
38. Both the liquidator, and the first named Respondent submitted that Mr. Delaney was a shadow director of the company. Counsel for the liquidator submitted that it was significant that Mr. Delaney did not deny that he was a shadow director.
39. His Affidavit relates to the landlord and tenant arrangement between himself and the company. He says that it was not until late 1996 that he had contact with the company other than in relation to the letting.
40. It was at that stage, Mr. Delaney avers, that Mr. Brady asked him to assist him in bringing up to date matters of an accounting nature. He completed the various returns. Mr. Delaney avers that Mr. Brady told him that he would deal with the liability to the Revenue Commissioners directly. It is significant that the draft Affidavit of the 12th of May which is described as an Affidavit and which was to be typed differs significantly insofar as it states:-
“I said we could assist him and in this regard prepared a number of value added tax returns and PAYE/PRSI returns.”
41. There is no reference in this draft to Mr. Brady dealing directly with the Revenue Commissioners in respect of the tax liability.
42. While the Court has no wish to treat what is, in fact, unsworn evidence by way of letter to the liquidators Solicitors as if it were on oath it is significant with regard to the bona fides of Mr. Delaney.
Shadow Director
43. The liquidator is clearly of the view that Mr. Delany’s relationship with, and involvement in the company was such as to constitute him as a shadow director within the meaning of Section 149(5) of the 1990 Act.
44. Shadow Director has the meaning assigned to it by Section 27 of that Act. A Shadow Director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. They are treated for the purpose of Section 150 as a director of the company unless the directors are accustomed so to act by reason only that they do so on advice given by the Shadow Director in a professional capacity.
45. Mr. Hughes, the liquidator is satisfied that Mr. Delaney had a significant involvement in and control over the management of the company’s business during its short trading life between February 1996 and 31st of July 1998. However Mr. Delaney says that he became involved in late 1996 and, accordingly to Mr. Brady was unavailable after October 1997.
46. To say that Mr. Delaney was the company’s accountant with responsible for maintaining and auditing the company accounts does not, of course, signify that he is a person in accordance with whose directions for instructions the directors of the company are accustomed to act.
47. He would appear to have received substantial monies (£105,000) in the short period in which, according to his own sworn evidence, he was involved in the company.
48. The liquidator says that until such time as Mr. Delaney makes himself amenable to the Court and offers evidence that he did not act as a shadow director that the Court should make an order restricting him from acting as a director. This is, of course, to beg the question.
49. Mr. Brady’s Affidavit goes much further in detailing the involvement of Mr. Delaney in arranging bank facilities, in dealing with lodgements (though not all lodgements) and in undertaking, on his own admission, to bring matters of an accounting nature up to date.
Applicable Law
50. These duties have been conveniently summarised in Barings and I would adopt the seven headings in the head note to the Barings case (re: Barings Plc. & Others Secretary of State for Trade and Industry-v- Baker & Others (1999) 1BCLC 433 at 435-6, more extensively detailed at 486-489) as follows:-
Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.
Subject to the articles of association of the company, the Board of Directors might delegate specific tasks and functions. Some degree of delegation was almost always essential if the company’s business was to be carried out efficiently: to that extent, there was a clear public interest in delegation by those charged with the responsibility for the management of a business.
The duty of an individual director, however does not mean that he might not delegate. Having delegated a particular function it does not mean he was no longer under any duty in relation to the discharge of that function, notwithstanding that the person to whom the function had been delegated appeared both trustworthy and capable of discharging the function.
Where delegation has taken place the Board (and the individual directors) remained responsible for the delegated function or functions and retained a residual duty of supervision and control. The precise extent of that residual duty will depend on the facts of each particular case, as will the question of whether it has been breached.
A person who accepted the office of Director of a particular company undertook the responsibility of ensuring that he understood the nature of the duty a director was called upon to perform. That duty would vary according to the size and business of that particular company and the experience or skills which the director held himself or herself out to have in support of appointment to the office. The duty included that of acting collectively to manage the company.
Where there was an issue as to the extent of a directors duties and responsibilities in any particular case, the letter of reward which he was entitled to receive or which he might reasonably have expected to receive from the company might be a relevant factor in resolving that issue. It was not that the unfitness depended on how much he was paid. The point was that the higher the level of reward, the greater the responsibilities which might reasonably be expected (prima facie at least) to go with it.
The following general propositions could be stated with respect to the directors duties:-
Directors had, both collectively and individually a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.
Whilst the directors were entitled (subject to the articles of association of the company) to delegate particular functions to those below them in a management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation did not absolve a director from the duty to supervise the discharge of the delegated functions.
No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it had been discharged, depended on the facts of each particular case, including the directors role in the management of the company. (As summarised on page 436)
Decision
51. Whilethe above matters in relation to Mr Delaney, of themselves, fall short of constituting a person a shadow director, even taken cumulatively, the uncontroverted evidence of Mr. Brady that he signed blank cheques to be filled in by Mr. Delaney does sit within the definition of shadow director in Section 27. Moreover the evidence of Mr. Brady as to the arrangements with National Irish Bank and Guinness & Mahon and, in particular, the recommendation to give security does provide substance to that allegation.
52. Of course, there may very well be plausible explanations which Mr. Delaney could have given with regard to these matters. He could very well have been a landlord and accountant providing a service to a company in difficulty.
53. However the lack of denial in his Affidavit is ominous. Mr. Delaney, I understand, is a certified accountant. If the maxim , ignorantia juris haud excusat, ignorance of the law is no defence, is to have any application it must have particular application to a person recognised by the Companies Acts as qualified to audit books of account.
54. With regard to the conflict of evidence between Mr. Brady and himself with regard to his involvement I prefer the evidence of Mr. Brady.
55. In relation to a Restriction Order I would have no hesitation in applying that to a shadow director. There is prima facie evidence which is not rebutted.
56. I think it appropriate, in the circumstances, to make such an Order but to grant a stay of twenty one days from the making of this Order to enable Mr. Delaney to make an application, if he so deems fit, under Section 152.
57. This does not, however exonerate Mr. Brady. The duties of directors have been clearly annumbrated in the cases both the liquidator and, indeed, Mr. Brady’s Counsel as referred to.
58. It is useful to distinguish the absence of books and records, or the inadequacy of any proper books and records in three time frame of the companies relatively short lifetime:-
From the commencement of business to the 31st of December 1996 which was the subject of the analysis of Delaney & Associates;
From that date to October 1997 when Mr. Brady lost contact with Mr. Delaney and,
From October 1997 to April 1998 when, on Mr. Brady’s evidence, the company ceased to trade.
59. It is significant that trading continued from April to September 1998 (in respect of which the TAN number of the company was utilised by Mr. Brady), despite the evidence of Mr. Brady that the company had ceased trading in April 1998.
60. Whatever about the absence of records during the first period – there appear to be records in which the detailed analysis of Delaney & Associate were made – and the absence of records in the second period there can be no doubt that Mr. Brady had the responsibility for the keeping of books and records after he failed to contact Mr. Delaney in October 1997.
61. Moreover, Mr. Brady was the only signatory of cheques. His evidence that he “would not have seen bank statements ” is vague and incredible.
62. Moreover, his attempt at exoneration by blaming Mr. Delaney is crude and has no basis after Mr. Delaney’s departure.
63. However, the obligation is not limited to a period in which a fellow (shadow) director has reputedly responsibility for the keeping of the books. The responsibility is a joint and separate liability on each of the directors.
64. It seems to me that a Restriction Order should be made in respect of Mr. Brady and I would so order. I will not grant any stay on the Order.
65. In respect of Mrs. Brady, the second named Respondent, it is clear that, despite her lack of involvement in the company, she is a director and must in principle comply with her duties as director.
66. There is no doubt that this duty extends to non-executive directors. In re. Hunting Lodges Limited (1985) ILRN 75 referred to the position of a wife taking what Mrs. Brady in the instant case calls a named directorship. It is clear from the judgment of Ms. Justice Carroll at 85 that such a director has responsibility to discharge her functions to the company.
“The day has long passed since married women were classified with infants and persons of unsound mind as suffering from a disability so far as their responsibility is concerned ……. (The Director) cannot evade liability by claiming that she was only concerned with minding her house and looking after her children. If that was the limit of responsibility she wanted, she should not have become a director of the company, or having become one she should have resigned. “
67. And then in relation to all directors Carroll J. Continued (also at 75):
“A Director who continues as director but abdicates all responsibility is not lightly to be excused. If she had reasonably endeavoured to keep abreast of company affairs and had been deceived (and there is no such evidence) it might be possible to excuse her. “
68. There is, indeed, a distinguishing feature in relation to Mrs. Brady. Curiously it is not contained in her Affidavit but in the Affidavit of Mr. Brady. That is that she opposed the increased borrowing of the company. This, in itself, should have been an indication to Mr. Brady as to the precarious nature of the company’s finances.
69. It would seem to me that this was, in the circumstances, a responsible position for Mrs. Brady to take. Accordingly, but not without some hesitation, given the duties of directors to the company and its creditors, it may be appropriate not to make such an order in respect of Mrs. Brady.
Keane -v- O’Callaghan
[2015] IEHC 669 (03 November 2015)
JUDGMENT of Mr. Justice Gilligan delivered on the 3rd day of November, 2015
1. This is an application brought by the liquidator of McSweeney Civil Engineering Limited (in liquidation) pursuant to s. 150 of the Companies Act 1990, for a declaration restricting the respondent for a period of five years from acting as a director of any company (other than one that meets the requirements of s. 150(3) of the Companies Act 1990).
2. Section 150 of the Companies Act 1990, provides:-
150.—(1) 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 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 meets the requirements set out in subsection (3); and, in subsequent provisions of this Part, the expression “a person to whom section 150 applies” shall be construed as a reference to a person in respect of whom such a declaration has been made.
(2) The matters referred to in subsection (1) are—
(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, or
(b) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a financial institution in connection with the giving of credit facilities to the company by such institution, provided that the institution in question has not obtained from any director of the company a personal or individual guarantee of repayment to it of the loans or other forms of credit advanced to the company, or
(c) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a venture capital company in connection with the purchase of, or subscription for, shares by it in the first-mentioned company.
(3) The requirements specified in subsection (1) are that—
(a) the nominal value of the allotted share capital of the company shall—
(i) in the case of a public limited company, be at least £100,000,
(ii) in the case of any other company, be at least £20,000,
(b) each allotted share to an aggregate amount not less than the amount referred to in subparagraph (i) or (ii) of paragraph (a), as the case may be, shall be fully paid up, including the whole of any premium thereon, and
(c) each such allotted share and the whole of any premium thereon shall be paid for in cash.
(4) Where a court makes a declaration under subsection (1), a prescribed officer of the court shall cause the registrar of companies to be furnished with prescribed particulars of the declaration in such form and manner as may be prescribed.
(5) In this section—
“financial institution” means—
(a) a licensed bank, within the meaning of section 25, or
(b) a company the ordinary business of which includes the making of loans or the giving of guarantees in connection with loans, and “venture capital company” means a company prescribed by the Minister the principal ordinary business of which is the making of share investments.”
The insolvent companies to which the restriction provisions of s. 150 apply are those companies referred to in ss. 149 and 154 of the 1990 Act (being the sections comprised in Chapter 1 of Part VII of the Act). Section 149 provides:-
“149.—(1) This Chapter applies to any company if—
(a) at the date of the commencement of its winding-up it is proved to the court, or
(b) at any time during the course of its winding-up the liquidator of the company certifies, or it is otherwise proved, to the court, that it is unable to pay its debts (within the meaning of section 214 of the Principal Act).
(2) 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 its winding-up.
(3) This Chapter shall not apply to a company which commences to be wound up before the commencement of this section.
(4) In this Chapter “company” includes a company to which section 351 of the Principal Act applies.
(5) This Chapter applies to shadow directors as it applies to directors.”
Section 154 of the 1990 Act provides:-
“154.—Where a receiver of the property of a company is appointed, the provisions of this Chapter shall, with the necessary modifications, apply as if the references therein to the liquidator and to winding up were construed as references to the receiver and to receivership.”
3. In brief, McSweeney Civil Engineering Ltd and a number of other companies, including McSweeney Building & Civil Engineering Ltd, were limited liability companies owned effectively by the respondent, his wife, and daughter, with often common directors, and these companies inter-traded and were involved principally in property development and construction.
4. McSweeney Civil Engineering Ltd ceased trading in 2006, but a Mr. Austin Connole took the view that he was owed €10,018.00 by the company which debt the respondent disputed as it related to the delivery of stone to a construction site by Mr. Connole and the respondent held the view that the stone was not actually delivered to the benefit of McSweeney Civil Engineering Ltd, that there were no weighbridge invoices in respect of the amount of €10,018, whereas the overall stone that was delivered by Mr. Connole was well in excess of €100,000.00 and in respect of which he was paid, and that apparently McSweeney Civil Engineering Ltd had a small judgment for almost €2,000 against Mr. Connole which was never satisfied.
5. Mr. Connole, however, proceeded to obtain an uncontested judgment in the sum of €10,018.00, together with costs against McSweeney Civil Engineering Ltd, and when this debt remained unsatisfied an application was made for the liquidation of McSweeney Civil Engineering Ltd, and Mr. Tom Keane was appointed as liquidator.
6. McSweeney Civil Engineering Ltd ceased trading in 2006, and in fact was not insolvent, and was fully tax compliant.
7. It appears that McSweeney Civil Engineering Ltd (in liquidation) put up no resistance to the appointment of Mr. Keane as liquidator.
8. In essence, what Mr. Keane ascertained on taking up his position as liquidator of McSweeney Civil Engineering Ltd was that the company was not insolvent, and was owed a very substantial inter-company debt which Mr. Keane estimated at €291,000.00.
9. The respondent did not agree that this was a correct analysis of the position and disputed the contention which resulted in a very substantial hearing before this Court (Laffoy J.) in High Court proceedings bearing the Record No. 2013/61COS In the matter of McSweeney Building and Civil Engineering Ltd, being a related company which Mr. Keane alleged owed McSweeney Civil Engineering Ltd (in liquidation) the sum of €291,000.
10. This Court (Laffoy J.) in a judgment of 10th March, 2013, took the view that it was appropriate to make an order winding up McSweeney Building and Civil Engineering Ltd as, in the view of the court, there was a very substantial sum of money owing between the two companies and the court took the view that McSweeney Civil Engineering Ltd was not bona fide disputing the debt and that there was, therefore, a deemed insolvency and that the court had jurisdiction to make a winding up order. Subsequently, a settlement was arrived at with the approval of the Court whereby McSweeney Building and Civil Engineering Ltd paid to the liquidator on behalf of McSweeney Civil Engineering Ltd a sum of €180,000.
11. Mr. Keane also took the view that there were other inter-company debtors namely O’Callaghan Investments Ltd in the sum of €373,139 and Cicero Electrical Ltd in the sum of €5,566.
12. As Mr. Keane, the applicant, states in his grounding affidavit, he believes the primary reason the company was wound up was because of the outstanding judgment against the company by Mr. Connole, and as he then sets out, the company refused to answer any correspondence from the creditor’s solicitors in relation to the matter and accordingly, the creditor petitioned to have the company wound up.
13. Mr. Keane, in respect of the application that is presently before the court, takes the view that it would be just and equitable to restrict the respondent from acting as a company director for the following reasons, as he sets out in his grounding affidavit:
“a) Failure to keep proper books and records
I say that the Respondent at all times attempted to obstruct my investigations into the affairs of the company. I say that the only information I was able to obtain in relation to the company was obtained though contacting the Respondents’ previous auditors namely Kelly Foley & Company.
I say and believe, and it is evident from my investigations, that the Respondent acted dishonestly and irresponsibly in relation to the affairs of the company in that he completed and swore a statement of affairs that was misleading and had errors which had failed to include the debt owing to the deponent and also other inter-company debt. Also, in furtherance, the Respondent detailed the only assets the company had was scrap vehicles. I say and believe this to be untrue as it was detailed in the Affidavit of Service of John Somers that when he attempted to deliver the Petition on the Respondent at his dwelling house he [saw] that the farm buildings were acting as a storage facility for plant and machinery owned by the Respondent…
As per the statement of affairs, the total assets in respect of the Company are €600 as detailed by Mr Thomas Kevin Callaghan. The assets comprise of 3 scrap motor vehicles. Mr Thomas Kevin Callaghan is disputing my rights to collect the said scrap vehicles despite having produced a sworn statement for the courts that the vehicles belonged to the company. I say and believe that the Respondent is engaged in a delaying tactic thus causing further work and costs for me and my legal team in pursuit of these assets.
I say and believe that the records that were kept are entirely inadequate and incomplete, that same are not consistent and that they do not maintain continuity. It would therefore seem apparent to the deponent that the Respondent violated his obligations as a director pursuant to section 202 of the Companies Act 1990.
b) Inter-company debt
I say and believe that there are inter-company debtors in the sum of €670,084. This can be broken down as follows:
McSweeney Building & Civil Engineering Limited €291,379
O’Callaghan Investments Limited €373,139
Cicero Electrical Limited € 5,566
As already alluded to the Respondent failed to include these figures in the Statement of Affairs and also failed to include the debt relating to the deponent company in the financial statement filed in the Company Registration office by his new auditors for the year ending December, 2010. It should be noted that the Respondent’s new auditors also filed the financial statement for December, 2011 which clearly included the debt outstanding to the deponent.
I also say further that the Respondent claimed capital allowances on the fact that the debt was owed to the deponent company and for the Respondent to now challenge the debt would clearly mean that the company had filed incorrect tax returns which would raise serious issues as to whether the Respondent and the company have acted bona fides.
c) Delay
I say that the Respondent continuously challenged my position and it was only when I was forced to issue a petition to wind up his company that the Respondent started to communicate with me. The Respondent issued replying affidavits in response to my affidavit and in total I was forced to file a further three affidavits as his affidavits stipulated that the outstanding debt to the deponent company did not exist. I say and believe that the Respondent did not act bona fides in relation to the communications and proceedings and in doing so caused undue delay in this matter.”
14. Where Mr. Keane makes an allegation that the respondent completed and swore a statement of affairs that was misleading and had errors which had failed to include the debt owing to the deponent and also other inter-company debt, the respondent says that in fact an agreement had been reached whereby the inter-company debt had been forgiven by McSweeney Civil Engineering Ltd, but yet as previously referred to this resulted in a protracted legal action resulting in the judgment of Laffoy J. of this Court, and the subsequent settling of this aspect of matters in the sum of €180,000 with the approval of the Court.
15. Further, there was an issue between the applicant and the respondent in respect of certain assets and the applicant says that he received no cooperation from the respondent and the respondent says that these goods were only valued at €600.00, and eventually it appears a settlement was reached in this sum in that regard.
16. The applicant maintains that the respondent failed to keep proper records and violated his obligations as a director pursuant to s. 202 of the Companies Act 1990, which the respondent denies.
17. The applicant says that the respondent effectively continuously challenged his position and it was only eventually after the issuance of proceedings that the respondent began to respond.
18. There is an issue as regards a claim for capital allowances which has resulted in a difference of opinion between Mr. Keane and Mr. O’Callaghan.
19. Mr. Keane in his report to the Director of Corporate Enforcement indicates that the respondent has, in his opinion, acted dishonestly and irresponsibly in relation to the affairs of the company.
20. Shanley J., In the Matter of La Moselle Clothing Ltd in his judgment of 11th May, 1998, took the view that in determining the responsibility of a director for the purpose 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 director’s 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.
21. Shanley J did not, however, intend that these factors be exhaustive and gave examples of other situations in which the Court may restrict a director (at 352):
“… not all situations of a want of responsibility will result from a breach of obligations imposed by the Companies Acts: for example, a director’s inability to see the ‘writing on the wall’ (e.g. an inability to see from a perusal of the company’s management accounts that the company was trading while insolvent) may result from sheer incompetence and justify a restriction… Equally a director who takes excessive sums from the company by way of drawings for salary without regard to the financial state of health of the company may be said to have acted without commercial probity…”
The La Moselle Factors, as they have come to be known, were subsequently approved by the Supreme Court in its decision in Re Squash (Ireland) Limited [2001] 3 IR 35.
22. In Re Tralee Beef and Lamb Limited [2004] IEHC 139, Finlay Geoghegan J expanded on the criteria identified by Shanley J in La Moselle as follows (at page 8):
“At common law, directors owe duties to the company which are normally divided into duties of loyalty based on fiduciary principles, developed initially by the courts of equity, and duties of skill and care developed initially by the common law courts from the principles in the law of negligence. There is no suggestion in the above decisions that the courts should ignore those duties. Accordingly, it appears to me that when considering the matters referred to by Shanley J in La Moselle Clothing Limited v Soualhi [1998] 2 ILRM 345 under paragraph (a) a court should have regard not only to the extent to which a director has or has not complied with any obligation imposed on him/her by the Companies Acts but also with duties imposed by common law.”
Relying on the proposition as set out in Keane, Company Law, 3rd Ed. (Dublin, 2000) that directors “owe a duty to the Company to exercise skill and diligence in the exercise of their functions,” Finlay Geoghegan J cited with approval the following propositions formulated by Parker J in Re Barings plc (No.5) [1999] 1 BCLC 433:
“(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 if each particular case, including the director’s role in the management of the company.”
23. The decision of Finlay Geoghegan J in Re Tralee Beef and Lamb was successfully appealed to the Supreme Court. However, it is clear that the Supreme Court did not disagree with the judgment of Finlay Geoghegan J in so far as common law duties ought to be considered in deciding the question of whether a director had acted responsibly. Hardiman J commented (at page 357):
“I wish to make it clear that I am in agreement with these propositions of law enunciated by the High Court Judge. In particular I would endorse her citation from Keane’s Company Law (3rd ed., 2000) and the cases cited there.”
Subsequently, the Supreme Court in Re Mitek Holdings Limited; Grave v Kachkar [2010] 3 IR 374 confirmed that the amplifications introduced by Finlay Geoghegan J. in Re Tralee Beef and Lamb represent the applicable law.
24. It is clear from the authorities that the purpose of section 150 is to protect against future management of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors, as per Finlay Geoghegan J. in Re Colm O’Neill Engineering Services Limited [2004] IEHC 83. At paragraph 3 of that judgment, the learned judge stated:
“In considering the matters raised by the liquidator in relation to the four respondent directors, I think it is necessary just briefly to consider the legal framework which has been established by s.150 and the authorities on the section. Firstly, it is well established that the purpose of the section is to protect the public against the future supervision and management of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors and others. It is also established that it is not the purpose of the section to punish the individuals concerned.”
25. In my view, the underlying assumption in respect of an application pursuant to s. 150 is that the directors allowed or caused or permitted the company to trade while insolvent as a result of which creditors were at a loss. In the most unusual and probably unique circumstances of this case, the company never traded while insolvent and there are no creditors, and the company was fully tax compliant, but for the reasons as already set out, the respondent took a particular view in respect of the claim by Mr. Connole and then declined to accept the validity of the judgment in respect of the amount claimed by him and costs as awarded to him and events proceeded from there. The respondent has brought all his troubles upon himself by the stance he adopted, and the particularly strong views he expressed in respect of events subsequent to the appointment of the liquidator. However, the fact remains that while the liquidator was put to substantial inconvenience and expense by Mr. O’Callaghan, the company was not insolvent, was fully tax compliant, and Mr. Connole’s judgment and costs have been paid in full and Mr. Keane’s costs and expenses have been fully discharged.
26. I take the view that the basic premise of applications pursuant to section 150 of the Companies Act 1990 and section 56 of the Company Law Enforcement Act 2001, is to protect members of the public and companies from those whose past record as directors of insolvent companies have shown them to be a danger to creditors and others.
27. Mr. O’Callaghan was not a director of an insolvent company and no third party is at any financial loss arising from his directorship. I also take into account that it is not the purpose of the section to punish, in this case, Mr. O’Callaghan.
28. I do not consider that where the company concerned is actually solvent, section 150 of the Companies Act 1990 and section 56 of the Company Law Enforcement Act 2001 have any role to play, and accordingly, I refuse the reliefs as sought on the applicant’s behalf.
McCoy -v- Courtney & anor
[2014] IEHC 369 (25 July 2014)
JUDGMENT of Mr. Justice Barrett delivered on the 25th day of July, 2014.
Background to application
1. This is an application made under s.150 of the Companies Act 1990, seeking a declaration that each of Mr. Gerard Courtney and Ms. Patricia Courtney be restricted in acting as company directors. It is perhaps a somewhat unusual application. On the one hand, there is a single affidavit from the liquidator in which he sets out several grounds on which a declaration under s.150 might be merited but then immediately proceeds to identify a lengthy set of mitigating factors. On the other hand, the court has before it a letter from Mr. Gerard Courtney indicating that he has no objection to a declaration being made against him under s.150. The court does not have before it a similar letter it from Ms. Courtney; her principal plea appears to be that she was merely a ‘helpful spouse’ who agreed to be a so-called passive director so as to satisfy the requirement that Zuccini Café and Restaurant Limited have at least two directors and who consequently ought not to be the subject of an order under s.150. This is the first case in which this Court has been presented on the one part with a liquidator who, admirably, states that in his professional opinion there are significant mitigating factors, and, on the other part, with respondent directors, one of whom is satisfied that the s.150 declaration petitioned for in these proceedings should issue against him and the other of whom considers that she ought not to be the subject of any such order.
Applicable law
2. There is, if anything, a possible surfeit of judicial guidance on the criteria that are relevant to determining a s.150 application. An early but significant contribution was made by Shanley J. in La Moselle Clothing Limited (in liquidation) v. Soualhi[1998] 2 ILRM 345, his observations having since been described by Hardiman J. in In the Matter of Tralee Beef & Lamb Limited [2008] 3 IR 347 at p.358, as being, at least at that time, of “near canonical status”. Shanley J.’s observations had previously been affirmed and expanded upon by the Supreme Court in Re Squash (Ireland) Ltd. [2001] 3 IR 35, the court holding, inter alia, that it is important, in a s.150 application, to have regard to the entire tenure of an individual as director of a company. In his judgment in La Moselle, Shanley J. had, at p.352 mentioned that the extent to which a director has or has not complied with the Companies Acts is a relevant factor when determining a section 150 application. In the High Court decision in Kavanagh v. Delaney [2005] 1 ILRM 34 at p.41, Finlay Geoghegan J. suggested that compliance by a director with the common law obligations of a director is also a relevant factor. In his judgment on appeal in what is now sometimes referred to as the Tralee Beef case, Hardiman J., at p.358 of his judgment, referred to above, indicated that he did not disagree with this ‘amplification’ by Finlay Geoghegan J., though he was concerned that no injustice should be wrought in that case as a result of the amplification being sounded therein for the first time. In truth it is somewhat difficult to see how a director could be held to have acted responsibly where he or she had complied with the Companies Acts but was in breach of his or her common law duties, though equally it is difficult offhand to see how a director could breach his or her common law duties where he or she was not guilty of any breach of, or exposed to any penalty under, the detailed and comprehensive code established by the Companies Acts. Be that as it may, the jurisprudence appears in any event to have further evolved, Fennelly J. signalling in Re Mitek Holdings Ltd. [2010] 3 IR 374 at p.396 that it is important not to adopt a formulaic, standardised, ‘tick the box’ approach to determining section 150 applications. Thus Fennelly J. emphasises “the need to identify the issues that are important in the particular case”, and then continues:
“I would not be disposed to limit the matters to which regard should be had or to substitute standardised judicial criteria for the general words of the statute.”
3. Section 150 enjoins the court to have regard to whether an affected person has acted “honestly” and “responsibly” and also to consider whether there is any other reason why it would be “just and equitable” that a s.150 order should issue. All of the quoted terms bear their ordinary meaning. There appear to be no ‘just and equitable’ grounds alleged in this case, nor do they in any event appear to the court to arise. In deciding whether Mr. and Ms. Courtney have acted honestly and responsibly the court may of course have regard to their obligations as directors, to general commercial practice and to prior case-law but perhaps more to anchor than to determine any decision of the court as to the responsibility or otherwise of their respective actions.
Facts
4. Mr. and Ms. Courtney were each directors of Zuccini Café and Restaurant Limited (in voluntary liquidation). Zuccini was incorporated on 13th September, 1999, ceased trading in July, 2008, and was placed in liquidation on 5th May, 2009. During its lifetime, Zuccini’s primary activity was the operation of a restaurant at Blackrock Shopping Centre in County Dublin. There appear to have been two principal factors that led to its eventual demise. The first was its inability to discharge amounts found to be owing to the Revenue Commissioners following an audit which uncovered an under-declaration of tax. The second was a significant ongoing reduction in turnover due to the opening and subsequent success of a rival shopping centre in Dundrum, County Dublin.
Grounds for instant application
5. The liquidator identifies the following grounds on which a s.150 declaration might be merited. First, a failure to discharge tax liabilities. Second, a deficiency in the company books and records. Third, a deficiency in documentation pertaining to an assignment of the lease at Blackrock Shopping Centre and certain company assets. Fourth, repayment of certain loan monies owed by the company to the directors. Fifth, use of a company credit card to make non-business related purchases. Sixth, a degree of non-cooperation with the liquidator. Having identified these grounds, the liquidator then avers as follows:
“25. Whilst it is acknowledged that the Respondents appear to have made errors of judgment in relation to the conduct of certain affairs of the Company, particularly in building up a large deficit to the Revenue Commissioners and other creditors, I believe that there are significant mitigating factors in this case which merit analysis by the Court in reaching its decision as to the responsibility of the Respondents.
26. On the basis of my initial discussions with the first named Respondent in particular, it would appear that the sudden and unforeseen difficulties created both by the Revenue audit and the worsening economic climate at the time resulted in enormous strain for the Respondents who became unable to manage the insurmountable problems the company faced. I believe that this strain significantly contributed to the way in which the business was managed during the relevant period and I understand that the Respondents also experienced significant personal difficulties at the time which, while not excusing the lack of co-operation I received later in the liquidation, does go some way toward explaining the difference in the level of co-operation and engagement I encountered.
27. Also relevant to my initial decision to seek relief from the Director was my view that the failure to maintain appropriate books and records and lack of co-operation by the Respondents did not in any way worsen the position of the creditors of the Company in the liquidation and I believe that had I received a full set of books and records for the Company, the realisations for the creditors are unlikely to have been any higher.
28. With regard to Ms Patricia Courtney, the second named Respondent, I say that she appears to have been a non-executive director with no direct involvement in the running of the business of the Company. Moreover, Ms. Courtney appears to have been appointed as a director purely to assist her husband, Mr. Gerard Courtney, in maintaining the statutory minimum requirement of two directors in a company and entirely delegated her duties as a director of the Company to Mr. Courtney who had primary responsibility for managing its affairs. For those reasons the second named Respondent was arguably not in a position to assist me any further in relation to my enquiries.”
6. The court will always have careful regard to the views of competent professionals such as the liquidator in proceedings such as those now before it, and has had the most careful regard to the averments quoted above. Turning to the various grounds raised by the liquidator as to why a s.150 order might issue:
– first, the failure to discharge tax liabilities. There is nothing before the court to suggest that the under-payment of tax was deliberate. It appears that a Revenue audit discovered that more tax ought to have been paid; this could happen to even the most upstanding of individuals or entities and there is nothing in this per se that would suggest either of the respondents was dishonest or less than responsible.
– second, the deficiency in the company books and records. It is very important that the company books and records that are required under the Companies Acts should be maintained. Fortunately for Mr. and Ms. Courtney the liquidator has averred in his affidavit that in his professional opinion, even had he “received a full set of books and records for the Company, the realisations for the creditors are unlikely to have been any higher”. Largely on the strength of this, the court concludes that in this case the actions of Mr. and Ms. Courtney in this regard were unwise and reproachable but were not dishonest or less than responsible. Were it not for this averment of the liquidator the court might well have concluded otherwise.
– third, a deficiency in documentation pertaining to an assignment of the lease at Blackrock Shopping Centre and certain company assets. This is not the first case in which this Court has been confronted with a situation in which a professionally qualified liquidator has pointed to deficiencies in documentation maintained by directors engaged in the hurly-burly of commercial life. In truth it is perhaps inevitable that there will often be something of a gap between the documentation trail that a professional practitioner would expect to see in a particular instance and the documentation trail that an entrepreneur might see fit to maintain. The court does not consider that the fact that there is such a gap of itself necessarily points to dishonesty or a lack of responsibility either generally or as regards the respondent directors in the instant case.
– fourth, repayment of certain loan monies owed by the company to the directors. The liquidator notes that between 28th February, 2008, and the issuance of the directors’ statement of affairs on 9th April, 2009, there was a repayment by Zuccini to the Courtneys of about €15,000 of a €39,000 loan owed by it to them. In addition, various other payments of circa. €6,000 were paid by Zuccini to the directors between 1st March, 2008, and July 2008. There is nothing in the facts as known to the court that suggest that any such loan payments or repayments involved or were due to dishonesty or a lack of responsibility on the part of either director. Thus, while this ground gave the court considerable cause for pause, the court does not consider that in the circumstances of the case, as they appear to it, a s.150 declaration is required on this ground.
– fifth, use of a company credit card by Ms. Courtney to make non-business related purchases. A company, however small, is not the private purse of its directors. This Court views most seriously any improper use of company funds to benefit company directors. The fact that a company credit card is used to make certain non-business related purchases need not necessarily be objectionable. However, no explanation has been offered to the court by or for Ms. Courtney as to why or in what circumstances these purchases were made. In the absence of any such explanation the court considers that it has no choice but to conclude that the fact of the purchases evidences, at the least, a want of responsibility on the part of Ms. Courtney in her capacity as a director of Zuccini, and thus that a s.150 declaration is required to issue in respect of her. It does not appear that Mr. Courtney was party to the use of the company credit card to make the relevant purchases.
– sixth, a degree of non-cooperation with the liquidator. This was not canvassed at length at the hearings and the court notes that, in light of all the circumstances of this case, even the liquidator is prepared to make allowances for any such non-cooperation as occurred. This Court has noted previously that it is very important that the directors of a company in liquidation should extend the fullest cooperation to a liquidator. There is no reason why a s.150 declaration could not issue on the basis of such non-cooperation alone. However, the court does not consider that this is a case in which such a declaration is merited: any failings of Mr. and Ms. Courtney in this regard are reproachable but do not appear to this court to have been irresponsible.
7. With regard to how the court ought to deal with a ‘helpful spouse’ who agrees to be a passive director so as to satisfy the requirement that a company has two directors but who does nothing as director, i.e. the point Ms. Courtney has sought to invoke in these proceedings and which is mentioned in para. 28 of the extract from the liquidator’s affidavit quoted above, the court does not consider that this issue requires to be decided in this case. This is because Ms. Courtney directly involved herself in the company’s operations to the extent of being a holder or user of a company credit card and proceeding to make private purchases with that card. Because of this the court has already concluded that a s.150 declaration must issue against her and thus it serves no purpose to consider whether she might escape liability through the invocation of the passive director rationale to which reference has just been made: such a defence in the circumstances presenting before the court in this case must fail.
Conclusion
8. For the reasons stated above, (i) the court is not satisfied that it is required to make a declaration under s.150 of the Companies Act 1990, in respect of Mr. Gerard Courtney; (ii) the court is satisfied that a declaration under s.150 of the Companies Act 1990 must issue in respect of Ms. Patricia Courtney and hereby issues such declaration on the terms contemplated by that provision.
McCoy -v- Courtney & anor [2014] IEHC 370 (25 July 2014)
URL: http://www.bailii.org/ie/cases/IEHC/2014/H370.html
Cite as: [2014] IEHC 370
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Judgment Title: McCoy -v- Courtney & anor
Neutral Citation: [2014] IEHC 370
High Court Record Number: 2014 230 COS
Date of Delivery: 25/07/2014
Court: High Court
Composition of Court:
Judgment by: Barrett J.
Status of Judgment: Approved
Neutral Citation: [2014] IEHC 370
THE HIGH COURT
[2014 No. 230 COS]
IN THE MATTER OF MINT RESTAURANT LIMITED (IN VOLUNTARY LIQUIDATION) AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001
BETWEEN
PATRICK MCCOY
AS LIQUIDATOR OF THE COMPANY IN THE WITHIN PROCEEDINGS
APPLICANT
AND
GERARD COURTNEY AND PATRICIA COURTNEY
RESPONDENTS
JUDGMENT of Mr. Justice Barrett delivered on the 25th day of July, 2014.
Background to application
1. This is an application made under s.150 of the Companies Act 1990, seeking a declaration that each of Mr. Gerard Courtney and Ms. Patricia Courtney be restricted in acting as company directors. It is the second such application against Mr. and Ms. Courtney in which the court is giving judgment today. Like the other application brought against Mr. and Ms. Courtney, it is perhaps somewhat unusual. On the one hand, there is a single affidavit from the liquidator in which he sets out several grounds on which a declaration under s.150 might be merited but then immediately proceeds to identify a lengthy set of mitigating factors. On the other hand, the court has before it a letter from Mr. Gerard Courtney indicating that he has no objection to a declaration being made against him under s.150. The court does not have before it a similar letter from Ms. Courtney; her principal plea appears to be that she was merely a ‘helpful spouse’ who agreed to be a passive second director so as to satisfy the legal requirement that Mint have at least two directors and who consequently ought not to be the subject of an order under s.150. Thus this Court is presented on the one part with a liquidator who, admirably, states that in his professional opinion there are significant mitigating factors which may justify no s.150 declaration being made, and, on the other part, with two respondent directors, one of whom is satisfied that a s.150 declaration should issue against him and the other of whom considers that no liability should attach to her.
Applicable law
2. There is, if anything, a possible surfeit of judicial guidance on the criteria that are relevant to determining a s.150 application. An early but significant contribution was made by Shanley J. in La Moselle Clothing Limited (in liquidation) v. Soualhi[1998] 2 ILRM 345, his observations having since been described by Hardiman J. in In the Matter of Tralee Beef & Lamb Limited [2008] 3 IR 347 at 358, as being, at least at that time, of “near canonical status”. Shanley J.’s observations had previously been affirmed and expanded upon by the Supreme Court in Re Squash (Ireland) Ltd. [2001] 3 IR 35, the court holding, inter alia, that it is important, in a s.150 application, to have regard to the entire tenure of an individual as director of a company. In his judgment in La Moselle, Shanley J. had, at p.352, mentioned that the extent to which a director has or has not complied with the Companies Acts is a relevant factor when determining a s.150 application. In the High Court decision in Kavanagh v. Delaney [2005] 1 ILRM 34 at 41, Finlay Geoghegan J. suggested that compliance by a director with the common law obligations of a director is also a relevant factor. In his judgment on appeal in what is now sometimes referred to as the Tralee Beef case, Hardiman J., at p.358 of his judgment, referred to above, indicated that he did not disagree with this ‘amplification’ by Finlay Geoghegan J., though he was concerned that no injustice should be wrought in that case as a result of the amplification being sounded therein for the first time. In truth it is somewhat difficult to see how a director could be held to have acted responsibly where he or she had complied with the Companies Acts but was in breach of his or her common law duties, though equally it is difficult offhand to see how a director could breach his or her common law duties where he or she was not guilty of any breach of, or exposed to any penalty under, the detailed and comprehensive code established by the Companies Acts. Be that as it may, the jurisprudence appears in any event to have further evolved, Fennelly J. signalling in Re Mitek Holdings Ltd. [2010] 3 IR 374 at p.396 that it is important not to adopt a formulaic, standardised, ‘tick the box’ approach to determining s.150 applications. Thus Fennelly J. emphasises “the need to identify the issues that are important in the particular case”, and then continues:
“I would not be disposed to limit the matters to which regard should be had or to substitute standardised judicial criteria for the general words of the statute.”
3. Section 150 enjoins the court to have regard to whether an affected person has acted “honestly” and “responsibly” and also to consider whether there is any other reason why it would be “just and equitable” that a s.150 order should issue. All of the quoted terms bear their ordinary meaning. There are no ‘just and equitable’ grounds alleged in this case, nor do they in any event appear to the court to arise. In deciding whether each of Mr. and Ms. Courtney has acted honestly and responsibly the court may of course have regard to their respective obligations as directors, to general commercial practice and to prior case-law but perhaps more to anchor than to determine any decision of the court as to the responsibility or otherwise of their respective actions.
Facts
4. Mr. and Ms. Courtney were each directors of Mint Restaurant Limited (in voluntary liquidation). Mint was incorporated on 24th October, 2003, ceased trading on 19th April, 2009, and was placed in liquidation on 5th May, 2009. During its lifetime, Mint’s primary activity was the operation of a restaurant in Ranelagh, County Dublin. The principal factor that led to its demise was the dramatic economic downturn in Ireland in 2008, following which Mint suffered from the greatly diminished spend that afflicted so-called ‘high-end’ restaurants from that time onwards.
Grounds for instant application
5. The liquidator identifies the following grounds on which a s.150 declaration might be merited. First, a failure by Mint to discharge certain tax liabilities and make certain tax payments towards the end of its existence. Second, a deficiency in Mint’s company books and records. Third, a repayment of certain loan monies owed by Mint to the directors. Fourth, use of a company credit card to make non-business related purchases. Fifth, a degree of non-cooperation with the liquidator. Having identified these grounds, the liquidator then avers as follows:
“25. Whilst it is acknowledged that the Respondents appear to have made errors of judgment in relation to the conduct of certain affairs of the Company, particularly in building up a large deficit to the Revenue Commissioners and other creditors, I believe that there are significant mitigating factors in this case which merit analysis by the Court in reaching its decision as to the responsibility of the Respondents.
26. From my investigations it appears that the creditor deficits identified above began to accrue only when the company faced the unprecedented financial difficulties created by the recession which was beyond the Respondents control. In addition, the largest creditors of the Company by far were the Respondents themselves who invested over €400,000 to keep the Company afloat and also faced the calling in of personal guarantees of the Company’s loans and overdraft facilities. The Respondents ultimately settled those liabilities by way of a further personal loan with AIB bringing their total losses to a figure in excess of €472,000.
27. On the basis of my initial discussions with the first named Respondent in particular, it would appear that the sudden and unforeseen difficulties created enormous strain for the Respondents who became unable to manage the insurmountable problems the company faced. I believe that this strain significantly contributed to the way in which the business was managed during the relevant period and I understand that the Respondents also experienced significant personal difficulties at the time which, while not excusing the lack of co-operation I received later in the liquidation, does go some way toward explaining the difference in the level of co-operation and engagement I encountered.
28. Also relevant to my initial decision to seek relief from the Director was my view that the failure to maintain appropriate books and records and lack of co-operation by the Respondents did not in any way worsen the position of the creditors of the Company in the liquidation and I believe that had I received a full set of books and records for the Company, the realisations for the creditors are unlikely to have been any higher.
29. With regard to Ms Patricia Courtney, the second named Respondent, I say that she appears to have been a non-executive director with no direct involvement in the running of the business of the Company. Moreover, Ms. Courtney appears to have been appointed as a director purely to assist her husband, Mr. Gerard Courtney, in maintaining the statutory minimum requirement of two directors in a company and entirely delegated her duties as a director of the Company to Mr. Courtney who had primary responsibility for managing its affairs. For those reasons the second named Respondent was arguably not in a position to assist me any further in relation to my enquiries.”
6. The court will always have careful regard to the views of competent professionals such as the liquidator in proceedings such as those now before the court, and has had the most careful regard to the averments quoted above. Turning to the various grounds raised by the liquidator as to why a s.150 order might issue:
– first, the failure by Mint to discharge certain tax liabilities and make certain tax payments towards the end of its existence. It seems to apply almost without failing in respect of any insolvent company that there will have been late or non-payment of taxes, perhaps coupled with a failure to make tax returns. This Court has recently considered in Van Dessel v. Gill and Another [2014] IEHC 317 (Unreported, High Court, Barrett J., 30th May, 2014) the issue of whether such a failure is to be treated as evidence of irresponsibility and does not propose to re-examine the question in detail in this judgment. Taxes due ought of course to be paid. However, on the facts before it, the court does not see that there is anything more than that “limited failure over a period’ to comply with tax requirements which Finlay Geoghegan J. identified in In the Matter of Digital Channel Partners Limited (in voluntary liquidation) [2004] 2 I.L.R.M. 35 as insufficient in and of itself to justify a s.150 declaration. There was not here a total disregard of revenue obligations. Moreover, while a failure to meet tax liabilities can in one sense always be considered as, to quote from para. 40 of Finlay Geoghegan J.’s above judgment, the “use [of) taxation liabilities for the purpose of financing a company”, there appears to be no suggestion that there has in this case been the deliberate decision to deploy such liabilities to the advantage of Mint in the manner that that Finlay Geoghegan J. appears to contemplate in her observations in Re Digital Channel Partners.
– second, the deficiency in company books and records. It is very important that the company books and records that are required under the Companies Acts should be maintained. Fortunately for Mr. and Ms. Courtney the liquidator has indicated in his affidavit that in his professional opinion, even had he “received a full set of books and records for the Company, the realisations for the creditors are unlikely to have been any higher”. On the strength of this averment the court concludes that in this case the actions of Mr. and Ms. Courtney in this regard were unwise and reproachable but were not irresponsible. Were it not for this last-quoted averment of the liquidator the court might well have concluded otherwise.
– third, the repayment of certain loan monies owed by the company to the directors. The liquidator notes repayments by Mint between 1st January, 2008, and 3rd April, 2009, of circa. €23,000 of an almost half-million euro loan previously made to it by the directors. There is nothing in the facts as known to the court that suggest that any such loan payments or repayments involved or were due to dishonesty or a lack of responsibility on the part of either director. Thus, while this ground gave the court considerable cause for pause, the court does not consider that in the circumstances of the case, as they appear to it, a s.150 declaration is required on this ground.
– fourth, use of a company credit card by Ms. Courtney to make non-business related purchases. A company, however small, is not the private purse of its directors. This Court views most seriously any improper use of company funds to benefit company directors. The fact that a company credit card is used to make certain non-business related purchases need not necessarily be objectionable. However, no explanation has been offered to the court by or for Ms. Courtney as to why or in what circumstances these purchases were made. In the absence of any explanation the court considers that it has no choice but to conclude that the relevant purchases evidence, at the least, a want of responsibility on the part of Ms. Courtney in her capacity as a director of Mint, and thus that a s.150 declaration is required in respect of her. It does not appear that Mr. Courtney was party to the use of the company credit card to make the relevant purchases.
– fifth, a degree of non-cooperation with the liquidator. This was not canvassed at length at the hearings and the court notes that, in light of all the circumstances, even the liquidator is prepared to make allowances for any such non-cooperation as occurred. The court has noted previously that it is very important that the directors of a company in liquidation should extend the fullest cooperation to a liquidator, and there is no reason why a s.150 declaration could not issue on the basis of such non-cooperation alone. However, the court does not consider that this is a case in which such a declaration is merited: any failings of Mr. and Ms. Courtney in this regard are reproachable but do not appear to this court to have been irresponsible.
7. With regard to how the court ought to deal with a ‘helpful spouse’ who agrees to be a passive director so as to satisfy the legal requirement that a private company has at least two directors but who does nothing as director, i.e. the point that Ms. Courtney has sought to invoke in these proceedings and which is touched upon in para. 29 of the extract from the liquidator’s affidavit quoted above, the court does not consider that this issue requires to be considered in the present case. This is because Ms. Courtney directly involved herself in the company’s operations to the extent of being a holder or user of a company credit card and proceeding to make private purchases with that card. Because of this the court has already concluded that a s.150 declaration must issue against her and thus it serves no purpose to consider whether she might escape liability through the invocation of the passive director rationale to which reference has just been made: such a defence in the circumstances arising in this case must fail.
Conclusion
8. For the reasons stated above, (i) the court is not satisfied that it is required to make a declaration under s.150 of the Companies Act 1990, in respect of Mr. Courtney; (ii) the court is satisfied that a declaration under s.150 of the Companies Act 1990 must issue in respect of Ms. Courtney and hereby issues such declaration on the terms contemplated by that provision.