We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
26 February 2008
In a significant recent decision the Supreme Court lifted an order made by the High Court against a non-executive director of an Irish company restricting him from acting as a director of any company for a period of five years. The court described the statutory regime in this area as “draconian”.(1)
The plaintiff was a chartered accountant appointed by the High Court to act as liquidator of Tralee Beef & Lamb Limited. The defendants were the directors of Tralee Beef at the date of commencement of its winding-up. The liquidator found that Tralee Beef was insolvent on winding-up. In line with the statutory provisions in the area, the liquidator commenced proceedings to obtain restriction orders against each of the directors,(2) which were granted by the High Court.
One of these directors, Mr Coyle, applied to the Supreme Court to have the restriction order against him set aside.
It was undisputed that Tralee Beef was, at the time of commencement of winding-up, unable to pay its debts and thus insolvent within the meaning of the relevant section of the Companies Act. The court noted that from the affidavits sworn, it was apparent that there was a very significant drop in value in the company in the final six months of its existence before its winding-up - it had gone from having net assets of almost €1 million to an excess of liabilities over assets of over €6 million.
Coyle, a chartered accountant, had been nominated to act as a non-executive director of the company to represent the interests of a group of investors. Coyle maintained that he was appointed solely to receive and review financial information from the executives of the company and to attend directors’ meetings.
It was clear from the liquidator’s affidavit that he had formed the view that Coyle had acted honestly and responsibly in relation to the affairs of the company. In those circumstances, he petitioned the director of corporate enforcement to be relieved from the statutory obligation to bring restriction proceedings against Coyle. This request was declined by the director, who gave no reasons for his decision.
The High Court judge inferred from this refusal to grant the liquidator’s request to be dispensed with the obligation of bringing a restriction application against Coyle that he disagreed with the official liquidator’s conclusion that Coyle had acted honestly or responsibly in relation to the company.(3)
The Supreme Court found that it was not prepared to draw such an inference. It noted that the director of corporate enforcement had given no reasons for his attitude either to the official liquidator or to the courts. The court stated that it was not clear on what basis the director of corporate enforcement could disagree with the liquidator’s professional judgment on Coyle’s actions. The liquidator requested to be relieved of the obligation to make a restriction application in respect of Coyle, but this application was refused. The liquidator made that request because he himself had formed the view that Coyle had acted honestly and responsibly.
The relevant statutory provisions state that where a company is found on winding-up to be insolvent, each director will be restricted from acting as a director for a period of five years, unless that person has acted honestly and responsibly in relation to the conduct of the affairs of the company and there is no other reason why it would be just and equitable that he or she should be subject to the restrictions imposed by that section.
The Supreme Court found that the statutory provisions were draconian. It argued that the relevant section makes it mandatory for a liquidator to bring an application to restrict directors in the case of insolvent winding-up. The liquidator would be guilty of a criminal offence if he did not bring the application. The court commented that this lended an air of unreality to the circumstances of the present case, in that the liquidator had positively concluded that Coyle had acted in an honest and responsible manner in relation to the company, but nevertheless was obliged to bring the application to the effect that Coyle was not honest and responsible or find himself stigmatized by conviction of a criminal offence. The liquidator took the only possible step to avoid bringing an application in which he plainly had no belief - he asked the director of corporate enforcement to dispense with requiring him from doing so, as was in that official’s power. The court noted that the director of corporate enforcement declined this request and offered no reasons for doing so. The court commented:
"This is an extraordinary position and one which makes it all the more regrettable that the director [of corporate enforcement] has neither given reasons nor sought to intervene in the proceedings.”
The court also stated that the statutory provisions are draconian because they place the burden of proof on directors to show that they acted honestly and responsibly in relation to the conduct of the affairs of the company. The court stated that it had some doubt as to whether this provision is consistent with fundamental fairness and constitutional justice.
The Supreme Court heavily criticized the existing directors’ restriction provisions and, in particular, the role of the director of corporate enforcement in their application. Liquidators and company directors will monitor the director of corporate enforcement’s reaction closely to see what steps he will take, if any, to address the Supreme Court’s criticism. As the Supreme Court commented, the statutory regime which was brought in to restrict dishonest directors is in practice, as this case showed, restricting honest and reputable directors.(4)
For further information on this topic please contact Daniel Scanlon at Matheson Ormsby Prentice by telephone (+353 1 232 2000) or by fax (+353 1 232 3333) or by email (email@example.com).
(1) Tom Kavanagh v John Delaney, Supreme Court judgment of Justice Hardiman delivered February 1 2008.
(2) Section 150 of the Companies Act 1990.
(3) Section 150 states that it is up to the court to decide whether a director of a company found to be insolvent on winding-up acted “honestly and reasonably” in relation to the conduct of the affairs of the company and thus can be relieved of having a restriction order made against him or her.
(4) Section 150 does not apply to directors of companies who are nominated by financial institutions which have given credit facilities to such companies or to directors nominated by venture capital companies in connection with their purchase of such companies.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.