Court, in Restriction Application, accepts undertaking from Director not to act as Director

In Cahill -v- O'Brien & anor [2015] IEHC 817, the Court considered an application for the restriction of two directors pursuant to Section 150 of the Companies Act, 1990 together with an application extending the time for the making of the application.

Facts
Director A was a chartered accountant and 27% shareholder of the Company. Director B was a teacher, and the non-executive nominee of a Liechtenstein entity which owned 36% of the Company.  The Company traded successfully until 2002 when one of its largest customers created a competing product. The Company incurred a loss that year and unsuccessfully attempted to diversify into other areas. In 2004 the directors tried and failed to identify investors or purchasers for the Company.  B claimed that, at this time, he suggested placing the Company in liquidation but the preference was to try to secure investment in the Company. Later in 2004, the Company’s Financial Controller informed the directors that the Company had been trading insolvently and pointed out the consequences of this for the directors personally.

Around this time, A became unwell and hired C on a consultancy assignment for €10,000 per month to try to assist with the sale of, or investment in the business. In early 2005, B sent a letter of resignation to the Company but a new director could not be found and B’s resignation was never formally registered.  In mid-2005, it was agreed that the assets of the Company would be leased to C for €60k per annum. These monies were to be used to discharge Revenue liabilities, rent, all outgoings and any creditors but, ultimately, the Company received no income from the arrangement. 

The Company was struck off in October 2005 for failure to file returns. B claimed that he had no involvement with the Company during this time. The Company continued to trade while struck off.  A successfully petitioned the Court to restore the Company to the Register in January 2010 and the Company was placed into liquidation in April 2010.

The ODCE took the view that the Directors should be restricted for their irresponsible actions including the fact that the Company was struck off for failure to file returns, the Company was not placed in liquidation on a timely basis, the failure to discharge significant tax liabilities, the failure to discharge significant unsecured creditor liabilities, the failure to ensure that assets of the Company were preserved for the benefit of its creditors at a time of insolvency, and the failure by the directors to join together in the supervision of the affairs of the Company.

Decision

Extension of Time Limit
The liquidator firstly sought an order extending the time for the making of the application. Section 56 of the Companies Act 1990 requires that an application under Section 150 must be brought not earlier than 3 months and not later than 5 months after the provision of the liquidator's report to the ODCE unless the liquidator is relieved of his obligation to do so by the ODCE. Here the liquidator had submitted a report to the ODCE in December 2011 recommending that he be relieved of his obligation to bring restriction proceedings. The ODCE responded in June 2013 indicating that he was not so relieved and gave him two weeks to submit any further report. The liquidator submitted another report at the end of August 2013 and in December 2013, a further letter issued from the ODCE instructing the liquidator that he was obliged to make the application.  The liquidator responded at the end of January 2014 seeking clarification.

The Court noted that it can be very difficult to ascertain with precision when the report is “provided” to the ODCE within the meaning of Section 56 because in some cases, where questions are raised by the ODCE, there can be more than one report.  In the circumstances, where the effect of the correspondence with the

ODCE on the statutory time limits was unclear and where non-statutory procedures appeared to have evolved between the ODCE and liquidators, the Court held that it would be unfair to penalise the liquidator and the application to extend time was granted.

Restriction Application
A claimed that at all times he had acted honestly and responsibly in relation to the affairs of the Company, and that the delay in seeking the restoration of the Company, which was ultimately financed at his personal expense, did not prejudice any of the creditors.  B claimed his conduct as a director did not contribute to the insolvency of the Company and he did all that he could to comply with his responsibilities.  With regard to the failure to file accounts, the directors pointed out that while the accounts had been prepared there were no funds to pay the auditors and A ultimately paid the auditors personally.

The liquidator was of the view that neither of the directors had acted dishonestly or irresponsibly and both had co-operated in the course of the liquidation. The Court noted that the liquidator was in the unusual position of presenting an application which he himself did not support (a position which has been remedied by Section 820 of the Companies Act 2014 which allows for the bringing of an application of this nature by the Director of Corporate Enforcement in his own right).  The directors argued that the Court should attach significant weight to the views of the liquidator, who they submitted was better placed than the ODCE to ascertain the honesty and responsibility of the directors.

A also argued that the Court should have regard to the entire tenure of the directors and noted that there was no criticism of the directors’ conduct between 1994 and 2004. B further submitted that as a nominee non-executive director he should not be held to the elevated standards of commercial probity that apply to other directors.

The Court was satisfied that each allegation raised by the ODCE had been made out. While the Court did not condemn the directors for their efforts to save the business between 2002 and 2004, once the Financial Controller warned them of the perilous state of the Company’s finances they should have acted.

The Court also noted that A, while fully aware of the consequences, failed to ensure that returns were filed and as a consequence, the Company was struck off which, in the Court’s view, on its own, warranted the restriction of A as it constituted a conscious and deliberate breach of his fiduciary duties to all creditors.  The Court was of the view that while the other events might be considered to be a series of unfortunate events, the strike-off, and thereafter knowingly trading while struck off was the essence of irresponsibility which warranted restriction pursuant to Section 150.

While the Court had some sympathy for B and acknowledged that he was in a different category to A, it did note that B had assumed certain responsibilities and was aware in late 2004 of the dire state of the Company’s finances and the risks involved in continuing to trade. Therefore, there was, in the circumstances, a duty upon him to act.  Furthermore, following his unsuccessful attempt to resign as a director, he simply withdrew from the Company and the Court was of the view that it was not sufficient for him to wash his hands of the events and insofar as he attempted to do so, he too was irresponsible.  However, the Court held that the interests of justice would be met by an undertaking from B, not to act as director for a period of five years rather than the imposition of a restriction order.

Comment
While this case was brought under the old Companies Act regime it is interesting that the Court was willing to accept an undertaking which is one of the novel features of the new restrictions and disqualifications regime.  It is also noteworthy that the Court adopted a less lenient approach to the directors than has been evident in some of the cases from early 2015.

For more information please contact Paula Mullooly.

Date Published: 19 January 2016