Director failed to satisfy the court that he acted responsibly

In the case of Fennell v Appelbe, a director of an insolvent company appealed a restriction order made against him by the High Court, which prevented him from acting as a director for five years. The Court of Appeal rejected the director's appeal and upheld the High Court's findings that the director had failed to demonstrate that he had acted responsibly throughout his tenure as director. The case confirms that a director in restriction proceedings must provide detailed evidence to the court to demonstrate that they acted honestly and responsibly with regard to the company's affairs. 

Section 819

This section of the Companies Act 2014 provides that, on the application of a liquidator, the court shall order that a person, who was a director of an insolvent company, be restricted for a period of five years. The extent of the restriction means they cannot be appointed or act in any way, directly or indirectly, as a director or secretary of a company, or be concerned in the formation or promotion of a company.

The court must make a restriction order unless it is satisfied of all three matters laid out in subsection (2):

1. the director 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,
2. the director 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
3. there is no other reason why it would be just and equitable that the director should be restricted

Facts of the case

The case concerned Alvonway Investments Limited (the Company), which was in liquidation. A number of loan facilities were acquired by the National Asset Management Agency (NAMA) in 2011. NAMA later issued letters of demand for payment of nearly €420m and appointed a statutory receiver in 2013. In 2014, NAMA presented a petition to wind up the company and Mr Fennell was appointed by the High Court as liquidator (the Liquidator).

At this time, the Company had three directors (Mr O'Donovan, Mr O'Brien and Mr Appelbe). The Office of the Director of Corporate Enforcement (ODCE) advised the liquidator of his duty to bring proceedings against the three directors for their alleged failings with regards to the Company (two applications for restriction and one for disqualification). The Liquidator's application centred on two payments made by the Company just prior to a statutory receiver being appointed. The Liquidator acknowledged that Mr O'Brien and Mr Appelbe had not benefited personally from the payments, but maintained that they did not act responsibly in relation to the conduct of the affairs of the company.

High Court proceedings

The crux of Mr Appelbe's argument in the High Court was that he had "little knowledge" of what was happening in the Company and was not involved in its day-to-day management. Mr Appelbe maintained that he had no knowledge of the payments, because the Company was under the "effective control" of NAMA at that time, which served to further diminish his responsibility. He also maintained that he was deprived of knowledge of the company during its insolvency (namely, by the receiver, NAMA and the Liquidator).

The High Court rejected these arguments and found that Mr Appelbe did not act responsibly in relation to the affairs of the Company. An order for restriction pursuant to section 819 was subsequently made against him. In particular, the High Court noted the following:

• Mr Appelbe's averment that he had little knowledge of what was happening during the period about which the complaint is made reveals "a most fundamental misunderstanding of the serious duties of directors".

• Mr Appelbe appeared to believe that in order to avoid the making of a restriction order he need only show that he was unaware of the transactions of which the Liquidator makes particular mention, but the case law clearly establishes that the onus is on a respondent director to demonstrate that he has acted honestly and responsibly in relation to the affairs of the company during his tenure as director (before and after the company becomes insolvent).

• Mr Appelbe adduced no evidence as to his contribution to the decisions of the directors at any time in the life of the Company. He did not demonstrate any "active steps" that he took as director to keep himself informed of the affairs of the Company. Apart from denying knowledge of the insolvency and the disputed payments, he was “totally silent” on his activities as a director.

Court of Appeal

The correct interpretation of section 819 was at the heart of the appeal. Mr Appelbe's core argument was that the High Court judge erred in making the restriction order against him, because the Liquidator had failed to put forward a case for Mr Appelbe to answer.

Faherty J in the Court of Appeal rejected this interpretation of the legislation:

• "The provisions of section 819 are stark. Section 819(2) makes it mandatory that the court restrict a director of an insolvent company, subject only to it being satisfied as to the three matters specified in the subsection."

• "[T]he most important feature of the legislation is that it effectively imposes a burden on the directors to establish that the insolvency occurred in circumstances in which no blame attaches to them as a result of either dishonesty or irresponsibility". (quoting Murphy J in Business Communications Ltd v Baxter and Parsons)

In the event that his first argument failed, Mr Appelbe further maintained that he could not be held responsible for the Company's insolvency, or the disputed payments, because he had never been "called upon" "to partake in, engage in or otherwise adopt an active role in the management of the Company’”.

Faherty J did not accept this argument either. Even though NAMA was in control, liaised only with the other directors and never requested that Mr Appelbe join any meetings, this, the Judge concluded, "did not absolve him of his obligation as a director to keep himself apprised of the affairs of the Company in the sense outlined in La Moselle, Re. Mitek Holding Ltd. and Re Vehicle Imports Limited".

The Court concluded that Mr Appelbe's claim that he had “no worthwhile information in relation to the affairs of the Company”, coupled with the fact that he had been a director of the Company since its inception in 2005, "demonstrated the degree of irresponsibility that, effectively, served to copper fasten" the order of restriction. Furthermore, the Court noted that Mr Appelbe was a director of 11 other companies and a qualified solicitor, "who thus could be taken as knowing what the obligations of a director were".

Comment

The Court in this case could not find in Mr Appelbe's favour, because of his "total failure" to provide information that would satisfy the court that he had acted responsibly in accordance with his duties as director and therefore, should not be restricted. In other words, Mr Appelbe did not put forward any evidence that would rebut the presumption against him in accordance with section 819.

It is worth noting that Mr Appelbe's co-respondent in the High Court, Mr O'Brien, was not restricted. Reflecting on the proceedings, Faherty J noted that there were "stark" differences between the two directors, not least that Mr O'Brien had been appointed some five years after Mr Appelbe, at a time when the Company was heavily in debt. However, "more fundamentally", Mr O'Brien was exonerated because he provided "extensive affidavit evidence which demonstrated his knowledge of the affairs of the Company, notwithstanding the fact he had been excluded from the engagements between NAMA and Mr. O’Donovan". The case highlights that a director in restriction proceedings must provide detailed evidence to the court and show that they acted honestly and responsibly in relation to the conduct of the company's affairs. 

This case also serves as a reminder, not only of what is required in section 819 proceedings, but also of the active nature of a director's duties to a company; what Keane J described as the distinction between “abdication of responsibility” and “delegation of responsibility” (Re Laragh Civils Limited).

The key takeaways, which were referenced in the High Court, are as follows:

• Each individual director owes duties to the company to inform themselves about the company's affairs and to join with their co-directors in supervising and controlling them (Re Vehicle Imports Limited (In Liquidation)).

• Directors may collectively delegate certain functions, but such delegation does not absolve the directors from their obligation of ultimate supervision (Kavanagh v Reidler). 

• Passive directors cannot be exonerated from liability or relieved from disqualification or restriction on the basis of the passive nature of their role (Re Walfab Engineering Limited).

For further information in relation to this topic, please contact Michelle McLoughlin, Knowledge Lawyer; Liam Murphy, Knowledge Lawyer; Anne O'Neill, Senior Knowledge Executive or any member of ALG's Corporate and M&A team.

Date published: 7 September 2022