Director who was ‘deceived’ not restricted by the Court

In Murphy -v- O'Flynn & anor [2016] IEHC 197 a liquidator sought an order from the Court restricting William and Deirdre O’Flynn from acting as directors pursuant to Section 150 of the Companies Act 1990.

Applicable Law
Keane J first considered the applicable legislation, as the Companies Act 2014 had come into operation between the time the motion grounding the application issued, and when it first came on for hearing.

He looked at the wording of Section 150 of the 1990 Act and Section 819 of the 2014 Act (being the comparable provision) and noted that under the new section, a director must establish that he has acted honestly and responsibly in relation to the conduct of the company’s affairs before or after the company became insolvent. He also noted that the Section now includes an express requirement that the respondent director establish that he or she has, when requested to do so by the liquidator, co-operated as far as could reasonably be expected in the conduct of the winding up. However, Keane J also accepted that there was an argument to be made that these differences added nothing of substance as under both formulations, a director must satisfy the Court that there is ‘no other reason why it would be just and equitable’ to make a restriction order.

Keane J also referred to the fact that the new Section imposes greater capitalisation requirements in respect of any company with which a restricted director may lawfully be involved during the period of his or her restriction. Under the 1990 Act, the applicable capitalisation requirement in respect of any such company - other than a public limited one - was €63,486.90, whereas under the 2014 Act that requirement is €100,000.

Despite the differences referred to, Keane J held, that in the absence of any significant countervailing factor, it was appropriate for him to consider the application pursuant to the 2014 Act.

Facts
The Company in question was incorporated in 1994 and the liquidator was appointed at a meeting of the creditors of the Company in April 2014.

In presenting the application for restriction to the Court, the liquidator drew a number of matters to the Court’s attention as relevant to the issue of whether the directors had acted responsibly in the conduct of the Company's affairs.  The first issue, was that the Company had to be restored to the register in 2000 and, again, in 2005, having been struck off for failure to file accounts. After the restoration of the Company, the directors again failed to file the appropriate accounts.

The Court was of the view that this demonstrated a persistent failure to comply with the obligations to maintain proper books and records and financial information and amounted to a persistent breach by the Company of its obligation to make returns in accordance with the Companies Acts.

The second issue was that the Company had failed to discharge CGT liabilities in the sum of €93,785 in 2005 and €478,865 in 2006; PAYE and PRSI liabilities amounting to €41,211 between 2008 and 2011 (inclusive); and VAT liabilities in the aggregate sum of €183,340 for the period 2006 to 2011 (inclusive).

The Court was of the view that this demonstrated, at the very least, a lack of commercial probity and want of proper standards on the part of the Company’s directors in using monies due to the Revenue Commissioners, including fiduciary taxes, to keep the Company afloat and in permitting the Company to continue trading while insolvent over an extended period.

Decision
Mr O’Flynn confirmed that he had ‘no objection’ to an order being made against him. He did not seek to contest the application or any of the evidence. Accordingly, Keane J accepted the liquidator’s evidence and held that Mr O'Flynn had failed to satisfy him that he acted responsibly in relation to the conduct of the Company’s affairs.

Keane J declined to make a declaration of restriction in respect of Mrs O'Flynn as he held that she had satisfied the court that she acted honestly and responsibly in the conduct of the Company’s affairs. She had given uncontroverted evidence to the Court that she had been actively deceived by her husband in relation to the Company's affairs, to the extent that, when she learned of these issues she moved immediately to retain an independent legal adviser.  She subsequently discovered that her signature as a director was forged on a number of identified documents executed on the Company’s behalf.

Comment
While accepting Mrs O'Flynn's evidence, Keane J did note that the common law duty of a director is to acquire and maintain a knowledge and understanding of a company’s business sufficient to enable him or her to act properly as such. The abdication of responsibility as a director during the trading life of a company cannot be cured or cancelled out by subsequent compliance with, the further, and quite separate duty, to co-operate with the liquidator after the commencement of the winding-up.

For more information please contact Paula Mullooly.

Date published: 26 April 2016