The operation of Section 150 of the

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1 The Restriction Of Directors Michael Quinn highlights recent judgements of the High Court in relation to the duties and responsibilities of limited company directors and officers The operation of Section 150 of the Companies Act, 1990 has continued to give rise to significant activity for insolvency practitioners, having been given fresh impetus by Section 56 of the Company Law Enforcement Act, In the last year alone, there have been a number of important judgments of the High Court and these offer guidance to insolvency professionals and to all those interested in the law governing the duties and responsibilities of directors and officers of limited liability companies. Hundreds of restriction applications are being heard by the High Court each year. In many of those cases, judgments are delivered ex tempore and therefore we have a limited number of reserved judgments considering the law in depth. This paper discusses some of those important judgments. Leading Cases The seminal judgment is that of the late Mr Justice Shanley in La Moselle Clothing Limited (1998). In that case, the Court indicated that in determining the responsibility of a director for the purposes of Section 150 the Court should have regard to the following: (a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts (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 Re Squash (Ireland) Limited (8 February 2001) the Supreme Court approved the tests set out by Mr Justice Shanley in La Moselle Clothing Limited. The Supreme Court also held that in scrutinising the conduct of any director, the Court should look at the entire tenure of his directorship, and not simply the few months in the run up to the liquidation. In the recent case of Tralee Beef & Lamb Limited (20 July 2004), Ms Justice Finlay Geoghegan adopted the judgment of Mr Justice Shanley, but amplified the considerations to be taken into account in relation to paragraph (a) quoted above. She 12

2 pointed out that Mr Justice Shanley had referred in that paragraph only to the obligations imposed on a director by the Companies Acts. She went on to declare that the duties owed by a director are not only those imposed by the provisions of the Companies Acts, but also the common law fiduciary duties and duties of skill and care. Non Executive Directors It is well understood that the Companies Acts do not distinguish executive and non-executive directors. In one of the earliest decisions concerning Section 150, Re Costello Doors Limited (21 July 1995), Mr Justice Murphy emphasised that there should be no expectation or assumption that a wife or friend who becomes a non-executive director would not be subject to scrutiny by reference to Section 150. The most detailed discussion on this subject is to be found in the judgment of Ms Justice Finlay Geoghegan in Re Tralee Beef & Lamb Limited (20 July 2004). In 1996/1997, Tralee Beef and Lamb Limited had acquired a business of slaughtering cattle and lamb for de-boning and onward sale. When a winding up Order was made on 28 January 2002, the company had four directors. They were Mr John Delaney, the managing director, and three non-executive directors being Mrs Patricia Delaney, Mr Terry Dunne and Mr Simon Coyle. Restriction orders were made against all four directors. The Court developed the principles concerning the duties of a director, citing the English High Court Judgment in the case of Re Barings plc & Others (1999) 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. Ms Justice Finlay Geoghegan then cited three further rules from the Barings case: 1. 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. 2. Whilst directors were entitled to delegate particular functions to those below them on 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. 3. No rule of universal application can be formulated as to the duty referred to in 2 above. The extent of the duty and the question of whether it has been discharged, depended on the facts of each particular case, including the director s role in the management of the Company. The Court then considered what principles should be applied in analysing the duties and responsibilities of executive and 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 In the last year alone, there have been a number of important judgments of the High Court 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 the company. The directors collectively delegate the day to day management of the company to inter alia the executive directors. 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, the Court should take into account the differing roles of each director. Ms Justice Finlay Geoghegan continued It also appears important to take into account that nonexecutive 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 Section 150 must 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 to envisage that a director could establish that he has acted responsibly in relation to the conduct of the affairs of the company if during a significant period he either failed to inform himself about its affairs or if he did not take any steps to join with his 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. 13

3 Ms Justice Finlay Geoghegan had little difficulty concluding that Mr Delaney, the managing director, had not acted responsibly. Whilst Mrs Patricia Delaney understood her role in the company to be extremely limited she was aware in March 2001 of the significant financial difficulties in the company. The Court held: Even as a non-executive director, without any special business expertise, unremunerated and an agreed limited role it appears to me at a 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 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. The liquidator had reported to the Director of Corporate Enforcement that he had been satisfied by Mr Coyle that he acted honestly and responsibly. The liquidator was not relieved by the Director of Corporate Enforcement of his obligation to bring the application under Section 150 of the Act in respect of Mr Coyle. Whilst the liquidator did not take issue with Mr Coyle s position, there were a number of disputes on the facts between Mr Coyle and Mr Delaney. Mr Delaney alleged that he had heard nothing from Mr Coyle for an eighteen month period up to September Mr Coyle on the other hand referred to regular attempts to obtain financial information from the company. The Court found that Mr Coyle had no direct communication with Mr Delaney or anyone else within the company for a prolonged period of 18 months which she found to be a critical time for the company. She also noted that there were no directors meetings in 2000 and Ms Justice Finlay Geoghegan said that Mr Coyle was not under an obligation to personally control the company and she recognised that the primary responsibility to arrange board meetings did not lie with Mr Coyle. He was, however, under an obligation to participate with his fellow directors in collectively controlling and supervising the affairs of the company. He had 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 Accordingly she made a restriction order in respect of him. The decision is under appeal to the Supreme Court. The effect of the judgement is to reinforce the onus on non-executive directors to be pro-active and insist that board meetings be held and financial information be made available on an ongoing basis, even where there may be no reason to believe that there are financial difficulties. 14

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5 Digital Channel Partners Limited 17 December 2003 This company encountered financial difficulties during the summer of In August 2001, an examiner was appointed and in November 2001 a scheme of arrangement approved. However the investment failed and in March 2002, a liquidator was appointed. The liquidator s principal complaints were as follows: 1. There had been a failure to make certain tax returns and to discharge tax liabilities. 2. The extent of the final deficit was such that it ought to be taken into account in making a restriction order. The Court relieved all of the directors. There was an interesting discussion by the Court of the approach to adopt in a case where the complaints included failure to file tax returns. Ms Justice Finlay Geoghegan held as follows: 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. insofar 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. The Court held that the size of the deficit does not preclude the Court from concluding that the directors acted responsibly. The Court relied significantly on the fact that in the examinership in autumn 2001, a scheme was approved. If the investment envisaged in the scheme had been put in place the company could have survived. Therefore, the company, whilst in a difficult financial situation, was a company which had been managed in a reasonable manner and was capable of surviving if the investment was put in place. Costs There have been a number of cases in which difficult issues concerning legal costs have arisen. Throughout the 1990s, when it was obligatory for liquidators in every compulsory winding up to bring a Section 150 application, awards of costs were made against every respondent director regardless of the substantive outcome of the hearing. The Company Law Enforcement Act, 2001 amended Section 150 to include a new provision in the following terms: The Court, in hearing an application for declaration under this Section from the Director, a liquidator or a receiver, may order that the directors against whom the declaration is made shall bear the costs of the application and any costs incurred by the applicant in investigating the matter. In GMT Engineering Services Limited (30 July 2003), the Court held that the effect of this insertion is that the discretion to award costs is now limited and a costs order can only be made against the directors in a case where a restriction Order is made. In that case, no application was There have been a number of cases in which difficult issues concerning legal costs have arisen. made for an Order for costs against the liquidator. However, in the subsequent case of Re Digital Channel Partners Limited, such an application was made and costs were awarded against the liquidator. The Court found that in the Section 56 Report, the liquidator did not address the specific role which the director concerned played as a director of the company and there was no evidence that the liquidator put matters before the director concerned or gave him an opportunity of commenting. Conclusion These cases are only a sample of the many issues which have come before the courts over the last year. In terms of reform, it is hoped that some consideration will be given to establishing a structure whereby, in appropriate cases, a director can submit himself to a voluntary restriction or a suitable form of undertaking, thereby avoiding the costs and expense which is incurred in every case which necessitates the making of an application in the High Court. The judgment of the Supreme Court in the Tralee Beef & Lamb Case will be the first significant examination of this subject by that court since the Squash (Ireland) case in Michael Quinn is a Partner with William Fry Solicitors. He specialises in insolvency, corporate recovery and commercial litigation. He has extensive experience in advising liquidators, receivers, examiners financial institutions, investors and creditors. 16