The High Court (Binchy J), has recently made restriction orders in respect of directors in two separate applications before it. Both Kirk v Kershaw & ors  IEHC 122, High Court, 16 February 2016 and Taite v Connolly & anor  IEHC 145, High Court, 8 March 2016 concerned applications for declarations of restriction under Section 150 of the Companies Act, 1990. As that section has been replaced by Section 819 of the Companies Act 2014, Binchy J held that he would deal with the application under Section 819 insofar as the 2014 Act imposed a higher standard than the 1990 Act.
In both cases Binchy J observed that a restriction order under Section 150 (now Section 819) is mandatory, unless a director can satisfy the Court, that they acted honestly and responsibly and that there is no other reason why it would be just and equitable that they should be restricted as a director.
Kirk v Kershaw & ors
In this case the Company was incorporated in 1996 and its primary activity was the leasing and sale of waste handling vehicles. The initial directors of the Company were the first named respondent (MK) and his father (AK), who were directors from December 1998 until December 2007. The second and third named respondents (PK and CK) were directors from December 2007 until October 2010.
Neither PK nor CK played any significant role in the affairs of the Company. PK was an employee but was not involved in the management of the business and he did not attend directors' monthly meetings although he did sign documents when requested to do so. He was 25 years of age when appointed a director of the Company. CK had trained as a beauty therapist and was appointed as a director when she was 20 years of age. She had no involvement in the daily running of the business nor did she attend any meetings of the board although she was asked to sign documents.
AK owned the Company until he sold 50% of it to the fourth named respondent (JM) in 2009. JM was a director of the Company for a seven month period from October 2010 until the appointment of the liquidator. JM stated that he was not involved in the day to day operation of the Company’s business until the final weeks preceding its winding up and that his involvement in the Company was at the request of AK. The fifth named respondent (RC), was appointed a director at the same time as, and on the nomination of, JM.
In May 2011 the Company ceased trading and a liquidator appointed. There was an estimated overall deficiency of approximately €6million of which €3.8 million was owed to the Revenue. This had arisen, as the Company had suppressed sales for a number of years between 1998 and 2006, prior to the involvement of MK, PK, CK, JM and RC in the affairs of the Company and was uncovered by a Revenue investigation. MK stated that, even though he was a director during this period, he had no knowledge of this suppression of sales by AK.
While MK resigned as director in December 2007, the liquidator argued that MK was a shadow director of the Company between May 2010 and November 2010 for a number of reasons including the fact that he held himself out as “Group Managing Director" and it appeared that he was the driving force behind the Company. MK disputed this and stated that during that period his involvement in, and relationship with the Company was purely as a shareholder.
The liquidator advanced a number of grounds in support of the application to restrict MK, PK and CK namely the failure of the Company to file statutory returns and audited accounts; the failure of the Company to keep proper books and records; the build up of substantial liabilities to the Revenue; and their failure to assist the liquidator.
MK alleged that the issues in relation to the accounts and records were due to the actions of JM and RC and that he sought to assist the liquidator, and that he had not acted irresponsibly. PK and CK relied on their lack of involvement in the Company and their reliance on JM and RC to file the accounts.
The liquidator brought the restriction application against JM and RC on substantially the same grounds, namely the failure of the Company to file statutory returns and accounts and the failure to keep proper books and records. He also alleged that JM and RC had sold Company assets in the weeks leading up to the liquidation. He confirmed that JM and RC had fully cooperated in the liquidation.
JM stated that the failure to keep proper books and records arose before his appointment and the majority of his time and effort as director was spent trying to agree a payment plan with the Revenue. He also stated that the monies raised from the sale of Company’s assets ensured the payment of staff and that the fleet was maintained on the road until the date of liquidation. He confirmed that he had no knowledge of the accrued Revenue liabilities which arose prior to him becoming a director.
Binchy J held that it was clear that PK and CK could only be regarded as having been puppet directors and that that both AK and MK were shadow directors of the Company at all material times.
With regard to the failure to file annual returns and audited accounts, Binchy J held that, while JM and RC were open to some criticism for accepting their appointments as directors without having checked the accounts, the responsibility for the failure to comply the statutory filing requirements rested principally with MK, PK and CK. He also held the primary responsibility for the failure of the Company to keep adequate books and records rested with MK, PK and CK.
Binchy J was also of the view that the only person who could bear any responsibility for the Revenue liability, which was the biggest single factor leading to the insolvency of the Company, was MK.
He noted that while there was no suggestion of dishonesty on the part of any of the directors it was clear that MK, PK and CK did not behave responsibly in relation to the conduct of the affairs of the Company. With respect to PK and CK he noted that it was well established that directors could not abdicate responsibility in relation to the management of a Company. Accordingly restriction orders were granted.
With regard to JM and RC, Binchy J was satisfied that, from the time of their appointment as directors they were dealing with a Company in crisis which would have impeded their ability to organise compliance by the Company with its statutory obligations. Furthermore they cooperated fully in the liquidation. Accordingly, Binchy J did not believe there was any reason to make a finding that they did not act responsibly or that there was any other reason why it would be just and equitable to subject them to restriction orders.
Taite v Connolly & anor
In this case, the first named respondent, RC, was a director and Secretary of the Company from September 2007 to the date of winding up. The second named respondent, Sean Dunne (SD) was the ultimate owner and controller of the Company. SD was a director from May 2006 to the date of winding up and was adjudicated bankrupt in Ireland in July 2013 and in the US in March 2013.
The Company had given a guarantee to secure debts of other companies and the insolvency of the Company was triggered by the demand for payment of its liabilities under the guarantee. However, at the date of liquidation, the Company also had separate and unrelated liabilities to other creditors of approximately €1.2 million. The liquidator raised concerns about a payment of €800k, from insurance proceeds by the Company to Amrakbo (a related Company) and payments to Mavior (another related Company) under a consultancy services agreement, rather than to the trade creditors of the Company. The liquidator noted that no adequate explanations or supporting evidence was furnished to him in regard to these transactions.
The liquidator did not allege dishonesty but stated that he was not satisfied that RC and SD had acted responsibly in relation to the conduct of the affairs of the Company. He expressed concern that the books and records that were made available to him upon his appointment were completely inadequate and that piecemeal release of documentation hindered his investigation into the affairs of the Company and he had yet to be provided with certain documentation. The liquidator also raised the delay by RC in co-operating with him; the lack of engagement by SD and the failure of either director to complete a directors’ questionnaire (although a short response was received from RC).
RC stated that he had provided all relevant books and records information to the liquidator. He noted PwC reviewed these books and records on an ongoing basis and at no stage did PwC raise any fundamental issues regarding them. He further stated that matters were complicated by the appointment of receivers by NAMA which prevented the signing off and filing of the 2010 accounts.
With regard to queried transactions RC stated that at the time the Company made these payments, he was satisfied that it had monies available to it, there had been no call on the guarantee, and no trade creditors were prejudiced by the making of payments. He rejected any assertion that the payments were not made at arms length and stated that his sole role in making these payments was an administrative one.
Binchy J was satisfied that the Company had failed to maintain its statutory books and records and there had been a failure to file annual returns. Despite the directors' reliance upon the fact that the Company was required to provide information on a monthly basis to PWC, the Judge noted that no correspondence to or from PWC was produced to the liquidator. Binchy J noted, in particular, that the Company failed to keep adequate records in relation to the insurance claim.
Binchy J also had regard to the fact that SD had not cooperated or assisted in the liquidation nor did he offer any credible explanation for his failure to do so. The Judge was of the view that SD's departure to the US to engage in a bankruptcy process in that jurisdiction did not relieve him of his obligations under Irish law.
While RC did make himself available to the liquidator and provided him with a significant amount of documentation, the piecemeal manner in which this was furnished was unsatisfactory and contributed to a suspicion that not all documentation had been delivered. Binchy J noted that while RC relied heavily upon SD as one of the ultimate owners of the Company and a highly experienced businessman, he had duties and obligations of his own as director.
Binchy J held that the failure by the directors to maintain proper books and records of the Company in this case went far beyond the failure to comply with technical statutory requirements. The absence of adequate books and records made it almost impossible for the liquidator to satisfy himself that there was a proper basis for significant payments made by the Company to related entities. Questions regarding the commercial management of the Company also remained unanswered on account of the dearth of proper records. For these reasons Binchy J was of the view that the conduct of the directors could not be regarded as responsible and made restriction orders in respect of each of them.