The perils of making a declaration of solvency by company directors, without reasonable grounds.
In Minister for Agriculture, Fisheries and Food and the Attorney General v Fintra Trawling Company Limited, Mr Justice Michael White applied the provisions of Section 210 of the Companies Act 2014 (the 2014 Act) and made an order requiring the directors of Fintra Trawling Company Ltd (the Company, or Fintra Trading) to personally reimburse more than €31,000 of costs to the Company, which had been previously awarded to the Minister for Agriculture, Fisheries and Food and the Attorney General (the Applicants).
This appears to be the first reported decision of the High Court in which the provisions of Section 210 of the 2014 Act have been considered and applied.
The decision serves as a useful reminder that caution should be taken by company directors in situations where they are contemplating making a declaration of solvency in order to carry out certain transactions permitted under the 2014 Act (in this case, a members' voluntary winding up), to ensure that they have reasonable grounds for making such a declaration, as failure to do so can result in personal financial liability for the directors.
Background- Summary Approval Procedure, and declarations of solvency
Chapter 7 of Part 4 of the 2014 Act permits private companies1 to enter into a range of transactions, known as "restricted activities", subject to compliance with the detailed requirements of that Chapter (known as the "Summary Approval Procedure"), including the making by the directors of a declaration ( known as a "solvency declaration") to the effect that the company, having carried out the "restricted activity" in question, will be able to pay its debts and liabilities in full, within a 12 month period after the date of the relevant act.
These "restricted activities" include the giving of financial assistance by a company for the purpose of an acquisition of shares of the company or its holding company; a reduction of company capital; the making of loans to directors and their connected persons; certain types of merger; and a members' voluntary winding up of a solvent company.
However, Section 210 of the 2014 Act provides that where a director of a company makes a declaration of solvency without having reasonable grounds for that opinion, the court may declare that the director is personally liable, without any limitation of liability, for all or any of the debts or other liabilities of the company.
The Company had been the subject of a members' voluntary liquidation in October 2013 and, as part of this process, a declaration of solvency was approved by the Company's board of directors on 10 October 2013. A liquidator was appointed to the Company on 11 December 2013.
However, the three directors of the Company failed to notify the liquidator that costs were due by the Company to the Applicants. Furthermore, the solicitor for the Company incorrectly certified to the liquidator that there were no outstanding claims or litigation arising in respect of the Company.
In fact, the Company had been engaged in litigation with the Applicants, which resulted in costs being granted against the Company in favour of the Applicants in November 2011. The Company filed a notice of appeal against this order. A summons to tax these costs was issued and served in February 2013. In November 2015, the appeal of the Company was struck out and the Company was ordered to pay costs to the Applicants. By this time, the Company was in liquidation. In separate judicial review proceedings in 2011, costs were awarded against the Applicants in favour of the Company. In March 2016, the High Court declared the dissolution of the Company to be void, under Section 708 of the 2014 Act, to enable an application for various reliefs to be made by the Applicants.
The Court's position on the declaration of solvency
Having reviewed the timeline and facts of the case, Mr. Justice White set out the provisions of Section 210 of the 2014 Act, which states that where a director of a company makes a declaration of solvency without having reasonable grounds for that opinion, on the application of a liquidator, creditor, member or contributory of the company or the Director of Corporate Enforcement, the court may declare that the director shall be personally responsible, without limitation of liability, for all or any of the debts or other liabilities of the company.
If a company (or a successor company) is wound up within 12 months after the date of the making of a solvency declaration and its debts are not paid or provided for in full within 12 months after commencement of the winding up, the 2014 Act further provides that it shall be presumed that each director of the company who made the declaration, did not have reasonable grounds for that opinion.
Mr. Justice White noted that even though there were monies in the Company to be paid to the directors, if a company's debts are not paid or provided for in full within 12 months after the commencement of the winding up, it must be presumed (as the 2014 Act requires) that there were not reasonable grounds for the solvency declaration.
He went on to emphasise that an order for costs made by the High Court goes beyond a contingent liability – it is an actual liability, he said, which is capable of measurement but not measured unless costs are taxed in default of agreement.
He noted that costs were subsequently taxed at €31,594 and a certificate in respect of this was issued in March 2015. However, he said that the fact that the order may have been made in error by the Taxing Master, as the company had been liquidated, did not impact on the jurisdiction of the High Court to make an order under Section 210 of the 2014 Act.
He therefore made an order directing the directors of the Company who had been repaid money, to reimburse that money to the Company to cover the award of costs, stating that credit was due for the amount of costs that would have been due to the Company on the costs award of December 2011.
An interesting aspect of the case is that it appears from the timeline described by White J. that the solvency declaration, which was deemed to have been made without reasonable grounds, was made by the directors of Fintra Trading in October 2013 (presumably pursuant to the now-repealed provisions of the Companies Act 1963 which previously governed company liquidations, including the members' voluntary winding up procedure). However, this was nearly 18 months before the entry into force of the 2014 Act, on June 1 2015.
Section 256(8) of the Companies Act 1963 permitted a Court to make an order, in similar terms to those of Section 210 of the 2014 Act, making directors personally responsible for a company's debts and liabilities, where a declaration of solvency made pursuant to Section 256 was made without reasonable grounds, and there are provisions in the Interpretation Act 2005 which permit penalties to be imposed by a Court for a contravention of a repealed statute, as if that statue had never been repealed. However, White J. made his order under Section 210 of the 2014 Act, rather than under Section 256 of the 1963 Act. Furthermore, the "declaration" of solvency referenced in Section 210 of the 2014 Act appears to refer to an unsworn "declaration" made pursuant to the 2014 Act, not a sworn statutory declaration, which was required under the 1963 Act. It is true that a provision of the 2014 Act permits "any thing commenced" under a provision of the prior Companies Acts, before their repeal, to be "completed" under the corresponding provision of the 2014 Act. However, it is unclear if this was a case where such a provision could be relied on. In any event, the judgment of White J. does not contain an analysis of these provisions.
Leaving the foregoing issue aside, the decision undoubtedly serves as a reminder to Irish company directors of the dangers of ignoring the provisions of Section 210 of the 2014 Act, and in particular, the fact that directors who make a declaration of solvency as part of the Summary Approval Procedure without reasonable grounds, can face unlimited personal liability for all or any of the debts or other liabilities of the company.
Directors who are considering using the Summary Approval Procedure in order to carry out any "restricted activity" under the 2014 Act may therefore wish to seek advice from the company's solicitors, as well as its auditors, prior to making the necessary declaration of solvency, given the onerous nature of Section 210.