Overview

On 13 January 2015 Barrett J handed down three judgments in applications to restrict directors under Section 150 of the Companies Act 1990.

Restriction orders were granted in only one of the three cases with the court continuing what appears to be a more lenient approach towards directors which was evidenced in judgments in 2014

The Cases

In Arkins V Murphy & anor [2015] IEHC 2 restriction orders were sought against husband and wife directors however no allegation of dishonesty was made against either of them. The Company had encountered significant financial difficulties in the last two years of its existence and while it made strenuous efforts to improve conditions it was to no avail.

Mrs Murphy argued that she was merely a 'nominal director' appointed because of ties of affection however, Barrett J rejected this contention noting that she was consulted on the difficulties that faced the company and was involved in critical meetings and transactions concerning the company therefore she had to ‘sink or swim’ with her fellow director in relation to whether or not a restriction order should issue.

The liquidator made five allegations of misconduct against the directors and, having considered the applicable case law at length, Barrett J found: 

  • Non-payment of revenue debts would not necessarily result in a restriction order and on the facts there was nothing which would require a restriction order be made on this ground. 
  • There was no want of responsibility by the directors in relation to inaccuracies in the last filed accounts. 
  • While the creditors meeting could have been convened a little earlier this did not require that a restriction order issue. 
  • The Court did not have sufficient evidence before it to conclude whether or not a loan issued to Mr Murphy was in breach of Section 31 of the Companies Act 1990 but it was satisfied that no loan had issued to Mrs Murphy.  Further there was evidence before the Court which indicated that most of the loan had been repaid and if there was an outstanding liability it was small and would not indicate a want of responsibility such as to require an order of restriction order. That said, the Court criticised the loose ‘money out, money in’ arrangements in the Company and considered that the directors should have obtained independent professional advice. However, despite this criticism, the actions of the directors were not irresponsible or dishonest. 
  • A misleading statement of affairs issued by the Company to a creditor prior to the presentation of its petition for the winding-up of the Company was prepared in good faith and clearly marked ‘Draft’. This did not indicate a want of responsibility which would justify a restriction order.

In all of the circumstances the Court did not consider that justice and equity required that a restriction order should issue against either of the directors.

In Fitzpatrick v O'Conaill & anor [2015] IEHC 4 the Company ran a substantial plumbing business which fell into difficulties with the downturn in the economy. There was a deficiency in contributions made to the industry pension scheme and it was on this basis that the liquidator argued that restriction orders should issue.  The directors were Mr O'Connaill and his mother who played no active role in the Company.

Barrett J noted that when times were good, all payments were made to the pension scheme and, following the crash, good faith efforts were made by Mr O'Connaill to address the arrears.  While the Court was of the view that the non-payment of contributions was serious, it noted that in all other respects the Company was properly run. The Court looked at the scale of the company, the length of service of the directors and it also factored into the equation the scale of the crash of 2008 and its aftermath.

While the Court declared it unacceptable that a company should default on the payment of pension contributions it had every sympathy for Mr O'Connaill's predicament. Barrett J described the case as close run but in all the circumstances he did not consider that Mr O'Connaill's behaviour evinced the irresponsibility or dishonesty that would require a restriction order.  As Mr O'Connaill's mother did not play any part in the company and there was no real moral blame attaching to her behaviour the Court held that it would not be just or equitable to restrict her from acting as a director. 

In Fitzpatrick v Sharma & ors [2015] IEHC 3 restriction orders were sought against four directors.  One was a shadow director, one a ‘nominal’ director, and the remaining two inactive directors.

The Company was incorporated in 2010, to carry on the operation of a hotel. The Company was a ‘phoenix company’, in that it had that emerged from the ashes of another entity that had collapsed owing the Revenue Commissioners substantial sums of money and which was trading in the same business. From the outset, the Company sustained substantial losses and in the months before it ceased trading, it was operating without an intoxicating liquor licence. As at the date of its liquidation the Company owed significant amounts of money to various creditors, including the Revenue Commissioners and a local authority.

The Court in arriving at its judgment had regard to the fact that the Company was a 'phoenix company' and it considered it significant it had incurred substantial losses from the outset, operated for some time without an intoxicating liquor licence and, ought to have ceased trading almost half a year before it did.

The directors were all UK resident and the Court noted that while Section 150 had extra-territorial effect in law, a question arose as to whether this would have any meaningful consequence in practice.

With regard to Mr Sharma, the shadow director, the Court considered that he had not acted responsibly in relation to the conduct of the affairs of the Company. He allowed it to be established as a ‘phoenix company’ that incurred substantial losses from the outset, allowed it to trade for some time without an intoxicating liquor licence and allowed it to continue trading for a considerable time after it ought  to have ceased trading. Accordingly it issued a restriction order against him.

With regard to the 'nominal director' the Court considered that, ‘real moral blame’ attached to her actions in acting as the required second director necessary to the establishment of a ‘phoenix company’. The Court therefore found it just and equitable that a restriction order should issue against her.

With regard to the two inactive directors, the Court noted that they did not appear to have done anything as directors beyond allowing themselves to be appointed. While this was unwise and evinced a lack of understanding as to the proper role of a director the Court did not find a want of honesty or responsibility on their part that would require the issuance of a restriction orders nor did it consider that there was any other reason why it would be just and equitable that restriction orders should issue against them.