Recent directors' restriction cases examine issues of reliance by directors on qualified professionals and cross-directorships
Two interesting cases under Section 150 of the Companies Act 1990 were heard recently in the High Court. In the first case,
Gerdando Ltd (in Liquidation): Peter Doherty v Karl Donoghue, Ruth Donoghueand Edith Donoghue1 , Mr. Justice Barrett considered the extent to which the directors could be held liable, having relied on the advices and services of professional advisors.
Karl, Ruth and Edith Donoghue (the respondents) were directors of Gerdando Ltd (the Company). In an effort to restructure their business, they sought professional advice and, on foot of this, entered into a so called ‘three-party swap’ transaction in 2008. The Company was subsequently wound up and applications were sought under Section 150 for restriction orders in respect of all three respondents. An issue arose as to whether the "three-party swap" had been carried out in breach of the relevant legislation, namely, Section 45 of the Companies (Amendment) Act 1983.
Mr. Justice Barrett concluded that the respondents had acted honestly during their tenure as directors. The sole issue therefore was whether they had acted responsibly in the reorganisation of the company, and specifically the ‘three-party’ swap transaction.
The judge noted that there was a divergence of opinion between the liquidator and an independent expert, as to whether or not there had been a breach of Section 45. He commented that this greatly weakened the contention that the respondents had failed to act responsibly in following the professional advice they received.
Following a review of the relevant caselaw, the judge made the following comments about the issue of reliance on professional advisors:
- Where a director, acting in good faith, seeks comprehensive professional advice of suitably qualified advisors, and in good faith acts in accordance with that advice, that will generally protect the director from being later restricted under Section 150;
- However, where the courts are dealing with a director who is professionally qualified or who directs a large or quoted enterprise, more exacting standards of behaviour will typically be applied than in a case like this where the directors in question were not experts in matters of law, tax or accounting; and
- For directors who are not experts in such matters, it is sufficient that they entrust their legal, tax and accounting matters to suitably qualified professionals, and that they conform fully with those advices. Were the contrary to apply, the result would be absurd.In light of these findings, Mr. Justice Barrett refused to impose restriction orders on the respondents. This decision will be of comfort to directors who, in good faith, seek professional advice on business matters and then act on that advice.
In the second case, Shellware Ltd: Declan Taite and Eoghan Breslin2, an application for a restriction order under Section 150 of the Companies Act 1990 was sought in respect of the former director of Shellware Limited, Mr Breslin. Shellware Ltd (the Company) designed and manufactured exhibition and presentation stands and was also engaged in the design and fit-out of various pubs. Following the economic collapse in 2008, the Company's business contracted rapidly and it was wound up in 2009.
Mr. Justice Barrett found no issue as to Mr. Breslin's honesty, and therefore the case turned on whether he acted responsibly in relation to the Company.
Six grounds were presented as evidence of Mr. Breslin's irresponsible behaviour. They were:
- a failure to maintain adequate books and records;
- late/non-payment of certain taxes;
- the steps taken when the Company was in financial difficulty;
- the making of payments to a related company;
- the use of company credit cards for personal expenses; and
- a claimed lack of cooperation with the liquidator.
In relation to the issue of books and records, Mr. Breslin gave evidence that comprehensive accounts had been maintained until 2008. When it became clear to him that liquidation of the Company was imminent, he felt it would be imprudent to pay the costs of an audit. Mr. Justice Barrett commented that while Mr. Breslin's actions might be open to criticism, they were not sufficient to be categorised as irresponsible.
On the issue of late / non-payment of taxes, Mr. Justice Barrett said there was no evidence that Mr. Breslin ever avoided making a tax payment in order to keep the business of the Company afloat. Therefore there was nothing that would transform what was reproachable behaviour into irresponsible behaviour.
On the issue of steps taken by Mr. Breslin when the Company was in financial difficulty, Mr. Justice Barrett found that Mr. Breslin had looked for new business, engaged with trade creditors, sought professional advice and liaised with the Revenue Commissioners when it became clear that the Company was in difficulty. Whilst he might have been guilty of misplaced optimism, he was not guilty of irresponsible behaviour.
The fourth issue concerned payments made by the Company to another company, Nerano Bars Ltd (Nerano), of which Mr. Breslin was also a director. There was evidence that in the period prior to Nerano going into examinership, the Company continued trading with Nerano when it must have been obvious to Mr. Breslin that there was little prospect of the Company realising its debts. Mr. Justice Barrett commented that cross-directorships within closely related companies invariably cause confusion and conflicts within individual boards of directors as to the best course of action for any one company. However, the judge concluded that at no point did Mr. Breslin cross the line from responsible to irresponsible behaviour.
On the fifth issue, the judge found that Mr. Breslin’s use of the Company's credit card facilities to cover his expenses and remuneration was not irresponsible.
Finally, on the issue of cooperation with the liquidator, Mr. Justice Barrett concluded that that Mr. Breslin did substantively cooperate with him.
Mr. Justice Barrett declined to make an order under Section 150 of the Companies Act 1990. This case highlights that while many of the actions of the director in this case were ill-advised, his actions in attempting to save an ailing company did not cross the threshold of irresponsibility.
FRC issues consultation on the UK Corporate Governance Code
The Financial Reporting Council (FRC) has published a consultation paper on proposed changes to the UK Corporate Governance Code (the Code) which, if implemented, will apply to reporting years beginning on or after 1 October 2014. Earlier consultations by the FRC include directors' remuneration (in October 2013) and risk management, internal control and the going concern basis of accounting (November 2013).
According to the consultation paper, the FRC is proposing that:
- Greater emphasis be placed on ensuring remuneration policies are designed with the long-term success of the company in mind. This should be led by the remuneration committee;
- Companies should put arrangements in place that will enable them to recover or withhold variable pay when appropriate to do so. Vesting and holding periods for deferred remuneration should be considered;
- Companies should explain when publishing AGM results how they plan to engage with shareholders when a significant percentage of them have voted against a particular resolution;
- The Schedule to the Code which deals with the design of performance related remuneration for executive directors should be updated to encourage companies to give further consideration to the arrangements they have in place for deferred remuneration such as vesting and holding periods for shares;
- Companies should state in their financial statements whether they consider it appropriate to adopt the "going concern" basis of accounting and identify any material uncertainties to their ability to continue to do so;
- Companies should robustly asses their principal risks and explain how they are being managed and mitigated;
- Companies should state whether they believe they will be able to continue in operation and meet their liabilities, taking account of their current position and principal risks and specify the period covered by this statement and why they consider it appropriate; and
- Companies should monitor their risk management and internal control systems and carry out a review of their effectiveness annually, and report on that review in the annual report.
The consultation also covers (a) a review of certain extracts of the FRC's revised guidance on risk and going concern and (b) whether there would be benefits to allowing companies to publish some or all of the information currently contained in the corporate governance report on a website rather than in the annual report and accounts.
The consultation closes on 27 June 2014 and is of significance to Irish companies listed on the Main Securities Market of the Irish Stock Exchange, or to any company in Ireland following the UK Corporate Governance Code.
EU / INTERNATIONAL DEVELOPMENTS
Commission proposal to amend the Shareholder Rights DirectiveIn April, the European Commission published a proposal to amend the Shareholder Rights Directive (the Directive). This Directive, which sets out rights for certain shareholders of listed companies, was implemented in Ireland by the Shareholders' Rights (Directive 2007/36/EC) Regulations 2009.
These Regulations apply to companies listed on the Main Market of the Irish Stock Exchange and to companies listed on a regulated market elsewhere in the EU but having their registered office in Ireland. The Regulations do not apply to companies whose shares are traded on AIM or ESM (formerly IEX), to UCITs and non-UCITs or to companies without a listing. In general, the rights granted under the Regulations apply only to the registered members of affected companies.
The proposal to amend the Shareholder Rights Directive was part of a package of measures announced by the European Commission in April, aimed at improving company law and corporate governance within the EU. The proposal for the revision of the Shareholder Rights Directive addresses certain corporate governance shortcomings relating to the behaviour of companies and their boards, shareholders (institutional investors and asset managers), intermediaries and proxy advisors.
The key proposed changes are:
- Companies will be required to publish detailed and user-friendly information on their remuneration policy and on the individual remuneration of directors. All benefits of directors, in whatever form, will be included in this remuneration policy and report. Shareholders will have the right to approve remuneration policy and to vote on the remuneration report. However, it will still be for the board, on the basis of the policy, to decide on the actual remuneration to be paid;
- Listed companies will be required to submit details of related party transactions, which represent more than 5% of the company's assets or turnover, to shareholders for their approval. Companies may not unconditionally conclude such transactions without their approval. Smaller related party transactions representing more than 1% of the company's assets must be publicly announced at the conclusion of the transaction, accompanied by a report from an independent third party confirming that the transaction is fair and reasonable from the shareholders' perspective;
- Proxy advisors will be required to adopt and implement adequate measures to guarantee that their voting recommendations are accurate and reliable, based on a thorough analysis of all the information that is available to them and are not affected by any existing or potential conflict of interest or business relationship. They must also publicly disclose certain key information related to the preparation of their voting recommendations and, to their clients and the companies concerned, information on any conflict of interest that might influence their voting recommendations;
- Intermediaries will be required to offer to listed companies the possibility of having their shareholders identified. There will be certain data protection measures in place relating to this.
Further information on this can be obtained in the Frequently Asked Questions document produced by the European Commission.
The proposal will be submitted to the Council and the European Parliament for their consideration and final adoption. The new Directive will then have to be implemented into domestic law.
European Parliament resolution on proposed directive on disclosure of non-financial and diversity information
The European Parliament has adopted the proposal for a directive on disclosure of non-financial and diversity information by certain large companies and groups. The companies concerned will be required to make disclosures on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors.
The new requirements will apply to large companies with more than 500 employees. In particular, large public-interest entities with more than 500 employees will be required to disclose certain non-financial information in their management reports. The Commission has indicated that companies will be required to disclose concise, information necessary for an understanding of their development, performance, position and impact of their activity, rather than a fully-fledged and detailed report. In addition it appears that disclosures may be provided at group level, rather than by each individual affiliate within a group.
The proposed directive gives companies significant flexibility to disclose relevant information in the way that they consider most useful, or in a separate report. Companies may use international, European or national guidelines which they consider appropriate
As regards diversity on company boards, large listed companies will be required to provide information on their diversity policy, such as, for instance: age, gender, educational and professional background. Disclosures will set out the objectives of the policy, how it has been implemented, and the results. Companies which do not have a diversity policy will have to explain why not.
The proposal must to be adopted jointly by the European Parliament and the European Council. The Council is expected to formally adopt the proposal in the coming weeks.
European Commission issues Recommendation on quality of corporate governance reporting ("comply or explain")
On 9 April 2014, the European Commission issued a Recommendation on the quality of corporate governance reporting ("comply or explain")
The objectives of the Recommendation are:
- To provide guidance on how listed companies should explain their departures from the recommendations of relevant corporate governance codes, and specifically, Article 20 of the Accounting Directive (2013/34/EU); and
- To encourage European listed companies to report on how they followed the relevant corporate governance codes on the topics of most importance for shareholders, in order to improve transparency and the quality of corporate governance reporting in general.
Specifically, the Recommendation outlines that in each departure from an individual recommendation, companies should:
- Explain in what manner the company has departed from a recommendation;
- Describe the reasons for the departure;
- Describe how the decision to depart from the recommendation was taken within the company;
- Where the departure is limited in time, describe when the company envisages complying with a particular recommendation; and
- Where applicable, describe the measures taken instead of compliance and explain how that measures achieves the underlying objective of the specific recommendation or of the code as a whole, or clarify how it contributes to good corporate governance of the company.
Member States must inform the Commission of the measures they have taken in accordance with the Recommendation by Spring 2015.