Court Refuses Restriction Orders for Directors who Relied on Professional Legal Advice

In Doherty v Donohoe & Ors [2014] IEHC 187, the High Court refused to make an order under section 150 of the Companies Act 1990 in respect of three directors who relied on professional legal advice, in regard to a company reorganisation which the liquidator believed was in breach of the relevant legislation.

The Court followed earlier case-law which shows that where a director, acting in good faith, seeks comprehensive professional advice from qualified advisors, and in good faith acts in accordance with such advice, that will generally suffice to prevent such director from later being the subject of a section 150 or like order.

However, Barrett J went on to suggest that in his view "more exacting standards of behaviour" will be applied by the courts when dealing with a director who is professionally qualified, or who directs a large or quoted enterprise. This aspect of the decision is noteworthy, and is discussed in more detail below.

Facts

These proceedings concerned an application for a restriction order under section 150 of the Companies Act 1990, as amended, in respect of each of the three defendant directors. The key issue arising was the extent to which directors may be held liable in law when they rely on professional advice.

The defendants were directors of Gerdando Ltd at the date of commencement of its winding up.  Gerdando was the proprietor of two Eddie Rocket's restaurants in Dublin.  The liquidator contended that one of the reasons for Gerdando's insolvency was a 'reorganisation' in 2008 of the corporate arrangements through which the restaurants were operated by the defendants. The legitimate intention underpinning the reorganisation was that each restaurant business should be owned and operated by a separate company.  The liquidator claimed that the reorganisation was done in breach of the Companies Acts and the fiduciary duties of the defendants as directors in that it entailed a distribution that was allegedly done in breach of section 45 of the Companies (Amendment) Act 1983.  It was not necessary in this application for the court to determine if a breach of section 45 had occurred.

The court was required to grant the declarations sought unless it was satisfied that that each of the defendants acted (a) honestly and (b) responsibly in relation to the conduct of the affairs of Gerdando and (c) there was no other reason why it would be just and equitable that an order under section 150 should issue.  There were no 'honesty' or 'just and equitable' grounds arising in this case.  Accordingly, the court only needed to consider whether the defendants had acted 'responsibly' in effecting the reorganisation in the manner that they did.

Decision

The High Court refused to make an order under section 150 restricting the three defendant directors, on the grounds that having obtained professional legal advice, and in light of the fact that they were not experts in matters of law, tax or accounting, they did not fail to act 'responsibly' in relation to the reorganisation of Gerdando.

The Court noted that in Coyle v Callanan [2006] I.R. 447, a section 150 application was made in respect of two directors of a company that had acted in breach of the financial assistance provisions in section 60 of the Companies Act 1963.  In that case, O'Leary J, refused to make the declarations sought on the basis that the defendants had received express and specific legal advice that a breach of section 60 did not arise from the transaction in issue in those proceedings. O'Leary J. noted that the legal advice was wrong but the defendants were entitled to rely on it for the purposes of defeating the section 150 application, though not necessarily in proceedings under other enactments which operate on the basis of strict liability.  In Stafford v O'Connor [2007] IEHC 246, the court took a similar view, and refused to make a restriction order against the respondents in circumstances where they had obtained proper professional advice in the matter which did not go against the completion of the transaction.

Barrett J. stated: "A director of a small enterprise who, as here, was unskilled in law, tax or accounting and who enlisted suitable professional assistance to ensure that his or her enterprise acted in compliance with applicable law and regulation would nonetheless suffer very serious sanction in the event of non-compliance. Were a director to suffer so, a question would surely arise as to whether there was any advantage to engaging professional advisors if the law was effectively going to set the value of their advices at nought.”

Comment

This decision follows earlier authorities to the effect that directors will be allowed to rely on professional advice they have obtained, in order to show that they have acted 'responsibly', and should not therefore be subject to a section 150 or like order. 

However, unlike in earlier case-law, Barrett J. appears to have drawn a distinction between the responsibility of directors of “small enterprises” who are unskilled in law, tax and accounting, on the one hand, and of directors who are professionally qualified, or are directors of large or quoted companies, on the other hand.  Barrett J. warns that, in his view, "more exacting standards of behaviour" will typically be applied by the courts in the latter case.

Unfortunately Barrett J. did not elaborate, for the benefit of such directors, on what exactly he meant by "more exacting standards of behaviour".  This is a pity, as such directors might understandably be concerned to know that there may be standards of behaviour to which they could be expected to adhere, but which have not been specified either in the relevant legislation or by the Courts.  We can only speculate as to what Barrett J. might have had in mind in this regard.  If such directors have a higher level of knowledge and expertise of applicable law and regulation, then perhaps the Judge considered that they might be expected to themselves evaluate or raise queries with respect to the advice given, regarding possible breaches of the law, rather than to just accept professional advice at face value? 

The comments of Barrett J. raise the unappealing possibility that a director with some knowledge of company law, tax or accounting, but who is not himself or herself an expert in these particular areas, might nevertheless be expected to second-guess expert professional advice on a technical issue, such as the making of unlawful distributions.  Such an approach could conceivably discourage directors with professional expertise from serving on boards of some companies.  As Barrett J. himself observed, at paragraph 14 of his judgment, in the context of the director of a small enterprise:

"…the person who sought such advice would be placed in an impossible situation in which, despite a lack of knowledge of applicable law and regulation, he or she would have to contemplate and raise queries regarding every possible breach of laws or regulations about which he or she knew little or nothing."

It is difficult in our view not to also apply the logic of this argument to the director with some professional training, or who is a director of a large or quoted enterprise, with or without such training.  The question also arises as to how a clear line is to be drawn between cases where the directors have no professional training and those where they do, and/or are directors of a large or quoted company.  In both cases, the directors may be entirely justified in seeking expert professional advice to guide them through the intricacies of some of our laws, particularly in the areas of corporate reorganisations and restructurings, which are becoming ever more complex and technical in nature.

It is to be hoped that in future cases dealing with section 150, the position is clarified by the Courts, so that either it is made clear that, for the reasons given above in particular, no such distinction should be drawn in our company law, or alternatively that, if such a distinction is to be drawn, then it is explained in detail what are the "more exacting standards of behaviour" which are to be applied to professionally qualified directors and directors of large or quoted enterprises, so as to ensure that all company directors, and in particular non-executive directors, are clear about the standards of behaviour they are expected to adhere to when seeking and relying upon professional advice and trying to avoid being the subject of a section 150 order.

Company directors should note that this decision is confined to reliance on professional legal advice as a defence to an application for a section 150 or like order.