The first anniversary of the credit crunch passed in recent weeks and the economic turbulence in this country has been reflected in the sharp increase in the number of insolvencies over the past 12 months.
According to figures compiled by accountancy firm FGS, 130 companies were placed into liquidation, receivership or examinership in the first three months of 2008, representing a sharp increase (60.5%) on the equivalent numbers for the same period in 2007. Among the first casualties of the credit crunch in August 2007 was Structured Credit Company (SCC), a provider of credit risk protection.
SCC sells derivatives to market dealers providing credit protection to such dealers. Between the beginning of July and mid-August 2007, SCC suffered a huge increase in its collateral liabilities - rising from US$5 million to US$350 million in the space of some six weeks. In addition, SCC's exposure to its creditors during this period grew at an exponential rate to the point where, having posted some US$175 million by way of collateral, SCC was left with funds on hand amounting to US$15 million to meet liabilities of a further US$175 million.
Acting on instructions from our client, Nomura International Plc, a creditor of SCC, LK Shields successfully petitioned the Irish High Court for a provisional liquidator to be appointed to SCC. Following this appointment, the directors of SCC successfully petitioned to appoint an examiner to the company.
In light of this ongoing uncertainty in the Irish economy, it is imperative that company directors fully understand the plethora of duties and obligations which are imposed upon them by both common law and the company law. In particular, directors of insolvent companies need to be aware of the various actions that can be taken by a company liquidator against them if they are found not to have complied with such obligations and duties.
This firm has acted in a number of high-profile actions taken by liquidators against company directors, two examples of which are set out below.
Pursuant to section 150 of the Companies Act 1990, a director (either executive or non-executive) can be restricted from acting as a director or secretary of a company for a period of five years unless the company has a paid-up share capital of €317,425 in the case of a public company and in the case of a private company, €63,487. In order to avoid a restriction order, a director must prove to the court that: o he has acted honestly in relation to the affairs of the company o he has acted responsibly in relation to the affairs of the company, and o there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by the section.
The Supreme Court recently delivered a landmark judgment overturning a decision of the High Court restricting a non-executive director from acting as a director. Our client was a non-executive director of Tralee Beef and Lamb Limited and was appointed to the position by a fund management company involved in business expansion schemes. In restricting our client from acting as a director, the High Court held that the fact that a director had been nominated to join the board by a shareholder in the company did not reduce the duty of care and skill in discharging the obligations imposed by him under the Companies Acts. This decision was successfully appealed by our client to the Supreme Court.
In the course of the Supreme Court judgment, Mr Justice Hardiman expressed significant dissatisfaction with the section 150 procedure. This Supreme Court decision has been widely reported as of significance to all directors, and, in particular, non-executive directors of Irish corporate entities.
Failure to Keep Proper Books and Records
Under section 204 of the Companies Act 1990, an application may be brought by a liquidator seeking to hold a director personally liable for the debts of the company on foot of the company's failure to maintain proper books and records. Where there has been a failure to keep proper books of account, the court may hold a director liable for the company's debts if it considers that such failure: o has contributed to the company's inability to pay its debts, or o has resulted in substantial uncertainty as to the assets and liabilities of the company, or o has substantially impeded the orderly winding-up of the company.
This firm acted for the liquidator in the seminal case in this matter (In the matter of Mantruck Services Limited, In Liquidation). On foot of an application brought by the liquidator, the court found that proper books of account had not been maintained. Mr Justice Shanley found that such contravention had substantially impeded the orderly winding-up of the company and resulted in substantial uncertainty as to its assets and liabilities. The court found that the losses sustained by the company as a result of this failure to maintain proper records were reasonably foreseeable by the respondent director and made an order imposing personal liability for the additional costs incurred in the liquidation by our client arising from this contravention.
In summary, in light of the current downturn in the Irish economy, it is imperative that company directors are fully aware of the various options open to them in circumstances where they find their company in financial trouble. In addition, it is imperative that directors of insolvent companies are fully aware of their duties and obligations.