The High Court has made a restriction order under section 150 of the Companies Act 1990 against the managing director of a construction company and his niece, a former director and assistant marketing manager of the company, on the basis that they failed to act responsibly in relation to the conduct of the affairs of the company.
The Court stated that while there is no express statutory obligation to prepare management accounts, a failure to do so may, in the circumstances of a particular case, constitute a breach of a director’s common law duty to inform himself about the affairs of the company. In the instant case, Herbert J found that the failure to prepare management accounts on a regular basis for a period of at least nineteen months, when it was known that the company was insolvent, was highly irresponsible. The directors were unable to refer the Court to any other system which had been put in place which might have fulfilled the same function as periodic management accounts.
Further, during the period when no management accounts were prepared, the company, without any form of contract, carried out very extensive works at a property owned by the managing director. The company was owed approximately €3.6 million in respect of such works, but no note of this was included in the company’s statement of affairs. Herbert J was satisfied that this debt contributed significantly to the insolvency of the company.
In making a section 150 order against the managing director, Herbert J commented that as managing director, he had a higher duty than the other directors to act responsibly in the conduct and management of the company’s affairs and that he had failed to so act. The judge was satisfied that he represented a serious and continuing danger to persons who might choose to do business with any company which he might promote or form in the future or of which he is a director or secretary.
The Court also made a section 150 order against the managing director’s niece, who as an executive director had played a significant role in the management of the affairs of the company. Herbert J remarked that she could not evade responsibility simply by claiming that all major functions within the company were under the sole control of the managing director. He sated that this demonstrated “a wholly unacceptable lack of understanding on her part, of her role and the legal obligations of directors, especially executive directors of a company.” He further observed that there was no evidence whatsoever to demonstrate any concern on her part as regards the company’s failure to comply with its legal obligations.
An application was also brought to restrict the son of the managing director who, for a period of five years, had occupied the position of a director. This application was refused as the Court was satisfied that the son’s only role in the company was to look after the plant and machinery, and there was no evidence that he played any real role in the day to day management of the affairs of the company. In refusing to make the order sought, Herbert J stated:
“while the [son] may have failed to act independently and assertively having accepted the office of director of the company he did not, in any but this very limited sense, neglect to exercise an appropriate degree of responsibility with regard to the management of its affairs. I am satisfied, looking at the entirety of the evidence, such as it is, touching the whole period of his tenure as a very nominal director of the company, that the [son] on the balance of probabilities does not represent a danger to persons who might chose to do business with any company of which he is a director or secretary which he might decide to promote or form.”]
In bringing the application, the liquidator sought to rely on a failure by the directors to file annual returns on behalf of the company for the 2007 financial year. The Court noted that annual returns had been made for the years ending 2004, 2005 and 2006. Herbert J stated that:
“A relatively short term failure to comply with formal obligations of this nature, where historically there had been compliance over a longer period would be difficult to describe as irresponsible, unless it contributed to the insolvency or hid the true condition of the company from third parties dealing with it. In the present case, while deprecating the failure to make annual returns for the financial year ending the 31st December, 2007, I am satisfied that this failure related only to that financial year and could not reasonably be said to have contributed, either directly or indirectly, to the insolvency of the company or to have hidden its true condition from parties dealing with it.”
The Court also stated that something more than non-compliance with tax legislation for a limited period of time only is required to show that directors did not act responsibly in the management of the affairs of the company.
In re Fergus Haynes (Developments) Ltd  IEHC 53