Judgment
Title: Director of Corporate Enforcement -v- Walsh
& ors
Neutral Citation: [2016] IECA 2
Court of Appeal Record Number: 13/14
High Court Record Number: 2014 141 COS
Date of Delivery: 20/01/2016
Court: Court of Appeal
Composition of Court: Kelly P., IrvineJ., Hogan J.
Judgment by: Kelly P.
Status: Approved
Result: Allow and set aside
THE COURT OF APPEAL
[2014/13]
[Article 64 Transfer Case]
Kelly P.
Irvine J.
Hogan J.
IN THE MATTER OF WALFAB ENGINEERING LIMITED AND
IN THE MATTER OF RPB PRODUCTS LIMITED AND
IN THE MATTER OF SECTION 160 OF THE COMPANIES ACT 1990
BETWEEN
THE DIRECTOR OF CORPORATE ENFORCEMENT
APPLICANT/APPELLANT
AND
BRENDAN WALSH AND CATHERINE WALSH AND
PATRICK WALSH
RESPONDENTS
JUDGMENT of Mr. Justice Kelly delivered on the 20th day of January 2016
Introduction
1. This is an appeal by the Director of Corporate Enforcement (the Director) against
a judgment and order of Barrett J. of 23rd July 2014 [2014] IEHC 365.
2. The trial judge was requested to make a disqualification order against the
respondents pursuant to s. 160(2)(h) of the Companies Act 1990 (“the 1990 Act”).
He declined to do so. He furthermore declined to make a restriction order pursuant
to s. 160(9A) of the 1990 Act.
3. The Director contends that the judge was in error in making the orders which he
did and asks this Court to so find and reverse the order of the High Court. He also
takes issue with a number of statements contained in the judgment under appeal
which he believes give rise to confusion which is undesirable in the context of
corporate regulation.
Relevant legislation
4. Section 160(2)(h) of the 1990 Act, provides as follows:“Where the court is satisfied in any proceedings or as a result of an
application under this section that –
...
(h) A person was a director of a company at the time of the
sending after the commencement of s. 42 of the Company
Law Enforcement Act 2001, of a letter under subs. (1) of s. 12
of the Companies (Amendment ) Act 1982, to the company
and the name of which, following the taking of the other steps
under that section consequent on the sending of that letter,
was struck off the register under subs. (3) of that section; . . .
the court may, of its own motion, or as a result of the
application, make a disqualification order against such a
person for such period as it sees fit.”
5. This particular subsection was introduced to s. 160 of the 1990 Act, as a basis
for disqualification by s. 42(b)(ii) of the Company Law Enforcement Act 2001 (the
2001 Act).
6. In considering an application under s. 160(2)(h), the provisions of subsection
(3)(A) (which was also inserted by the 2001 Act) have to be borne in mind. It
provides as follows:
“The court shall not make a disqualification order under paragraph
(h) of subsection (2) against a person who shows to the court that
the company referred to in that paragraph had no liabilities (whether
actual, contingent or prospective) at the time its name was struck off
the Register or that any such liabilities that existed at that time were
discharged before the date of the making of the application for the
disqualification order.”
7. The terms of s. 160 (3)(A) make it clear that s. 160(2)(h) is concerned with
insolvent companies. A respondent to a s. 160(2)(h) disqualification application
who can demonstrate that the relevant company had no liabilities at the time its
name was struck off the Register or that any such liabilities were discharged before
the date of making the application for the disqualification order is provided with a
defence by virtue of s. 160(3)(A).
8. The 2001 Act created the position of the Director. He is independent in the
performance of his functions which include the enforcement of the Companies Acts.
9. An important provision of the 2001 Act is s. 56. Section 56(1) provides:
“56.—(1) A liquidator of an insolvent company shall, within 6 months
after his or her appointment or the commencement of this section,
whichever is the later, and at intervals as required by the Director
thereafter, provide to the Director a report in the prescribed form.”
Subsection (2) provides:
“(2) A liquidator of an insolvent company shall, not earlier than 3
months nor later than 5 months (or such later time as the court may
allow and advises the Director) after the date on which he or she has
provided to the Director a report under subsection (1), apply to the
court for the restriction under section 150 of the Act of 1990 of each
of the directors of the company, unless the Director has relieved the
liquidator of the obligation to make such an application.”
10. Section 56 created an obligation on all liquidators of insolvent companies to
report to the Director and to bring the prescribed application unless relieved of the
obligation to do so by the Director.
11. In the event of a liquidator bringing an application under s. 150, the court is
obliged to make the order unless the directors can show that they acted honestly
and responsibly and that there was no other reason why it would be just and
equitable that they should be subject to restriction.
12. Directors of insolvent companies could of course avoid the provisions of s. 56
by not placing the insolvent company into liquidation at all. By simply allowing the
company to be struck off the Register for failure to file an annual return, they
would not fall to be investigated by a liquidator under s. 56 of the 2001 Act. It
appears clear that the introduction of s. 160(2)(h) was with a view to ensuring that
directors of insolvent companies who permitted them to be struck off for failure to
make returns rather than putting them into liquidation would not, by so doing,
avoid the rigours of the regulatory regime bolstered by the introduction of the 2001
Act.
13. Section 160 (2)(h) has as its focus directors who, through culpable inaction,
have allowed an insolvent company to be stuck off the register. They ought to have
the company wound up. By failing to do so, they avoid scrutiny of a liquidator
under s. 56 of the 2001 Act. The enactment of s. 160(2)(h) seeks to address this
abuse.
The Annual Return
14. Section 125(1) of the Companies Act 1963 (the 1963 Act) requires every
company to make a return in the prescribed form once every year.
15. Section 383(3) obliges each director and secretary of a company to ensure that
the requirements of the Companies Act are complied with by the company. The
combination of these two sections imposes the obligation on each director and
secretary to ensure that annual returns are filed in respect of each company.
16. The company’s annual return provides information which may be of use to
persons dealing with the company. A failure to make such a return deprives those
persons of this information. When there is a failure for one or more years to make
an annual return, the Registrar of Companies is entitled to strike such company off
the register. By so doing, those who control the company lose the privilege of
incorporation.
17. There is a rather elaborate statutory procedure prescribed which precedes the
striking off of a company. It includes the sending of a letter to the company
specifying that unless the outstanding returns are delivered within one month, a
notice may be published in the CRO Gazette with a view to striking the name of the
company off the register. If the CRO is told that the company is not carrying on
business or if it fails to deliver the annual returns, then the necessary notice in the
CRO Gazette may be published. The contents of that notice specify that at the
expiration of one month from the date of the notice, the name of the company will,
unless all outstanding returns are delivered, be struck off the register and the
company will be dissolved.
18. As is clear from the terms of s. 160(2)(h), a person who was a director of a
company at the time of the sending of the letter prescribed by s. 12 of the
Companies (Amendment) Act 1982 (the 1982 Act) may be disqualified for his
default.
19. Such persons are also, of course, liable to criminal prosecution in respect of
their default, but that has no relevance to the issues in this case.
20. The interplay of these various statutory provisions make it plain that directors
who do not bring about the winding up of an insolvent company, but rather allow it
to be struck off the register, cannot, by that device, escape the prospect of
disqualification or restriction.
The Evidence
21. It is common case that an application under s. 160(2)(h) involves the court
engaging in a two-step inquiry. The first step requires consideration of whether or
not the court has jurisdiction to make the order which is sought. This creates no
difficulty in this case because, on the evidence, the respondents accept that all of
the formal proofs had been made out and that therefore the High Court had
jurisdiction to make the order sought.
22. The second stage of the inquiry involves a consideration of whether or not the
court should disqualify the directors, or, as an alternative, restrict them under the
provisions of s. 150. Such a decision involves the exercise of a judicial discretion
which was exercised by Barrett J. in the manner complained of by the Director.
23. It is necessary to examine the evidence which was before the judge when he
made his order.
24. Apart from the formal proofs which conferred jurisdiction on the court and
which are not in issue, there was uncontested evidence that in the case of Walfab
Engineering Ltd., there was an unsatisfied judgment registered against it for the
sum of €954 in favour of Country Clean Recycling Ltd. The judgment was dated
15th April 2010.
25. In the case of RPB Products Ltd., there was a judgment for in excess of
€70,000 in favour of the Collector General of Revenue of 21st September 2009
which had been satisfied to the extent of €18,895. There was a further judgment
for a sum of in excess of €13,000 in favour of the Collector General in respect of
which a sum of €4,949 had been discharged. There was a further judgment of 17th
January 2011 in favour of a company called Killarney Advertiser Ltd. for €547
which had not been discharged at all. There was a further judgment for €35,572 in
favour of the Collector General of 26th October 2011 which was wholly unsatisfied.
Finally, there was a judgment for €1,072 of 3rd March 2010 in favour of Tex Oil
Ltd. which remained unsatisfied.
26. The most recent annual return made in respect of RPB Products Ltd. was in
respect of the financial year ending 30th September 2009 which showed creditors
falling due within one year in the amount of €189,405 and creditors falling due
after more than one year in the sum of €148,934.
27. In the case of Walfab Engineering Ltd., the annual return in respect of the
financial year ending 30th April 2007 showed creditors falling due within one year
in the amount of €299,399 and creditors falling due after more than one year in the
sum of €12,272.
28. Two replying affidavits were sworn. One was sworn by the third named
respondent, Patrick Walsh, on his own behalf an on behalf of the first respondent,
Brendan Walsh. Both are metal fabricators by trade. In the case of RPB Products
Ltd., these two respondents and another director formed the company in June
2002. Its business was importing and installing prefabricated stairways.
Unfavourable conditions in the market resulting from the economic downturn
caused an acute decline in the number of customers of the company. In addition, a
number of debtors failed to honour their credit commitments. The company, as a
result of this, ceased to trade on 30th April 2011. The first and third respondents
took a decreasing role in the company from October 2008 when, at a directors’
meeting, it was decided that they would concentrate their efforts on Walfab
Engineering Ltd. and try to trade through the difficulties. From that time, the dayto-day running of the company was carried out by these two directors and it is said
it was their intention that they would resign their directorships but they failed to do
so.
29. In the case of Walfab Engineering Ltd., the third respondent is a director with
his wife, the second respondent. They became directors on 23rd October 1992, and
on 21st January 2003 were joined by the first respondent as a director. They
remained so until the company was struck off the Register of Companies. This was
also a metal fabrication and manufacturing company. The company traded
successfully until 2008. At the height of its existence, it had 13 fulltime employees.
The economic downturn is blamed for the decline in the company’s fortunes, and by
the time it ceased trading on 1st October 2011, there were just three employees
left in the company.
30. Mr. Walsh did not dispute the failure on the part of each of the companies to
file annual returns. In the case of RPB Products Ltd., the annual returns for the
years 2009 and 2010 had not been filed. In the case of Walfab Engineering Ltd.,
there was a failure to file annual returns for the years 2008 and 2009. The reason
given for this was “that the effect of the economic downturn had an acute and
significant impact upon the company’s ability to trade due to the involvement and
reliance of both companies in the building and construction sector and the demise
of the company’s fortunes came about as a result”.
31. The third respondent, on his own behalf and on behalf of the first respondent,
averred that they had at all time acted honestly and responsibly in relation to the
companies. He said that the reasons that the companies were struck off the
register was that they became insolvent as a result of the economic downturn and
reliance upon business being generated by customers in construction, and in
particular, the commercial construction sector. He said that as a result of the
companies becoming insolvent, neither they nor the directors were in a financial
position to afford to liquidate them as neither company had any assets. He
described the withdrawal of overdraft facilities by a bank in respect of RPB Products
Ltd. in November 2009. In January 2010, the banks to Walfab Engineering
withdrew term loan facilities. The relevant facilities were secured by personal
guarantees which were called in by the banks. In addition, equipment used by the
companies was repossessed. He averred that the directors made increased efforts
at cost savings and efficiency but without result.
32. He further averred that he and his fellow director, the first respondent, acted in
the best interests of the companies in regard to compliance with their obligations
as company directors. He said they made every honest and reasonable effort to
continue to ensure the survival of their livelihoods and the business in which they
had invested significant human and capital resources over the years. It was their
genuine intention to keep trading into a position of recovery. They did not take any
significant remuneration from the companies for a considerable amount of time
before the companies were struck off the register. Directors’ loans in the amount of
€120,000 existed at the time the companies ceased to trade.
33. The third respondent also swore that Catherine Walsh, the second respondent,
is his wife and was a director of Walfab Engineering Ltd. since 1992. He averred
that she did not take any part in the management of the company or play any role
in its affairs during its period of incorporation. She was not involved in the
company in any active manner and was not responsible for the consequences of
what materialised.
34. He said that he and the first respondent took every step to ensure the survival
of a family business that was exposed to a period of acute market decline.
35. In addition, he said that notwithstanding the fact that his and his fellow
deponents’ obligations as company directors were paramount, there were other
matters including the discharge of liabilities, satisfying customers’ orders and
finishing works in progress and sustaining their livelihoods which concerned them.
36. The second affidavit was sworn by the second respondent, Catherine Walsh,
who confirmed her directorship of Walfab Engineering Ltd. but was not in any way
involved in RPB Products Ltd.
37. This deponent is a nurse by profession and has worked continuously and
exclusively in that capacity since she qualified in 1988. She is the wife of the third
respondent and the sister-in-law of the first respondent. Walfab Engineering Ltd.
was operated as a family business. It was never her intention to be actively
involved in the company and she took no active role in it. At no stage during the
time when it was trading did she play any active part in the day-to-day
management and affairs of the company save being made aware of the overall
state of the company’s performance by her husband and fellow director. She never
received any director’s remuneration, drawings, wages, salary or otherwise from
the company. The accounts of the company were presented to her by the company
accountants for signature during the initial years of trading. During the last ten
years of the company’s trading, these accounts were signed by the first and third
respondents only.
38. She admits that there was a failure on the part of Walfab Engineering Ltd. to
file annual returns for the years 2008 and 2009.
39. She averred that the detriment caused to the business by the external
economic circumstances became an insurmountable challenge for the company to
continue to trade. Thus, despite strenuous efforts of which she was aware, the
company became insolvent. She had no active involvement in the company’s affairs
and had no role in the management of it. She said that she always acted honestly
and responsibly in relation to the conduct and affairs of the company.
40. It was in the light of this evidence that the judge made the order under appeal.
41. Because of the criticism which is made by the Director of the judgment of
Barrett J., it is, I think, necessary at this stage to refer to the state of the case law
on s. 160(2)(h) prior to that judgment.
Case Law
42. The first reserved judgment on the meaning and application of s. 162(2)(h)
was that of Finlay Geoghegan J. in Re Clawhammer Ltd. [2005] 1 I..R. 503. There
had been a previous ex tempore judgment of Laffoy J. given in November 2004 in a
case called Re Norse Security Ltd. which is in fact referred to in Clawhammer.
43. The Clawhammer case involved three separate applications brought by the
Director. Finlay Geoghegan J. considered all three together and construed the
relevant statutory provisions in order to provide guidance in respect of future
applications.
44. In the course of her judgment, she identified the purpose of these statutory
provisions where she said:
“13 Counsel for the Director submitted that the court should have
regard to the scheme of the Companies Acts and in particular Part
VII of the Act of 1990 in considering the appropriate order. Further,
it was submitted that the Oireachtas, by including in s. 160(2)(h) of
the Act of 1990 the possibility of disqualification in the circumstances
set out therein reflects a serious legislative concern about the
practice whereby to the detriment of creditors, insolvent companies
are allowed by their directors to be struck off the register rather than
be wound up in a proper fashion. The concern for the position of
creditors is reflected in s. 160(3A) of the Act of 1990 which permits
directors to escape either disqualification or restriction under the
section where they can show that there were in fact no creditors at
the time of strike off or that such creditors have been discharged
prior to the making of the application.
14 I accept the submissions. There is potential prejudice to creditors
of an insolvent company if the directors, by default, permit it to be
struck off the register rather than taking steps to wind it up. In such
circumstances such assets of the company as remain are not applied,
as a matter of course, in the discharge of creditors according to
statutory priorities. Even directors who seek to discharge liabilities of
the company may do so in accordance with their own preferences
and possible perceived future commercial needs or future commercial
intentions or to escape liabilities under guarantees. It also may be of
benefit to the directors in the sense of escaping the scrutiny of their
conduct of the company's affairs which might follow an investigation
by a liquidator including the possibility of being fixed with personal
liability for liabilities of the company in circumstances where same is
mandated by the Companies Acts. Accordingly, I accept the
submission made on behalf of the Director that the Oireachtas
regards the fact that directors may have permitted a company to be
struck off the register as a result of their failing to make annual
returns as more than a technical breach of their obligations under the
Companies Acts.”
45. Paragraph 18 of the Clawhammer judgment, sets out the judge’s conclusions as
to the exercise by the court of the jurisdiction conferred under s. 160(2)(h) of the
Act. The judge set them out in numerical order as follows:
“1. Where the Director satisfies the court on the necessary proofs
under s. 160(2)(h) of the Act of 1990 and the respondent directors
do not offer any exculpatory evidence to the court either as to their
involvement in the company, the circumstances leading up to the
striking off of the company or the outstanding liabilities of the
company an order of disqualification is probably in general justified.
2. In any application where the respondent directors appear and
offer evidence to the court it will be appropriate to take that evidence
into account in determining whether or not to make a disqualification
order or a declaration of restriction.
3. Where the respondent directors adduce evidence of the likely
quantum of the undischarged liabilities of the company or their role
in relation to the company or other circumstances leading to the
striking off of the company, it will be appropriate for the court to take
such facts into account in determining any period of disqualification.
Similarly it will be appropriate for the court to take into account any
impact on the respondent directors of the making of a disqualification
order in the context of any evidence offered of future proposals to
earn a livelihood.
4. The scheme of s. 160(2)(h) of the Act of 1990 is such that the
Director may satisfy the court that the circumstances for the making
of a disqualification order exist without the court having any evidence
of the extent of the liabilities of the company in question or any
information as to the role of the respondent directors in the affairs of
the company or leading up to the striking off of the company other
than that such person was a director of the company. It appears
appropriate that the court should attempt to apply a consistent
period of disqualification in such cases.
5. In determining a period of disqualification the court must have
regard to the fact that the Oireachtas intended such order as a more
serious sanction than a declaration of restriction under s. 150 of the
Act of 1990. This follows from the express wording of s. 160(9A) of
the Act of 1990.
6. The mandatory period for the declaration of restriction under s.
150 of the Act of 1990 is five years.
7. Whilst a full disqualification order is in its terms more restrictive
than a declaration of restriction, in practice the latter may operate to
prevent certain respondents from acting as directors. This depends
upon the particular circumstances of a respondent director. In the
absence of a respondent putting before the court any relevant
evidence, it is difficult to conclude that a disqualification order for
any period less than five years will be a more onerous sanction for
the respondent than a declaration of restriction which must be for
five years.
8. If a respondent, by failing to offer any evidence to the court has
over-looked putting before the court evidence which might have
persuaded the court to either make a disqualification order for a
lesser period or grant a declaration of restriction, there is available
an application for relief under s. 160(8) of the Act of 1990.
9. Hence in the absence of any relevant evidence in relation to a
respondent, other that the minimum proofs to satisfy s. 160(2)(h) of
the Act of 1990, a period of disqualification for five years appears
appropriate.”
46. The approach set out by Finlay Geoghegan J. in para. 18 of her judgment is
one which has been followed in all subsequent applications under s. 160(2)(h).
47. Since the decision in Clawhammer, the Director has obtained a total of 114
disqualification orders and nine restriction orders in all of which the Clawhammer
principles were applied
48. One commentator, Dr. Deirdre Ahern in her book ‘Director’s Duties, Common
Law and Practice’ (Dublin, 2009), says that “the Clawhammer propositions have
been regarded as authoritative ever since”.
49. The only departure from the application of those principles is that authored by
Barrett J. in the present case and his decision in Chercrest Ltd. [2014] IEHC 363.
50. Before embarking on a consideration of the judgment under appeal, I list a
number of authorities which were cited in argument which are enlightening and
which are entirely consistent with the principles identified in Clawhammer. The
court was referred to Re CB Readymix Cahill v. Grimes [2002] 1 I.R. 372; Re Wood
Products Ltd; Director of Corporate Enforcement v. McGowan [2008] I.R. 598; Re
NIB: Director of Corporate Enforcement v. Byrne [2010] I.R. 222; Re Kentford
Securities Director of Corporate Enforcement v. McCann [2011] 1 I.R. 585 and Re
NIB: Director of Corporate Enforcement v. Seymour [2011] IESC 45. It necessary
to mention just one of those decisions at this juncture.
51. In Kentford, O’Donnell J. examining the qualification regime under s. 160, said
it was important to consider it in its entirety. He went on:
“[32] It seems clear that the complexity and variety of s. 160 cannot
be reduced to a single touchstone whether identified as the ‘primary
purpose’ or the ‘only function’ of the Act of 1990. Instead, the Act of
1990 ranges from very serious matters requiring mandatory
disqualification to matters which might, in certain circumstances, be
regarded as regulatory, posing no immediate or obvious threat to the
public. It is also significant in my view that the deemed
disqualification under s. 160(1) is mandatory. The consequence of
mandatory disqualification follows upon the conviction irrespective of
the nature of the matters giving rise to the conviction, their age or
any prediction as to the future risk to the public from the individual
concerned.”
52. Later in the same judgment, O’Donnell J. had this to say:
“[38] A consideration of the structure of the subparagraphs of s.
160(2) is useful in seeking to interpret the subparagraphs in issue in
any individual case. It is noteworthy that only subs. (d) and (e) refer
expressly to the concept of unfitness. It has been observed that in
one sense s. 160(2)(d) can be said to encapsulate all the other
grounds. Looked at in another way, this subsection could be said to
be a catch all provision capturing conduct not specifically identified in
the other subsections, but which may nevertheless justify
disqualification subject to the court's discretion. It is important,
therefore, that the Companies Act 1990 specifies conduct in the
other subsections of s. 160(2) which the Act itself appears to
consider to render a person, presumptively at least, unfit to be a
director. In that way, subs. (d) sheds light on the other subsections.
By the same token, the other subsections give some indication of the
type of conduct unspecified in subs. (d) itself, which would justify the
making of a disqualification order under that subsection. Given the
vagueness of the concepts being discussed, the perspective thus
provided offers a valuable degree of focus to an inquiry under s. 160
of the Act of 1990.”
53. These observations of O’Donnell J. appear to me to demonstrate that the
decision in Clawhammer is in accord with them. Applying the observations of
O’Donnell J., it is clear that s. 160(2)(h) identifies conduct which, by itself, the
legislature identified as rendering a director presumptively unfit for such office.
That intent on the part of the legislature finds expression in Clawhammer and
particularly at para. 18.1 where Finlay Geoghegan J. said that a person against
whom the proofs were duly satisfied under s. 160(2)(h) ought, in general, to be
disqualified in the absence of exculpatory evidence. In addition, she correctly
identified, at para. 18.3 of her judgment, the matters that are appropriate for
consideration and which might influence a court not to make a disqualification
order.
The Judgment under Appeal
54. Barrett J. correctly decided that he had jurisdiction to make a disqualification
order. In so doing, he expressly followed the views expressed by O’Donnell J. in
Kentford that an application of the type in suit is a “two-stage structure”. The
Director accepts that this was a correct approach on the part of the judge.
Thereafter, however, the Director parts company with the judge and contends that
he fell into error in the construction which he placed on s. 160, generally, and in
particular, s. 160(2)(h). The Director also contends that the judge misdirected
himself concerning the nature of the discretion given to him and the matters to
which he should have regard in the exercise of that discretion.
55. It is clear from the judgment under appeal that the trial judge, although he
considered the decision of Finlay Geoghegan J. in Clawhammer, departed from the
guidance given by her. That departure is notified from an early stage in his
judgment where, at para. 3, he says:
“Finlay Geoghegan J. delivered her judgment in Clawhammer in early
2005, some years in advance of the financial maelstrom that afflicted
the State from late 2008 onwards. While her observations are as true
now as they were then, the practical context in which s. 160
applications fall to be considered has changed utterly. In this regard,
it is worth noting that the courts do not administer justice blinkered
from general facts of which they are entitled to take judicial notice
such as the collapse of the national economy around 2008, the
protracted financial downturn that followed, and the adverse financial
consequences that all of this has entailed for many people, including
the respondents and indeed the creditors of the companies of which
they were directors.”
56. Whilst it is of course true that courts do not decide cases in a vacuum or are
unaware of general facts such as the serious downturn of the economy, there is, in
my view, no justification for that to alter or displace the well-established
interpretation or implementation of a statutory provision such as s. 160.
57. A “financial maelstrom” does not change the purpose of s. 160 which is the
promotion of proper corporate governance (in this regard see the observations of
Fennelly J. in Re Wood Products and O’Donnell J. in Kentford).
58. Neither does a “financial maelstrom” alter the obligations upon directors in
circumstances where companies under their control become insolvent. In such a
circumstance, they should take the necessary steps to bring about the company’s
winding up. They cannot, as an alternative, fail to carry out their obligations by not
making annual returns and waiting for the company to be stuck off the Register. If
they do, then they are likely to face an application of the sort in suit. Difficult
trading conditions or financial pressure does not provide a form of absolution from
the statutory duties undertaken by persons when they decide to become directors
of a company.
59. At para. 8 of his judgment, the trial judge considered matters which he
regarded as pertinent to the exercise of his discretion. The first of these was what
he described the “scale of enterprise and qualification of directors”. He pointed out
that the courts:
“In applying the law are of course sensitive to the personal
circumstances and social background of persons who present before
them. This is what makes our courts hallowed places in which,
subject at all times to what the law requires, it is sought to dispense
measured justice and avoid unmerited harshness of treatment.
In the instant case, Messrs. Brendan Walsh and Patrick Walsh are
metal fabricators by trade and, though clearly commercially astute,
they are not professional directors, do not possess professional
qualifications, and have never served at the helm of large or quoted
enterprises. Mrs. Catherine Walsh is married to Mr. Patrick Walsh
and, it appears, largely because of that was appointed a director of
Walfab Ltd., a family enterprise, perhaps to satisfy the minimum
two-director requirement that arises under law. Certainly, she never
took an active part in the operation of Walfab.”
59. At para. 9, he then considered what he described as the “context in which
director transgressions occur”. He said:
“If justice can be tempered by reference to context, and it both can
and should, then it follows that it must also be capable of being
tempered by reference to the times, given that the times form a part
of the context against which the facts of the case unfold. In this
case, the relevant facts unfolded in unprecedentedly turbulent times,
when the respondents and the companies of which they were
directors were confronted with economic challenges of such a scale
and swiftness that customary practices such as the filing of returns
may not have had the priority to some, the respondents among
them, that legal requirements ought generally to have for all. The
respondents’ failure to make the necessary returns and their
apparently complacent acquiescence in the strike off process is
undoubtedly reproachable but needs to be viewed in context . . .”
60. For my part, I cannot agree that the factors identified by the trial judge can be
regarded as relevant to the exercise of his discretion. The whole thrust of the
legislative provision is to ensure that all directors of all companies comply with their
obligations. It matters not that they be directors of family companies, or be at the
helm of large or quoted enterprises. Neither do the qualifications of the directors or
the economic challenges that the companies may be facing affect the obligations of
directors to act responsibly in respect of an insolvent company.
61. In the following paragraph of his judgment, the trial judge says:
“It may be, it almost certainly is, that they should have sought to put
the companies into liquidation sooner and so ensure an orderly wind
up of the companies’ affairs in accordance with the law pertaining to
company liquidations.”
He is undoubtedly correct that they ought to have put the companies
into liquidation, but it is not a question of doing so “sooner” because,
in fact, they never wound up the companies at all.
62. Later, in this part of his judgment, the trial judge said:
“One might criticise the respondents’ behaviour in failing to file their
annual returns as foolish, unwise or reproachable. However, when
put in context, it is also to some extent understandable. It certainly
does not appear to this Court to be of such a nature as to require
that the court must exercise its discretion so that a disqualification
order now follows.”
The approach of the trial judge, as identified in the last part of the judgment from
which I have quoted, seems to be contrary to that identified by Finlay Geoghegan
J. The failure of the respondents to file annual returns or to wind up the company
would be such as, according to para. 18.1 of the Clawhammmer judgment, to
normally render a disqualification order appropriate.
63. The next factor identified by the trial judge at para. 11 of his judgment which
ought to be borne in mind in applications made under s. 160(2)(b) is the past
behaviour of respondents. In support of this he cites from the judgment of
O’Donnell J. in Kentford where that judge said:“In my view, it is clear from an analysis of the Act of 1990 that that
Act directs attention to that past conduct as certainly the best, if not
the only, guide to the necessity for disqualification.”
64. In his purported application of that dictum, the trial judge said:“Apart from the failure as regards the submission of annual returns
which led in turn to the eventual strike-offs, the court's attention has
not been drawn to any other misbehaviour on the part of any of the
respondents as directors during their relatively long tenure as
directors. This long period of good behaviour is a relevant factor
when deciding whether any of them should be exposed to the
severity of a disqualification order and inclines this Court to the view
that they should not. Neither in this nor in any other respect does it
appear to this Court that the behaviour of any of the respondents to
these proceedings comprises that egregious behaviour at which
s.160 is aimed.”
65. I am of the view that s. 160(2)(h) does not impose any burden on the Director
to establish any instances of past bad behaviour in order to bring about the making
of a disqualification order. As was pointed out by O’Donnell J. in Kentford (at para.
32 already quoted) there is no single purpose which underpins section 160. Each of
the wrongdoings identified in it are instances of conduct which warrant
disqualification. The intent of the legislature runs the risk of being frustrated if an
obligation is placed upon the Director to put before the court evidence of the entire
past behaviour of directors. Commenting upon the failure to draw attention to any
other misbehaviour by the respondents is to place an unnecessary and, indeed,
unworkable burden on the Director. He can have little knowledge about the affairs
of the companies and the director’s behaviour because no annual returns have
been made. As the companies have not been placed in liquidation there is no s. 56
report from a liquidator available to him. In many cases, the directors will not be in
a position to form any view as to how directors have carried out their obligations in
the past.
66. As is clear from the foregoing, I am of opinion that the trial judge was in error
in his departure from the Clawhammer principles. Later I will consider the
appropriate order to make on a proper application of the Clawhammer principles to
the facts of this case. Before doing so however, it is necessary to address another
aspect of the judgment which is also criticised by the Director.
Passive Directorships
67. The Director makes complaint about the trial judge’s approach to the position
of Mrs. Catherine Walsh. At para. 15 of his judgment he said:“One of the points touched upon in these proceedings is the extent to
which a married woman, who acts as the second-named director of a
company solely to satisfy the minimum two director requirement
under the Companies Acts, and who in point of fact does nothing in
relation to that company, can rely upon the passive role that she has
consistently played to justify the non-issuance of an order against
her under s.160 of the Act of 1990. As the court considers that in
any event no liability should attach to any of the respondents, it is
not necessary to render judgment on the contention made in respect
of the second-named respondent that she was in effect only a
passive director of Walfab and ought not to be exposed to liability as
a consequence. That said, it does not appear that Ms. Catherine
Walsh in her actions as director was or is tainted with that ‘real moral
blame’ to which reference was made by Carroll J. in the renowned
case of In Re Hunting Lodges Limited (in liquidation) [1985] I.L.R.M.
75 at p.85 as the basis for imposing personal liability on a
purportedly passive director.”
68. The Director contends that this is an incorrect approach and runs contrary to
authority.
69. The first thing to be said is that Re. Hunting Lodges was an application under s.
297 of the 1963 Act in which personal liability was sought to be attached to
directors by reason of their participation in a scheme of fraudulent trading. The
factors which are relevant to a consideration of personal liability being found
against directors for fraudulent trading have little to do with the topic of
disqualification or restriction under ss. 160 or 150 of the 1990 Act.
70. It would be contrary to the whole notion of proper corporate regulation that
passive directors would be exonerated from liability or relieved from disqualification
or restriction on the basis of the passive nature of their role. There are a number of
cases where that is made clear.
71. In Re. Costello Doors (High Court, 21st July, 1995) Murphy J. did not accept
that a director could be excused from acting responsibly merely because he or she
accepted the office to facilitate the proprietor without being prepared to involve him
or herself in any aspect of the management of the company. Similarly in Re.
Vehicle Imports [1985] ILRM 75, the wife of an executive director who alleged that
she was just a named director with no involvement in the company was
unsuccessful in persuading the judge that director’s duties did not apply to her. He
held that there was no doubt that director’s duties apply equally to non executive
as to executive directors, but on the facts of the case he found it was inappropriate
to make a restriction order against her because she had adopted a responsible
position in opposing the company’s increased borrowings. These decisions were
given in the context of s. 150 restrictions, but I am of opinion that no different test
would be appropriate in the context of a s. 160 application. All directors whether
passive or otherwise are required to undertake all reasonable steps to file annual
returns.
72. There is no warrant to limit the disqualification or restriction of passive
directors pursuant to s. 160(2)(b) to one where there is a “real moral blame” on
their part shown.
Section 160(9A)
73. Section 160(9A) provides that:“In considering the penalty to be imposed under this section, the
court may as an alternative, where it adjudges that disqualification is
not justified, make a declaration under section 150.”
74. In the judgment under appeal, the judge at para. 13 indicated his view that
this was not an appropriate case to issue a disqualification order against any of the
respondents. He then cited s. 160(9A) and said at para. 14 as follows:“The use of the word "may " in the above-quoted text points to the
power under s. 160(9A) being a discretionary power; the reasoning
of Murphy J. in Business Communications and McCracken J. in Re
Newcastle Timber , considered above, appears to put this beyond
doubt. The discretion arising, however, seems to be confined to the
court's electing whether or not to consider if a s.150 disqualification
(sic) falls to be made. Once the court goes down the path of
considering whether a s.150 declaration falls to be made, it seems
from the decision of McCracken J. in Re Newcastle Timber, at p.592,
that the court is trammelled by all the requirements of s.150, most
notably that if the criteria set by that provision are satisfied the
issuance of a restriction order is mandatory, a perhaps surprising
turn of the law given that s.160(9A) confers a power that, as stated,
is ultimately discretionary. Under s.150 of the 1990 Act, the court
must grant a restriction order unless satisfied that any of a variety of
circumstances identified in s.150(2) pertain, the relevant
circumstances in this case being that the respondents acted (a)
honestly and (b) responsibly in relation to the conduct of the affairs
of the company(ies) of which they were respectively directors and (c)
there is no other reason why it would be just and equitable that any
of them should be the subject of an order made under s.150. Nor
does it appear to the court that, apart from the issue of whether they
each acted responsibly, there is any other reason why it would be
just and equitable that any of them should be the subject of an order
made under s.150. So the sole issue arising is whether they each
acted responsibly.”
75. The judge then went on to hold that the directors had not behaved
irresponsibly and declined to make an order under section 150.
76. The Director contends and I believe correctly, that the trial judge fell into error
in holding that the court is “trammelled by all of the requirements of s. 150 when
applying the provisions of s. 160(9A)”. In fairness to the respondents it must be
said that they made no effort to stand over this part of the trial judge’s judgment
and effectively conceded that he was wrong in his approach to section 160(9A).
77. In my view s. 160(9A) does nothing more than provide an option to impose a
more lenient sanction than that prescribed under section 160. Thus, if there is an
entitlement to make an order under s. 160(2)(h) there is, depending upon the
facts, an entitlement to make an order under section 160(9A).
78. From its plain wording s. 160(9A) is concerned with a penalty to be imposed.
The penalty need not be that prescribed under s. 160 but, as an alternative, the
court may adjudge that a declaration under s. 150 will suffice.
79. Section 150 insofar as it is material recites:“(1) The court shall, unless it is satisfied as to any of the matters
specified in subsection (2), declare that a person to whom this
Chapter applies shall not, for a period of five years, be appointed or
act in any way, whether directly or indirectly, as a director or
secretary or be concerned or take part in the promotion or formation
of any company unless it meets the requirements set out in
subsection (3); and, in subsequent provisions of this Part, the
expression “a person to whom section 150 applies” shall be
construed as a reference to a person in respect of whom such a
declaration has been made.
(2) The matters referred to in subsection (1) are:
(a) that the person concerned has acted honestly and
responsibly in relation to the conduct of the affairs of the
company and that there is no other reason why it would be
just and equitable that he should be subject to the restrictions
imposed by this section, or
(b) subject to paragraph (a), that the person concerned was a
director of the company solely by reason of his nomination as
such by a financial institution in connection with the giving of
credit facilities to the company by such institution, provided
that the institution in question has not obtained from any
director of the company a personal or individual guarantee of
repayment to it of the loans or other forms of credit advanced
to the company, or
(c) subject to paragraph (a), that the person concerned was a
director of the company solely by reason of his nomination as
such by a venture capital company in connection with the
purchase of, or subscription for, shares by it in the firstmentioned company.”
80. The application for the declaration under subs. (1) may be made to the court
by the Director, a liquidator or a receiver.
81. Utilising the ordinary rules of statutory construction it is clear that the meaning
of s. 160(9A) is that in applications made to the court under s. 160, the court is
given a discretion to make a declaration under s. 150 as an alternative to making a
disqualification order where it adjudicates that a disqualification order is not
justified.
82. It is, in my view, incorrect to suggest that s. 160(9A) allows the court to make
a s. 150 declaration only where such could be made on foot of a s. 150 application.
I find nothing in the subsection or authorities to support that view of the trial
judge. In fact all of the authorities are in the opposite direction. In Clawhammer,
Finlay Geoghegan J. said
“Section 160(9A) of the Act of 1990 enables the court, on an
application for disqualification, in certain circumstances in the
alternative to make a declaration under s. 150 of the Act of 1990.
83. Later in her judgment she said:“Section 160(9A) of the Act of 1990 clearly envisages that a
declaration of restriction under s. 150 of the Act of 1990 is to be
considered as a lesser sanction than a disqualification order. It
enables the court ‘as an alternative, where it adjudges that
disqualification is not justified, make a declaration under s. 150’.”
84. A similar expression of view was made Laffoy J. in Re. Wood Products [2005]
IEHC 41.
85. But perhaps the best example to demonstrate the incorrectness of the trial
judge’s view that he was trammelled by all of the requirements of s. 150 is to be
found in the decision of the Supreme Court in Director of Corporate Enforcement v.
Seymour [2011] IESC 45. In this regard it is important to bear in mind the s. 150
Act is situated in Part VII, Chap. 1 of the 1990 Act which is headed “Restriction on
Directors of Insolvent Companies”. Section 160 is situated in Chap. 2 which deals
with disqualification generally. Applications under s. 150 are limited to directors,
but s. 160 applications are not so limited. Mr. Seymour faced a s. 160 application
and was not a director of the company (National Irish Bank) in respect of which
wrongdoing was alleged against him. He was in fact a former chief executive of that
entity. The Supreme Court, per Macken J., for reasons which are explained in her
judgment declined to make a disqualification order. Instead she said:
“I consider that a less draconian order, to be made pursuant to s.
150 of the Act of 1990, may and should be properly be made. In the
circumstances, I would set aside the High Court order and substitute
for it an order restricting the appellant, pursuant to s. 150 of the Act
of 1990 for a period of five years.”
86. If the trial judge’s view of s. 160(9A) was correct the Supreme Court could not
have made the order which it did in Seymour’s case.
87. In these circumstances I am satisfied both by the application of the ordinary
rules of statutory construction and a consideration of the authorities, that s.
160(9A) unambiguously does no more than permit the court to impose the lesser
sanction of a s. 150 declaration on a s. 160 application in an appropriate case.
This case
88. I now turn to the exercise of judicial discretion having regard to the facts of this
case.
89. I have already reproduced the evidence that was put before the court by each
of the respondents. The first and third respondents were directors of both
companies whilst the second respondent was a director of just one ie. Walfab. The
companies were insolvent with substantial judgments outstanding.
90. However, applying the test identified in Clawhammer and on a consideration of
the affidavit evidence which has been filed by the respondents and the explanations
given, I am inclined to the view that this is a case where the court ought to
exercise its discretion under s. 160(9A) of the Act and not make a disqualification
order. Instead there should, in my opinion, be a declaration of restriction under s.
150 for a period of five years in respect of each of the respondents.
Result
91. In my opinion, this appeal ought to be allowed and the order of the High Court
should be set aside.
92. In lieu thereof there should be substituted, pursuant to s. 160(9A), a
declaration of restriction under s. 150 in respect of all three respondents for the
mandatory period of five years from today.
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