High Court orders directors disqualified under Companies Act 1990 s.150 for failing to check company records before giving contradictory evidence.

Neutral Citation No. [2005] IEHC 59

THE HIGH COURT

[Record No. 2004/48COS]

IN THE MATTER OF CMC (IRELAND) LIMITED (IN VOLUNTARY LIQUIDATION)

AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT, 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT

ACT, 2001

BETWEEN

KEN FENNELL

APPLICANT

AND

GARY CAROLAN AND NIALL COSGROVE

RESPONDENTS

Judgment of Mr. Justice Clarke delivered the 4th day of March, 2005

1. In these proceedings the applicant as liquidator of CMC (Ireland) Limited seeks a declaration that both of the respondents (“the

respondent directors”) should be subjected to the orders specified in s. 150 of the Companies Act, 1990 (as amended) restricting

their activities in relation to companies for a period of five years.

2. The facts of this case are, however, somewhat unusual. The circumstances in which CMC (Ireland) Limited went into liquidation are

set out fully in the report of the liquidator. It seems clear therefrom that as a result of the loss of a major customer the company was

placed in very considerable difficulties. Protracted negotiations in relation to a rescue plan followed which reached an advanced stage

but ultimately proved to be fruitless. In the circumstances the company went into liquidation. While a number of matters were

investigated by the liquidator it seems clear from his report and from the arguments addressed in the course of the hearing that he

did not consider that the manner in which the business of the company was conducted up to the time of its liquidation would warrant

the making of orders under s. 150 in relation to any of the persons who may have been directors. That this view was shared by the

Director of Corporate Enforcement may be gleaned from the fact that the Director relieved the liquidator of his obligation to bring an

application under s. 150 in respect of each of the other directors of the company. There has been no suggestion that the respondent

directors had any larger role in the conduct of the affairs of the company prior to its liquidation than those directors who were so

relieved (indeed if anything the converse is the case).

3. It is important in that context to note that the liquidator has expressed the view that the company appears to have kept proper

books and records and was up to date with its statutory returns. The liquidator has also given evidence to the effect that the

directors kept their taxation returns up to date, which fact enabled him to complete returns that were outstanding at the date of his

appointment. It seems clear that the only basis upon which the liquidator and the Director considered it appropriate to bring this

application before the court stemmed from certain matters that occurred in the course of the winding-up and after the company had

gone into liquidation. Both respondent directors have adopted identical positions in their evidence to and arguments at this hearing.

4. Before turning to the specific matters raised I should comment briefly on an issue which is the subject of a large volume of

evidence in the significant number of affidavits filed before the court. It concerns the question as to whether the respondent

directors had in fact resigned as directors sometime prior to the company going into liquidation. It is not contended that any such

resignation was such as to exclude them from having been directors within the twelve months period ending at that date specified in

s. 150. The point does not, therefore, have any relevance to the jurisdiction of the court to consider making an order under s. 150

because it is conceded on behalf of the respondent directors that they were directors within the relevant period. There is a clear

conflict of evidence in relation to whether they resigned. Their accountant has deposed to the fact that he prepared the appropriate

Companies Office documentation to evidence such a resignation. Both respondents have deposed to the fact that they placed that

document (being the appropriate B10 form) on the desk of Mr. Ernest McDonald, secretary of the company. Mr. McDonald has denied

that such occurred. It is not possible to resolve that conflict of fact at a hearing which was conducted on affidavit alone. In the

circumstances, and by virtue of the fact that it is only of marginal importance to the considerations in the case, I would propose

considering the matter on the basis of the high point of the respondent directors’ case, that is to say on the basis that they did in

fact resign as they contended.

5. It is also necessary to consider the legal position in relation to actions of directors in the post liquidation period in the context of

whether such actions provide a basis for the making of an order, in an appropriate case, under s. 150. While the judgment of Shanley

J. in La Moselle Clothing Limited (in liquidation) and Rosegem Limited (in liquidation) –v- Jamel Soualhi [1998] 2 ILRM 345 is most often

referred to for the analysis of the criteria which the court should adopt in determining the “responsibility” of a director for the

purposes of s. 150 (as set out at p. 352 of the judgment), Shanley J. went on at p. 353 to state the following:-

“Apart from satisfying the court that he as a director acted honestly and responsibly the director must also satisfy the

court that there are no other reasons why it would be just and equitable to restrict him from acting as a director of a

company. It is to be noted that acting honestly and responsibly relates to ‘the conduct of the affairs of the company’ and

arguably as such bears no relation to any period after the commencement of a winding up or receivership of the particular

company where the person may not be involved any further in the conduct of the affairs of the company. That the

director must satisfy the court that there is no other reason why it would be just and equitable to restrict the director,

allows the court to take into account, in my view, any relevant conduct of the director after the commencement of the

winding up or the receivership (for example, any failure to cooperate with the liquidator or receiver) in deciding whether or

not to make an order under s. 150(1) of the Companies Act, 1990.”

6. Therefore, unusually, this case is not concerned with the question of whether the respondent directors may be said to have acted

honestly and responsibly but rather whether, by virtue of relevant conduct after the commencement of the winding up it is just and

equitable to make an order under the section.

7. In that context four matters were relied upon:-

1. The respondent directors took and kept possession of certain property of the company, viz. a forklift truck, for a period

of some months after the liquidation. The liquidator originally wrote to the respondent directors on 12th March, 2003

requesting information on the whereabouts of the assets of the company. They were written to again on 3rd July, 2003

and on 6th August, 2003, specifically in relation to the forklift. There was no response to those letters. However, in

November, 2003, subsequent to the report by the liquidator to the Director of Corporate Enforcement pursuant to s. 56 of

the Company Law Enforcement Act, 2001, the machine was returned to the liquidator. In their response both have

indicated that they accept that they were wrong in so doing but that as soon as they received advice that they should

return the forklift truck to the liquidator they did so. Their actions were, in the course of the hearing, described as being

in the nature of “self help” arising from their contention that the company owed them money.

It is axiomatic that the duties of persons who have served as directors include an obligation to be of any assistance

which they can to the liquidator in the conduct of the liquidation. The rights of the creditors of a company are likely

to be compromised not only by the fact that a company is insolvent and unable to pay its debts as of the date of

liquidation but also such rights can be further compromised where, due to inappropriate action or inaction on the

part of directors or former directors, the liquidator is prevented from being in a position to effectually get in the

assets of the company for the purposes of discharging the liabilities due to the creditors to the greatest extent

possible and as soon as possible. In the circumstances I am satisfied that the court is entitled to take into account

any conduct on the part of directors or former directors which amounts to an inappropriate retention of the

companies assets subsequent to the commencement of the winding up.

2. Secondly it is complained, on a similar basis, that the respondent directors failed to cooperate generally with the

liquidator and declined, for a considerable period of time, to meet with him. The history of the liquidator’s attempts to

meet with the respondent directors is set out at paras. 7(g) and (h) of the grounding affidavit. It was not until 1st March,

2004, virtually one year after it was resolved that the company be wound up and that the liquidator be appointed, that

the respondent directors first met with him. The correspondence seeking the assistance of the respondent directors had

commenced with a letter to them from the liquidator of 12th March, 2003. The initial meeting, therefore, occurred after

these proceedings were commenced on 2nd February, 2004.

Again these facts are accepted by both of the respondent directors but it is offered in mitigation that their view of

their obligations was, at least in part, coloured by their understanding that they had resigned and that, as with the

forklift truck, as soon as they received advice as to their obligations they sought to cooperate. If that be the case,

it should be said that the obtaining of earlier advice would have been prudent, especially in a case where it was not

intended to comply with the requests of the liquidator. For similar reasons to those expressed above I am satisfied

that the failure to cooperate at all with the liquidator is a matter which the court can and should take into account.

As was pointed out by counsel for the liquidator anything which places a significant barrier in the way of the

efficient conduct of the liquidation is likely to lead to a diminution in the extent to which the creditors of the

company will be paid. Even if there is no ultimate failure to recover the assets of the company, delay in their

recovery can effect the legitimate interests of the creditors not least because an elongation of the liquidation is

likely to mean greater costs which all have to come out of the same pool which ought, properly, be available for the

creditors.

3. An issue arose between the liquidator and the respondent directors concerning proceedings brought by the liquidator

on behalf of the company in the Courts in the Netherlands seeking to recover monies loaned by the company. In those

proceedings both of the respondent directors filed what appeared to have been in the nature of witness statements

which were supportive of the case of the defendant and thus against the interests of the company. It should, of course,

immediately be noted that it would be wholly inappropriate to imply an obligation on the part of any director or former

director a duty not to give truthful evidence in any court in any jurisdiction even if the effect of that evidence would be

to the disadvantage of the company. However, the complaint which the liquidator makes is more subtle. I am satisfied on

the basis of the evidence tendered by the liquidator that the statements made by both of the respondent directors were

at variance with the records of the company. I am also satisfied that the respondent directors did not seek to check the

records of the company prior to furnishing their statements. While there is no evidence upon which it would be

appropriate to contest their bona fides it does seem to me that the obligations of a director in the course of a winding up

at least extend to exercising care when taking action which may be contrary to the interests of the company. If he does

so in a careful fashion he should not be subjected to any criticism. However, if, as here, without any regard to what may

be contained in the books and records of the company he intervenes in proceedings against the interests of the company

he may well be said to do so at his peril.

4. The final matter complained of concerns an assertion on the part of the liquidator that he has found it difficult to

collect sums due to the company from particular debtors who are now customers of the respondent directors (in a new

business which they have established) and who were, while they were customers of the company, clients who were the

responsibility of the respondent directors. However, I am not satisfied that there is any evidence which would support the

view that there were any inappropriate actions on the part of the respondent directors under this heading and I would not

propose to consider it further.

Conclusion

8. In the light of my findings at 1-3 above I am satisfied that each of the respondent directors engaged in activity which, at least

taken cumulatively, amounts to a sufficient departure from the reasonable standards that can be expected of a director or former

director during a winding up so as to make it just and equitable to make an order under s. 150.

9. In conclusion I should state, lest the matter become relevant in the event that either or both of the respondent directors make an

application to the court under s. 152 for relief, that in my view the actions of both respondent directors, while being sufficiently

serious to make it just and equitable to make the order under s. 150, nonetheless were on the lower end of the range of seriousness

of such actions.