Supreme Court allows appeal against director restriction order where appellants acted responsibly despite record loss.

THE SUPREME COURT

RECORD NO. 27/06

Denham J.

Kearns J.

Finnegan J.

IN THE MATTER OF DUBLIN SPORTS CAFÉ 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/RESPONDENT

and

DAVID LONG AND GERRY WRIGHT

RESPONDENTS/APPELLANTS

Judgment of Mr Justice Finnegan delivered on the 16th day of December 2008

Dublin Sports Café Limited (hereinafter called “the Company”) was incorporated on the 11th November 1997. From

incorporation and at all relevant times the appellants were the Directors of the Company. By ordinary resolution passed on

the 17th October 2003 it was resolved that the Company be wound up voluntarily it being by reason of its liabilities unable

to continue in business. On the same date at a meeting of the creditors of the Company the respondent (hereinafter called

“the Liquidator”) was appointed Liquidator of the Company. On the 18th March 2005 the Liquidator certified that the

Company was then and at the date of the commencement of the winding-up unable to pay its debts within the meaning of

section 214 of the Companies Act 1963. In compliance with the Company Law Enforcement Act 2001 section 56 the

Liquidator provided to the Director of Corporate Enforcement (hereinafter “the Director”) a report and on the 16th April

2004 the Director relieved him from the obligation of bringing proceedings pursuant to the Companies Act 1990 section 150

seeking to restrict the Directors. He submitted a further report on the 18th October 2004 and by letter dated 4th February

2005 the Director refused to relieve him of the obligation to bring such proceedings. The Liquidator was accordingly obliged,

under pain of committing an offence, to apply to the High Court for the restriction under section 150 of the Companies Act

1990 of each of the appellants. By order made on the 21st December 2005 the High Court (Peart J.) restricted each of the

appellants for a period of five years from the date of the order from being appointed or acting as director or secretary or

being concerned or taking part in the promotion or formation of any Company unless it meets the requirements set out in

section 150 (3) of the Act of 1990. The appellants appeal that order.

The Company operated a licensed premises comprising a bar, a disco bar and off-licence from premises in the Parnell

Centre, Parnell Street, Dublin. The premises were leased at a rent of €317,434 per annum. The Company did not trade well

and was unable to achieve the turnover necessary to meet its costs and overheads and accordingly incurred substantial

trading losses during its some six years of trading. The Liquidator attributes this to an inability to bring in business from

outside the immediate vicinity of the premises. While losses were incurred throughout the trading life of the Company the

bulk of the same arose in its first two years of trading. There is a deficiency as regards unsecured creditors amounting to

€2,400,866.00. However of this sum the second named appellant is an unsecured creditor in the amount of €1,776,160.00.

Each of the appellants has personally guaranteed a loan from Bank of Scotland in the sum of €425,410.00 in effect

therefore in respect of the amount owed to unsecured creditors approximately €2,200,000.00 or ninety one per cent of the

same is owed to the second named appellant or the appellants are jointly and severally personally liable in respect thereof.

In his affidavit grounding the application the Liquidator brought the following matters to the court’s attention:-

(1) The first named appellant was the managing director of the Company and responsible for its day-to-day running. The

second named appellant was a non-executive director who provided financing for the Company and who is the Company’s

principal creditor. The first named appellant greatly aided the Liquidator in his investigation into certain matters relating to

the lease of the Company’s premises. Neither appellant is involved with any similar style business. Neither respondent has

been involved in any phoenix style resurrections of the Company.

(2) The second named appellant showed great financial commitment to the Company and in the opinion of the Liquidator

the collapse was due to genuine business failure resulting from the location of the premises.

(3) The last set of audited accounts for the Company were filed for the year ended 31st August 1999. An Annual Return for

the Company was outstanding from 30th May 2002 until the date of the winding-up resolution.

(4) The Company was largely up-to-date with its tax returns.

(5) The Liquidator’s principal concern arises from the absence of books and records. A part time bookkeeper was employed

who kept detailed and up-to-date financial records for the bar, disco bar and off-licence. The first named appellant referred

to management accounts but the Liquidator was unable to locate the same.

(6) From March 2003 until it ceased trading the Company operated a lap dancing club. In June 2003 as part of an

investigation into the employment of non-nationals the Gardai raided the lap dancing club and seized its records. The

Liquidator received a list of such records from the Gardai and that list did not refer to any cash receipts and payments book

regarding the lap dancing club. When queried about this the first named appellant remained adamant that the Gardai

removed such records. The Liquidator was unable to confirm the existence or otherwise of the same.

(7) Arising out of the Garda investigation criminal proceedings were instituted against the Company and the first named

appellant. Following the appointment of the Liquidator the proceedings against the Company were discontinued. The first

named appellant successfully defended the charges brought against him.

(8) The Liquidator was advised by the first named appellant that receipts from the lap dancing premises were made up

approximately 50% by way of credit card payments and 50% by way of cash. Of the receipts 50% was paid to the

Company and 50% paid to the dancers: usually the entire receipts by way of cash were paid to the dancers. The credit card

payments were lodged to a bank account in the name of the Company. The Liquidator has been unable to locate supporting

evidence to confirm that the cash receipts from the lap dancing business were so dealt with.

(9) For the final three months of trading there is inadequate back-up documentation for lodgments compared to sales

receipts. The shortfall is approximately €26,000.

(10) The Liquidator sought to be relieved by the Director from the obligation to apply to the court for restriction under

section 150 of the Companies Act 1990 but the Director refused that request.

The letter from the Director does not state any grounds for refusing to relieve the Liquidator and as a result the matter came

before the High Court in circumstances where the appellants, the Liquidator and the court were unaware of the Director’s

view as to the manner in which the appellants acted other than honestly and responsibly. As the Liquidator sought to be

relieved of the obligation to apply to the High Court it would appear that he does not share the Director’s view of the

conduct of the appellants.

Each of the appellants filed an affidavit in reply. The first named appellant dealt in detail with matters drawn to the court’s

attention by the Liquidator as follows:-

(I) The annual return together with annual accounts for the year ended 31st August 1999 were filed with the

Companies Registration Office. Audited accounts were prepared for the year ended 31st August 2000 but were

not signed-off by the auditor because of a dispute concerning fees claimed in respect of the audit for the year

ended 31st August 2002. At all times he had access to weekly figures so that the appellants were fully aware of

the financial position of the Company and continued to support it financially. Without audited accounts the

annual returns for 2001 and 2002 could not be submitted.

(2) Proper books of account were maintained. A bookkeeper was employed from 2001 and she

maintained a meticulous manual accounting system and recorded all sales, purchases, creditors, wages

and banking records for the bar. The management accounts referred to by him consisted of an

extrapolation of information from the records prepared by the bookkeeper. Since the year 2000

overheads had been stabilised at approximately €16,000 per week and in order to break even it was

necessary to achieve a weekly turnover of €25,000. His reference to management accounts was a

reference to his calculations based on the figures recorded by the bookkeeper.

(3) From March 2003 until the date of winding-up the Company operated a lap dancing club. The

records for this were maintained by the club manager. The records were seized by the Gardai during a

raid in June 2003. At the time of the liquidation the records from June to September 2003 were in the

possession of the manager for processing and analysis. She re-located to Galway and the bulk of her

records were mislaid by her. Some of the records were later recovered and these were furnished to

the Liquidator and exhibited on the application to the High Court. He estimates the receipts from the

lap dancing club at €38,000 by way of credit card transactions and €38,000 by cash. The proceeds of

credit card transactions were lodged to a bank account in the name of the Company and the cash

receipts applied in paying the dancers and security. All cash was used to pay expenses and there was

no cash surplus. He furnished the Liquidator with all documentation contained in the Book of

Evidence served in connection with the criminal proceedings.

(4) During the final months of trading some essential suppliers required cash on delivery of goods and

essential members of staff were also paid in cash from bar receipts. These were ordinary expenses of

the Company and no surplus cash funds arose. All cash payments were recorded in the Company’s

books.

(5) His investment in the Company amounts to approximately €130,000 and in addition he has

personally guaranteed Bank of Scotland in the sum of €425,410.

The second named appellant in his affidavit deposes that he has always been a non-executive director of the Company but

had always concerned himself in its affairs and been involved in all decisions other than those concerning the day-to-day

management of the business. He had always considered the accounts prepared by the Company’s auditors and had been

aware of and approved their contents. He confirms that he invested substantial sums in the Company and is an unsecured

creditor as indicated by the Liquidator and is also a guarantor of the Company’s liabilities to Bank of Scotland in the amount

of €425,410.00. While the Company was faced with difficult trading conditions from the beginning its greatest losses were

incurred in the first two years of trading. Until shortly before the Company was wound up he was firmly of the belief that it

would be possible to trade out of its difficulties as indicated by the extent to which he was prepared to support the Company

financially. While he has no other business interests in Ireland he has substantial business interests including company

directorships in Canada. Should he be restricted as a director this would have severe repercussions on his business interests

in circumstances where he has always acted honestly and responsibly in relation to the conduct of the Company’s business.

JUDGMENT OF THE HIGH COURT

The learned High Court judge was satisfied that the collapse of the Company was not due to any dishonestly on the part of

the appellants. Rather the collapse of the Company resulted primarily from the decision to locate in Parnell Street. The

Company’s business of bar, disco bar and off-licence was run in a responsible manner in that there was a competent

bookkeeper who kept detailed and up-to-date financial records which were the source of management information available

to the appellants and to that extent the learned trial judge was satisfied that the respondents acted responsibly in the affairs

of the Company. In relation to the lap dancing club, however, the learned trial judge did not consider adequate and in

accordance with good corporate governance the manner in which the records were kept and the manner in which cash

receipts were dealt with and in this regard he had this to say:-

“In my view there is a heavy onus upon directors of a company which generates a significant amount of cash

transactions to ensure that records and systems within the company are sufficient to ensure that it is possible to track

those cash receipts through the records of the company including the bank accounts and to avoid an otherwise inevitable

conclusion that cash received was not recorded and was used to defray expenses which also are not properly vouched and

recorded either by way of wages to employees, sub-contractors, suppliers, directors drawings and such like.”

He considered the daily dance sheets, of which thirteen only were recovered from the club manager, as inadequate. In

relation to the club aspect of the Company’s business he was not satisfied that the appellants acted responsibly. He did not

consider the seizure of documents by the Gardai or the loss of documents by the club manager an adequate explanation.

The lack of an appropriate paper trail in respect of the cash transactions was not, however, the cause of the collapse. Finally

the learned trial judge did not consider the explanation offered for failing to file the annual return sufficient and found that

the appellants had not acted responsibly in relation to the same.

The law

The Companies Act 1990 section 150 provides as follows:-

“150(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 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.”

The Companies Act 1990 section 150 was considered in La Moselle Clothing Limited (In Liquidation) and Rosegem

Limited (In Liquidation) v Soualhi [1998] 2 I.L.R.M. 345. Shanley J. held that the primary purpose of the section is the

protection of the public from persons who, by their conduct, have shown themselves unfit to hold the office of, and

discharge the duties of, a director of a Company and, in consequence represent a danger to potential investors and traders

dealing with such companies. The objective is to protect the public and not to punish the individual director. Shanley J. went

on to say:-

“Thus it seems to me that in determining the ‘responsibility’ of a director for the purposes of section 150(2)(a)

the court should have regard to:-

(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts

1963-1990.

(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.

(c) The extent of the director’s responsibility for the insolvency of the company.

(d) The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of

the winding-up or thereafter.

(e) The extent to which the director in his conduct of the affairs of the company has displayed a lack of commercial

probity or want of proper standards.”

In addition to requiring a director to demonstrate that he acted 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 the company. A common

example of a circumstance in which a director might fail to satisfy the court that there are no other such reasons is where he

fails to co-operate with the Liquidator.

Specifically in relation to the keeping of accounts, in Business Communications Limited .v. Keith Baxter and Another,

unreported, the High Court, 21st July 1995 Murphy J. had this to say:-

“Ordinarily responsibility will entail compliance with the principal features of the Companies Acts and the

maintenance of the records required by those Acts. The records may be basic in form and modest in

appearance but they must exist in such a form as to enable the directors to make reasonable commercial

decisions and auditors (or liquidators) to understand and follow the transactions in which the company was

engaged.”

The test applied is objective and regard will be had to the directors entire tenure: Re Squash (Ireland) Limited [2001] 3 I.R.

35. In that case in the course of her judgment McGuinness J. said:-

“The question before the court is whether they acted responsibly and this, as correctly stated by counsel on

behalf of the respondent, must be judged by an objective standard. In the case of all companies which have

become insolvent it is likely that some criticisms of the directors may be made. Commercial errors may have

occurred; misjudgments may well have been made; but to categorise conduct as irresponsible I feel that one

must go further than this.”

Having considered the judgment in La Moselle Clothing Limited v Soualhi she went on to say:-

“I find this passage of considerable assistance in the instant case and applying the standards set out by Shanley J. to the

facts I would say firstly that in speaking of his tenure as a director of the company I would agree with Shanley J. that the

court should look at the entire tenure of the director and not simply at the few months in the run up to the liquidation. It

appears from the history of the company that the appellants have always acted responsibly and honestly and have put the

interests of the company in the forefront of their minds, even insofar as losing their own money in an effort to assist the

continuation of the company.”

The duties of Directors inter se may differ and in particular the duties of a non-executive director may not be co-extensive

with those of an executive director. Each case will turn upon its own circumstances: In the Matter of Tralee Beef and

Lamb Limited (In Liquidation), Kavanagh v Delaney & Others, unreported, Supreme Court, 1st February 2008.

Discussion

The learned trial judge held that the appellants had failed to act responsibly in two particulars only, namely:-

1. An annual return for the Company was outstanding from the 30th May 2002 until the date of the winding-up resolution.

2. Inadequate books and records were kept in relation to the lap dancing club.

These two defaults should be looked at in context. The learned trial judge was satisfied that the collapse of the Company

was not due to any dishonesty on the part of the appellants and he was satisfied that each of the appellants had acted

honestly. The collapse of the Company resulted from the decision made as to where to locate its business. He was also

satisfied that the bar, disco bar and off-licence side of the business was run in a responsible manner with appropriate records

being maintained over the six years of trading. The financial commitment made by each of the appellants was substantial.

There was full co-operation with the Liquidator. The second named appellant resides in Canada and was a non-executive

director. The Liquidator sought to be relieved of the obligation imposed upon him by the Company Law Enforcement Act

2001 section 56. The section provides as follows:-

“56(1) A liquidator of an insolvent company shall within six 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.

(2) A liquidator of an insolvent company shall, not earlier than three months nor later than five 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.

(3) A liquidator who fails to comply with subsection (1) or (2) is guilty of an offence.”

It would appear therefore that the Liquidator considered the appellants to have acted both honestly and responsibly. The

Director did not relieve the Liquidator from the obligation imposed by section 56. He gave no reasons for not so doing. As a

result the Liquidator being of the view that the appellants acted honestly and responsibly on pain of a criminal sanction was

required to bring an application to the court. In his affidavit grounding the application he set out such matters as he

considered relevant to a finding as to whether the appellants had acted honestly and responsibly. The learned trial judge

having considered such matters found the appellants to have acted other than responsibly in relation to the two matters set

out above. I propose to look at each of those matters in detail.

From the grounding affidavit it appears that an annual return was outstanding from the 30th May 2002 until the date of

winding-up, the 17th October 2003. The explanation for this failure is that the Company was in dispute with its auditor over

fees due in respect of the audit for the year ended 31st October 2002. As a result the accounts for the years ended 31st

August 2001 and 31st August 2002 were not signed off. As accounts are required to be appended to the same the

outstanding annual return could not be filed. It is clear that the accounts were in fact prepared for the two years 2001 and

2002 as they are exhibited in the affidavit of the first named appellant. The nature of the dispute was that the Company

considered the auditors’ fees excessive. The learned trial judge considered this explanation insufficient but did not make a

finding as to it being true or not. As the matter was determined on affidavit there is available to this court the same

information as was available to the learned trial judge and while this court should be slow to interfere with findings made by

the trial judge it is open to this court to do so. I am satisfied that the default is not of itself sufficient to justify the

disqualification of the appellants. Each of them it is accepted acted honestly throughout the Company’s history and for this

reason it is more likely that on this application they are truthful. Their account of the reason for the failure is supported by

the instant availability to the Liquidator of two years accounts which had not been signed off. A refusal to pay fees

considered excessive may indicate that the Directors are acting responsibly rather than irresponsibly in that careful

stewardship of a Company’s assets is to the benefit of creditors. In the context of their conduct overall throughout the

Company’s history of trading I would consider the delay in question here a relatively minor matter and having regard to the

explanation offered, and which has been made out as a matter of probability, not a matter which of itself would justify

restriction.

Books and records must exist. They may be basic in form and modest in appearance. The requirement is that they must be

such as to enable the directors to make reasonable commercial decisions and enable the auditors or a Liquidator to

understand and follow the transactions in which the Company was engaged.

In relation to its bar, disco bar and off-licence business the learned trial judge was satisfied with the accounts maintained.

The lap dancing club operated from March 2003 until the date of the winding-up of the Company. The records in respect of

the same were retained by the manager Ms Louise Keane. The form of the records maintained was indeed basic in form and

modest in appearance. They were in the form of a dance sheet maintained for each day of operation. Each dance sheet

showed the amount received by each dancer, distinguished between cash and credit card payments and either showed the

amount payable to each dancer or enabled that amount to be ascertained. Wages paid to others are also shown. I am

satisfied that a book keeper presented with the dance sheets would be in a position to prepare full and correct accounts for

the lap dancing club in the form of a cash receipts and payments book. The first named appellant deposes that such sheets

were indeed kept. The records up to June 2003 were seized by the Gardai in June 2003 and never returned. The records

from June to September 2003 were in the possession of the manager who moved to Galway and in the course of that move

most of the dance sheets were mislaid. If it is accepted that the appellants are honest and truthful I can see no reason for

refusing to accept this explanation. The Liquidator does not cast doubt upon it. There is one further matter which suggests

that the explanation is true. The first named appellant sets out how the lap dancing club operated. The total receipts were

divided equally between the Company and the dancers. The general pattern was that 50% of the receipts was by way of

credit card and 50% by way of cash. The cash was used to pay the dancers and recorded on the dance sheets. Credit card

payments were lodged to the Company’s bank account. The Liquidator is satisfied in relation to the treatment of credit card

payments. However in relation to cash payments he was unable to satisfy himself as to how these were dealt with in the

absence of most of the dance sheets or a cash receipts and payments book. I am satisfied that all necessary information

would have been available to him in relation to cash receipts and their disbursement had the great majority of those sheets

not become unavailable in the manner deposed to. The circumstance that credit card payments were properly dealt with to

the satisfaction of the Liquidator and that this was in the manner described by the first named appellant is sufficient to

persuade me that his account as to how the cash receipts were dealt with is likewise truthful.

Accepting that the dance sheets were unavailable for the reasons proffered by the first named appellant I am satisfied on the

evidence that the appellants acted responsibly in regard to records of the lap dancing club.

Conclusion

The learned trial judge restricted the appellants having found that in two particulars they had not acted responsibly. In

respect of each matter an explanation was given by the appellants. Each of these matters should be looked at in the light of

the conduct of the appellants overall. Neither matter resulted in any loss to the creditors of the Company in that they did not

contribute to the insolvency. No question of dishonesty arises. On the first matter I take the view that the appellants acted

prudently in failing to submit to what they considered to be excessive charges. In the second matter accepting as I do the

explanation for the non-availability of records for the lap dancing club and accepting that the cash receipts from the same

were properly applied for the Company’s benefit I am again satisfied that the appellants acted responsibly.

Accordingly I would allow the appeal.