07 September 2016
In two recent cases, the High Court has re-affirmed that directors will not escape restriction simply because they played a passive role in the conduct of the company's affairs. The only defence to a restriction application is that a director acted honestly and responsibly in relation to the company's affairs.
In the first case, Kirk v Kershaw , the primary reason for the liquidation of the company was a large debt to the Revenue Commissioners. Applications for restriction were brought by the liquidator against five individuals who had acted as directors of the company. The first respondent had resigned as a director in 2007, but the liquidator claimed that he was a shadow director of the company between May and November 2010 (within 12 months of the company being wound up) and therefore could be subject to a restriction order. The Judge ruled that he was a shadow director and largely accountable for the revenue liability which was the single biggest factor leading to the insolvency of the company and restricted him.
The second and third directors had little involvement in the running of the business and did not attend directors' meetings. The Judge found that they were ‘puppet directors’ and became directors to be of assistance to other members of the family involved in the business. However, he affirmed that their responsibility as directors could not be diminished on these grounds and restriction orders were granted against them.
The applications against the fourth and fifth directors, who were only appointed shortly before the liquidation, were brought on the grounds that the company failed to file statutory returns and to keep proper books and records. The judge accepted that at the time of their appointments these directors were dealing with a volatile company and as such this was a barrier to their ability to ensure statutory compliance. The judge also took account of their efforts to negotiate with the Revenue Commissioners and their co-operation with the liquidator, and ultimately they were not restricted.
In the second case, In Re BOD Investments (IRL) Ltd; Murphy v O'Flynn , the High Court refused a restriction order against a passive director. The director had been deceived by her husband, a co-director, but she had immediately sought independent advice on learning from a third party of irregularities in the company's affairs. The court found that she had acted honestly and responsibly in relation to the company's affairs. The judge referred to case law in which it was held that although a director who abdicates responsibility is not likely to be excused, if a director has endeavoured to keep abreast of company affairs and acted responsibly in the conduct of the company's affairs, it might be possible to excuse that director from restriction. In contrast the judge found that her co-director had not acted honestly and responsibly and he was restricted. There was a persistent failure on his part to comply with obligations to maintain proper books and records and to make returns. The company had also failed to discharge significant liabilities to the Revenue Commissioners.
These cases serve as a useful reminder that directors must be cognisant of their duties and responsibilities under company law and will not be excused from restriction on the basis that they were passive or had little involvement in the running of the company.