05 May 2016
A recent decision of the Court of Appeal seems to have halted a trend towards leniency in the High Court in applications for the restriction and disqualification of directors of insolvent companies − particularly where the company has been struck off the register of companies (the register) for failing to file annual returns.
In Re Walfab Engineering Limited and RPB Products Limited, the High Court rejected an application by the Office of the Director of Corporate Enforcement to disqualify or alternatively restrict the directors of two related and insolvent companies. The companies had been struck off the register for failing to file annual returns.
Reduced level of scrutiny
In the High Court, the Judge, although critical of the directors’ failure to comply with their statutory obligations, adopted the view that the ‘financial maelstrom’ that afflicted the State from late 2008 and led to the insolvency of the companies, provided some degree of defence to the directors.
In particular, the High Court applied a reduced level of scrutiny in circumstances where the directors were ‘not professional directors, do not possess qualifications, and have never served at the helm of large or quoted enterprises’ and determined that the obligations imposed by the Companies Acts must be ‘tempered by reference to the times’. The High Court decided that the directors’ failures to file annual returns or to wind up the company before it became hopelessly insolvent, such that there were no assets to fund a liquidation, were reproachable but understandable in the wider economic circumstances.
In addition, the High Court had also adopted the view that one of the directors, who was married to one of the main directors/shareholders and had no day-to-day role in the company (i.e. a ‘passive director’), was not tainted with any ‘real moral blame’ that would justify an order being made against her.
However, the Court of Appeal rejected this approach and re-affirmed the approach taken in previous cases by the High Court. These had led to a significant number of orders for the disqualification or restriction of directors for failure to file annual returns leading to the striking off of insolvent companies.
The Court of Appeal determined that where an insolvent company has been struck off the Register for failing to file annual returns, the appropriate sanction, absent any exculpatory evidence, is an Order disqualifying the directors from acting as directors of any other company for a period of five years. Factors which a court should take into account when hearing such applications are the:
Although such factors may impact a court’s discretion to reduce the sanction from disqualification to restriction, they do not affect the underlying obligations imposed on company directors. The Court of Appeal held that directors of all companies, regardless of whether the companies are family based or small or where the company directors have no professional qualifications or face economic hardship, must comply with their obligations.
Furthermore, the Court of Appeal rejected the High Court’s finding that there was a necessity to find real moral blame before restricting a passive director. Rather the Court of Appeal re-affirmed the approach adopted in previous cases, that directors' duties apply equally to executive and non-executive directors and that the passive nature of a director’s role is not sufficient to relieve that director from disqualification or restriction.
In this case, where the companies had liabilities exceeding €300,000 each when struck off and had been badly affected by the economic downturn, the Court of Appeal ordered that each of the directors be restricted for a period of five years.
Rejected trend for leniency
This decision clarifies that a director’s duties are not affected or limited by economic troubles and must be complied with at all times – in fact it is in times of business difficulty when directors’ duties and responsibilities can be most important. Furthermore, the decision rejects the recent trend towards leniency which had been seen in a number of cases where directors of insolvent, family run, companies had not been restricted where the insolvency was directly related to the economic downturn.
In addition, the case underlines the importance of directors’ compliance with their statutory obligations, particularly the filing of annual returns, and that passive directors of insolvent companies will not escape sanction solely because they have adopted a passive role in the company.