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01 September 2014

Some interesting cases under Section 150 of the Companies Act 1990 have been decided recently in the High Court. In the first case, Gerdando Ltd (in Liquidation): Peter Doherty v Karl Donoghue, Ruth Donoghue and Edith Donoghue, Mr Justice Barrett considered the extent to which the directors could be held liable for the failure of the company, having relied on the advices and services of professional advisors.

Karl, Ruth and Edith Donoghue (the respondents) were directors of Gerdando Ltd (the Company). In an effort to restructure their business, they sought professional advice and, on foot of this, entered into a so called ‘three-party swap’ transaction in 2008. The Company was subsequently wound up and applications were sought under Section 150 for restriction orders in respect of all three respondents. An issue arose as to whether the ‘three-party swap’ had been carried out in breach of the relevant legislation, namely, Section 45 of the Companies (Amendment) Act 1983.

Mr Justice Barrett concluded that the respondents had acted honestly during their tenure as directors. The sole issue therefore was whether they had acted responsibly in the reorganisation of the company and specifically the three party swap transaction. 

The judge noted that there was a divergence of opinion between the liquidator and an independent expert, as to whether or not there had been a breach of Section 45. He commented that this greatly weakened the contention that the respondents had failed to act responsibly in following the professional advice they received.

Following a review of the relevant case law, the judge made the following comments about the issue of reliance on professional advisors:

  • where a director, acting in good faith, seeks comprehensive professional advice of suitably qualified advisors, and in good faith acts in accordance with that advice, that will generally protect the director from being later restricted under Section 150;
  • however, where the courts are dealing with a director who is professionally qualified or who directs a large or quoted enterprise, more exacting standards of behaviour will typically be applied, than in a case like this where the directors in question were not experts in matters of law, tax or accounting; and
  • for directors who are not experts in such matters, it is sufficient that they entrust their legal, tax and accounting matters to suitably qualified professionals and that they conform fully with those advices. Were the contrary to apply, the result would be absurd.

In light of these findings, Mr Justice Barrett refused to impose restriction orders on the respondents. This decision will be of comfort to directors who, in good faith, seek professional advice on business matters and then act on that advice.

In the second case, Shellware Ltd: Declan Taite and Eoghan Breslin, an application for a restriction order under Section 150 of the Companies Act 1990 was sought in respect of the former director of Shellware Limited, Mr Breslin. Shellware Ltd (the Company) designed and manufactured exhibition and presentation stands and was also engaged in the design and fit-out of various pubs. Following the economic collapse in 2008, the Company’s business contracted rapidly and it was wound up in 2009.

Mr Justice Barrett found no issue as to Mr Breslin’s honesty and therefore the case turned on whether he acted responsibly in relation to the Company.

Six grounds were presented as evidence of Mr Breslin’s irresponsible behaviour. They were:

  • a failure to maintain adequate books and records;
  • late/non-payment of certain taxes;
  • the steps taken when the Company was in financial difficulty;
  • the making of payments to a related company;
  • the use of company credit cards for personal expenses; and
  • a claimed lack of cooperation with the liquidator.

In relation to the issue of books and records, Mr Breslin gave evidence that comprehensive accounts had been maintained until 2008. When it became clear to him that liquidation of the Company was imminent, he felt it would be imprudent to pay the costs of an audit. Mr Justice Barrett commented that while Mr Breslin’s actions might be open to criticism, they were not sufficient to be categorised as irresponsible.

On the issue of late/non-payment of taxes, Mr Justice Barrett said there was no evidence that Mr Breslin ever avoidedmaking a tax payment in order to keep the business of the Company afloat. Therefore there was nothing that would transform what was reproachable behaviour into irresponsible behaviour.

On the issue of steps taken by Mr Breslin when the Company was in financial difficulty, Mr Justice Barrett found that Mr Breslin had looked for new business, engaged with trade creditors, sought professional advice and liaised with the Revenue Commissioners when it became clear that the Company was in difficulty. Whilst he might have been guilty of misplaced optimism, he was not guilty of irresponsible behaviour.

The fourth issue concerned payments made by the Company to another company, Nerano Bars Ltd (Nerano), of which Mr Breslin was also a director. There was evidence that in the period prior to Nerano going into examinership, the Company continued trading with Nerano when it must have been obvious to Mr Breslin that there was little prospect of the Company realising its debts. Mr Justice Barrett commented that cross-directorships within closely related companies invariably cause confusion and conflicts within individual boards of directors as to the best course of action for any one company. However, the judge concluded that at no point did Mr Breslin’s conduct cross the line from responsible to irresponsible behaviour.

On the fifth issue, the judge found that Mr Breslin’s use of the Company’s credit card facilities to cover his expenses and remuneration was not irresponsible. Finally, on the issue of cooperation with the liquidator, Mr Justice Barrett concluded that Mr Breslin did substantively cooperate with him.