Judgment Title: Director of Corporate Enforcement -v- McGowan & anor
Composition of Court: Denham J., Geoghegan J., Fennelly J.
Judgment by: Fennelly J.
Status of Judgment: Approved
THE SUPREME COURT
Supreme Court No 118/2005Denham J.
IN THE MATTER OF WOOD PRODUCTS (LONGFORD) LIMITED AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 160 OF THE COMPANIES ACT, 1990, AS AMENDED AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 160(6A) OF THE COMPANIES ACT 1990, AS AMENDED
THE DIRECTOR OF CORPORATE ENFORCEMENT
PATRICK McGOWAN AND PATRICIA McGOWAN
JUDGMENT of Mr. Justice Fennelly delivered the 6th day of May 2008
1. Where the directors of a company have failed over a period of thirteen consecutive years to make any of the annual returns prescribed by law to the Companies Registration Office, have they been “persistently in default in relation to the relevant requirements” ? Laffoy J held that the respondents had not been in persistent default, since they had not been adjudged guilty of any default by a court. That is the key legal issue on this appeal. Depending on how it is answered, the Court may have to consider whether to exercise its discretion to make an order disqualifying the directors. The principal concern of the Director of Corporate Enforcement is to correct what he perceives to be an erroneous interpretation of the relevant legislation.
Statutory provisions regarding disqualification of directors
2. The Companies Act 1990 (“the Act of 1990”) provides for a wide range of circumstances in which the High Court may on its own motion or pursuant to an application disqualify persons from acting, inter alia, as directors for such period as the Court thinks fit.
3. Section 160(2) of the Act of 1990, as amended by the Company Law Enforcement Act, 2001, so far as is relevant to the particular provisions invoked by the Director, provides:
( b ) an order under section 184 of the Principal Act…”
4. By virtue of Section 159 of the Act of 1990, "officer" in relation to any company, includes any director, shadow director or secretary of the company…” That section also defines the expression, “relevant requirements,” as meaning:
5. The “relevant requirements” in relation to which the Director claims that the respondents were in persistent default relates to the filing with the Companies Registration Office of annual returns in accordance with sections 125 and/or 126 of the Companies Act 1963, as amended. Section 125 of the Companies Act, 1963, as substituted by 159 of the Act of 2001 provides:
(2) If a company fails to comply with this section, the company and—
(a) every officer of the company who is in default, and
(b) any person in accordance with whose directions or instructions the directors of the company are accustomed to act and to whose directions or omissions the default is attributable,
shall be guilty of an offence.
(3) Proceedings in relation to an offence under this section may be brought and prosecuted by the registrar of companies.”
6. Since the definition of “relevant requirements” includes requirement under repealed provisions, it is of no consequence that part of the period of default by the respondents in making returns occurred before section 125 was amended in 2001.
7. Laffoy J interpreted section 160(2(f) by reference to subsection 3 of the section, which provides:
(b) A person shall be treated as being adjudged guilty of a default in relation to a relevant requirement for the purposes of this subsection if he is convicted of any offence consisting of a contravention of a relevant requirement or a default order is made against him.
8. The Act of 2001 provided the High Court with an alternative to the power of disqualification set out in section 160(2). Section 160(9A), as inserted by section 46(e) of that Act provides:
10. Finally, section 160 (6A) of the Act of 1990, as inserted by sections 42(e) of the Act of 2001, empowers the Director to make applications pursuant to the section.
11. Woodproducts (Longford) Limited (the “company”) was incorporated on the 2nd January 1975. The Respondents, Patrick McGowan and his wife Mrs Patricia McGowan were the sole directors of the company at all relevant times. The company has its premises and registered office in Longford. Its business is wood products and joinery. It continues to trade, employing 12 people.
12. The last annual return made by the company prior to the making of the Director’s application was delivered in 1991. It covered the year ending 31st December 1989.
13. On 25th June 1999 the company was struck off the Register of Companies pursuant to section 12 of the Companies (Amendment) Act, 1982 due to its failure to file annual returns. It was dissolved on 2nd July by operation of section 12(3) of the Act of 1982. However, a creditor applied successfully to have the company restored to the register. By order of the High Court dated 14th May 2001 the company was restored the Register of Companies. That order further provided that within three months from its date the respondents were to deliver all outstanding annual returns required by Section 125 or 126 of the Act of 1963 to the Registrar of Companies.
14. The order also included a requirement that the same persons deliver to the Revenue Commissioners a number of specified outstanding tax returns. These included corporation tax, value added tax, PAYE and PRSI. The company was represented by counsel at the hearing leading to that order. Both respondents were notified by letter of the making of the order by letters dated 12th June 2001. They were thus informed that they were required to deliver the outstanding returns without delay.
15. The directors did not comply with that order. On the application of the Revenue Commissioners, the High Court (Carroll J) made an order on 13th October 2003 extending for a period of two months the time within which the respondents were to deliver the outstanding tax returns specified in the order of 14th May 2001. Up to 25th November 2003, no annual returns had been delivered since 1991. Nor did they comply with their obligations in relation to tax matters. On 10th June 2003, the Collector General secured a judgment against the company in the sum of €33,525.41 together with €589 for costs; on 12th May 2002 the Collector general obtained a High Court judgment £246,287.63 and costs. Neither judgment had been satisfied at the date of the Director’s application, though it appears that the amounts have since been paid. Furthermore, each judgment had been registered as a mortgage against the Company’s property registered on Folio 1785F, Co Longford. In addition, the directors failed to respond to correspondence from the Director informing them of these matters.
16. None of the above facts are disputed by the respondents. The only suggestion of an explanation offered by the first-named Respondent in his affidavit is that, during the 1980s and into the 1990s the company “encountered difficulties in receiving payment and found it quite difficult to trade due to the substantial sums due and owing.” The complaint is that certain state bodies delayed in making payments. That would obviously affect cash flow of a small company.
17. Mr McGowan adds that the company has changed its trading policy and is now trading profitably. He states that some or all of the required tax returns have been made. He accepts that the directors did not act in a manner which was appropriate to their position. He says that they did not act dishonestly or act in a manner which could be construed as reckless to an extent which would justify that making of disqualification orders. He fully accepts that the High Court had jurisdiction to disqualify the Respondents from acting as directors but argues that, if the Court were to exercise its discretion not to disqualify, the Respondents would be able to trade, expand and deal with all outstanding issues. He accepted that he and his wife had been in flagrant breach of the order dated 14th May 2001 and unreservedly apologized for that disobedience. He also apologized for failure to appear before the High Court on 30th October 2003 when the matter was listed. In addition, the first-named Respondent said that the second-named Respondent had suffered from depression over a number of years due to matters unconnected with the subject-matter of these proceedings.
18. In summary, as is stated in the written submissions of the Respondents before this Court, they accept that they are “at the mercy of the Court.”
19. Nonetheless, as summarized by Laffoy J in her judgment, the respondents had taken a number of remedial actions following the initiation of the Director’s application. They were:
(2) The outstanding tax returns were filed with the Revenue Commissioners. The Revenue Commissioners issued nil assessments on foot of the Corporation Tax returns submitted.
(3) With effect from 27th February, 2004 the second respondent resigned as a director of the Company and Vincent Fox, an accountant by profession, was appointed a director in her place. On 22nd April, 2004 these changes were notified to the CRO on the relevant form (Form B10).
The proceedings: application; judgment; scope of appeal
20. By an originating Notice of Motion dated 26th November 2003, the Director applied to the High Court for orders pursuant to section 160(2)(d) and (f) of the Act of 1990 as amended declaring the each of the respondents be:
22. Laffoy J gave separate consideration to the interpretation of the provisions, respectively, of paragraph (d) and (f) of section 160(2), though in reverse order. She noted that, in the case of paragraph, (f) the Director must satisfy the court that the respondents have been persistently in default in relation to compliance with provisions of the Companies Acts, in relation to making returns to the CRO.” In the case of paragraph (d) he must establish Conduct making a person unfit to be concerned in the management of a company……”
23. She observed that the Director could not avail of the provisions of sub-section (3), in the absence of any evidence of prosecution of the respondents for their failure to make the required annual returns.
24. Dealing firstly with paragraph (f), she cited the Shorter Oxford English Dictionary (3rd ed.) for the following definition of the verb “persist:” “to continue firmly or obstinately in a state, opinion, purpose, or course of action esp. against opposition.” Then, in a passage of which the Director makes specific complaint, she continued:
25. Hence, the Director had not, in her view, established the facts necessary to justify a disqualification based on paragraph (f). In effect, she had no jurisdiction to make an order based on paragraph (f).
26. Laffoy J reviewed the authorities concerning the finding of unfitness necessary to justify an order based on paragraph (d). She made a number of severe comments on the behaviour of the respondents, such as:
In my view, the explanations proffered by the respondents in an attempt to mitigate the consequences of their conduct do not excuse their failure to comply with the law and protect the assets of the Company and the interests of the generality of its creditors and its employees.”
I have no doubt that the respondents acted irresponsibly. In the context of the application of s. 160, the question which arises is whether they have displayed a lack of commercial probity or, as it is sometimes put, whether they have fallen below the standards of commercial morality. In my view, the conduct of the respondents has come very close to that threshold, but has not quite reached it.”
29. The position she took regarding paragraph (d) is less clear. The jurisdictional trigger for the exercise of that power pursuant to that paragraph is proof that the respondents are “unfit to be concerned in the management of a company.” The learned judge, in the passage quoted above, summarised the “question which arises” in that context as being whether the respondents had “displayed a lack of commercial probity or, as it is sometimes put, whether they have fallen below the standards of commercial morality.” She proceeded, though narrowly, to reach a negative conclusion on that issue. The respondents had “come very close to that threshold, but ha[d] not quite reached it.”
30. It follows that the learned judge made no finding that the respondents or either of them had been shown by the Director to be “unfit to be concerned in the management of a company.”
32. In the absence of a finding of unfitness, the learned judge had not established her jurisdiction to make a disqualification order. It was not logical for her to proceed to consider the exercise of her discretion. From the point of view of the respondents, the outcome was the same whether she dismissed the application for failure to prove unfitness or because she exercised her discretion not to make an order. However, it is important for the purpose of the appeal. The Director’s Notice of Appeal treats the question of persistent default by reference to paragraph (f) in paragraphs 1 and 2. At paragraph 1, he claims that the learned judge misinterpreted paragraph (f) and at paragraph 2 complains of her failure to find, in fact, that the respondents had been in persistent default. In paragraph 3, the Director pleads that the learned judge “ought to have exercised her discretion to make disqualification orders……” The Notice of Appeal contains no ground challenging the failure of the judge to make a finding of unfitness. It emerged at the hearing that the Director appeared to have conflated the two questions. Mr Michael Cush, Senior Counsel for the Director, made submissions to the Court based on paragraph 3 of the Notice of Appeal, but accepted, when it was raised by the Court, that the making of the finding depends on an appreciation of the facts and is not a matter of discretion. Nobody adverted at the hearing to the absence of any ground of appeal challenging the finding.
33. This is an unsatisfactory context in which to ask the Court to interfere with the exercise by the learned High Court judge of her discretion. I entirely accept that the issues raised by the case are of great importance for the Director. They relate to proper standards for management of limited companies. The facts disclosed are disturbing. The High Court findings of irresponsibility against the respondents are fully merited. The learned judge used striking language in reaching the conclusion that “the conduct of the respondents has come very close” to establishing “a lack of commercial probity” or “commercial morality…” She described their behaviour as “reprehensible” and “roundly condemned” it. In my view the commercial behaviour of the respondents fully merited these sever criticisms. In fairness to the second-named Respondent, it is clear that her husband must shoulder almost the entire blame. It was such as to merit the making of the orders sought. However, the High Court failed to make the essential finding of unfitness. Nonetheless, I do not think it would be fair or just to embark on a review of the exercise of the judge’s discretion, where the Director has not appealed against the failure of the High Court to make the essential finding of fact.
34. For that reason, I will confine consideration of the appeal to the issue under section 160(2)(f).
Interpretation of paragraph (f)
35. I am satisfied that the learned High Court judge erred in her interpretation of paragraph (f).
36. She held that “persistent default is not merely default which has continued over a long period of time but is default which has continued in the teeth of intervention on the part of the courts more than once.” She imported into paragraph (f) what she described as the “three strikes” philosophy which underlies sub-s. (3)…” There is no warrant for that approach. Sub-section (3) is a deeming provision. In its own terms, it is expressed to be “without prejudice to …proof in any other manner.” What the learned judge has done is effectively to transform a faculty to rely on a deeming provision into a requirement.
37. The question is, therefore, whether, on the admitted facts, there was persistent default on the part of the respondents. The Oxford Dictionary definition of “persist” is “to continue firmly or obstinately in a state, opinion, purpose, or course of action esp. against opposition.” To persist is to do more than to continue, although repetition is involved. It implies an element of determination. The dictionary offers: “firmly.” It also often suggests opposition to something, whether an idea, a rule, advice or disadvantage. Paragraph (f) uses simple everyday language. Its terms are capable of application directly to the facts of a particular case. No elaborate citation of authority is needed. The Director has cited the judgment of Hoffmann J (as he then was) in Re Arctic Engineering Ltd  1 WLR 686. He interpreted the corresponding term in English legislation:
39. The respondents, failed annually, for a period of thirteen years, to comply with their legal obligation to file prescribed returns with the registrar of companies. Each failure constituted the commission of a criminal offence. They repeatedly acted in breach of a mandatory obligation, which lay upon them because they were directors of a company. They repeatedly committed criminal offences. That amply meets the requirement of persistent failure.
40. If that were not enough, they failed to comply with the order of the High Court dated 14th May 2001, which allowed them three months from its date to deliver all outstanding annual returns. For another period of more than two and a half years, no annual returns were filed.
41. In my view, the failure to file annual returns for so many years continuously demonstrates a quite extraordinary disregard for the statutory obligations of directors. When the company had been struck off and restored to the register pursuant to an order requiring the filing of the returns, the default became flagrant. As can be seen from the affidavit of the first-named Respondent, it is not disputed that the respondents did not perform their duties in a manner appropriate to their positions as Directors.
Exercise of discretion
42. The learned High Court judge did not reach the question of discretion by reference to paragraph (f), since she made no finding of persistent default. She exercised her discretion against making a disqualification order pursuant to paragraph (d). As I have pointed out, the question should not, strictly speaking, have arisen, since she had made no finding of unfitness.
43. Some only of the material considered by the High Court under paragraph (d) will be relevant to the exercise of discretion pursuant to Paragraph (f). It is only the failure to make annual returns that can now justify the making of an order. Hence, the failure to make tax returns under a wide variety of headings, suffering judgment to be entered in favour of the Revenue Commissioners or permitting a judgment mortgage to be entered against the company property are not relevant to the question of whether an order should be made.
44. The persistent and, as I have described it, flagrant failure of the respondents to file annual returns is undoubtedly such as would ordinarily warrant the making of a disqualification order. To say otherwise would be to disregard the importance of the power conferred on the court. The Director has cited English authority for the proposition that limited liability is a valuable commercial facility but that those who benefit from with must comply with the rules. Limited liability should be regarded as a privilege conferred by the law. It enables business to raise capital and the promoters to limit their liability to the amount subscribed, as well as to organise itself efficiently. The corollary is, however, that the beneficiaries must comply with the law as to companies. Too many companies have failed as a result of inefficiency, bad management, fraud or mere bad luck. The filing of annual returns offers some, admittedly limited, protection to possible creditors, who may be able to ascertain the financial state of the company. On this subject, Kelly J, in his judgment in Re NIB Ltd: Director of Corporate Enforcement v D’Arcy  2 IR 163, at page 176, cited the following passage from the judgment of Henry L.J. in Re Re Grayan Building Services Ltd.  Ch. 241:
45. Where, as here, the circumstances arise for the exercise of the discretion to disqualify, consideration must be given to the principles upon which the power should be exercised. Firstly, it is clear that, even where the ground for its exercise is established, the court has discretion. The section uses the word, “may.” (See Cahill v Grimes  1 IR 372, per Murphy J at page 381). Secondly, it has been accepted in a number of cases that the purpose of exercise of the power of disqualification is not punitive but protective. Our courts have applied a dictum of Browne-Wilkinson V.-C. in In re Lo-Line Ltd. -1988] Ch. 477:
47. The reasons given by Laffoy J for the exercise of her discretion not to make disqualification orders are, so far as relevant to paragraph (f) as follows:
· that it was not unreasonable to conclude that to some extent the failure to file returns was facilitated by a failure on the part of the Companies Registration Office to take action to ensure compliance with section 125 until the late 1990s;
48. Laffoy J was rightly concerned with the interests of the employees of the company and of third parties. A disqualification order is widely defined. It extends to taking part in the management of any company. On the evidence before the High Court, the company, after restructuring and rectification of its defaults, was continuing to trade, it was claimed, profitably. It is a small private company with twelve employees.
49. Taking all of these circumstances into account, I do not think a disqualification order is warranted. It would not, at this stage, serve any useful purpose and would probably disrupt the ongoing business of the company. For largely the same reasons, I would also decline to make a declaration pursuant to section 150 of the Act of 1990. Crucially, such a declaration would not permit a person to “… act in any way, whether directly or indirectly, as a director ……of any company.” It would not be possible to limit such a declaration in such a way as to allow the first-named respondent to continue as a director of the company. As Laffoy J correctly said, such a declaration would undoubtedly impact on the ability of the Company to give effect to its intention to discharge its liabilities to the Revenue Commissioners and to carry on as a going concern
50. The position might have been different if we had to consider the matter under the heading of unfitness. The Respondents narrowly escaped an adverse finding on that issue, which the Director has not challenged.
51. The position of the second-named respondent is, arguably, different. She is no longer involved in the management of the company. Nonetheless, it would be harsh to make an order or a declaration against her, when it is quite clear that her husband was entirely responsible for the defaults.
52. For these reasons, I would dismiss the appeal.