THE COURT OF APPEAL
[2014/13]
[Article 64 Transfer Case]
Kelly P.
Irvine J.
Hogan J.
IN THE MATTER OF WALFAB ENGINEERING LIMITED AND
IN THE MATTER OF RPB PRODUCTS LIMITED AND
IN THE MATTER OF SECTION 160 OF THE COMPANIES ACT 1990
BETWEEN
THE DIRECTOR OF CORPORATE ENFORCEMENT
APPLICANT/APPELLANT
AND
BRENDAN WALSH AND CATHERINE WALSH AND
PATRICK WALSH
RESPONDENTS
JUDGMENT of Mr. Justice Kelly delivered on the 20th day of January 2016
Introduction
1. This is an appeal by the Director of Corporate Enforcement (the Director) against a judgment and order of Barrett J. of 23rd July 2014 [2014] IEHC 365.
2. The trial judge was requested to make a disqualification order against the respondents pursuant to s. 160(2)(h) of the Companies Act 1990 (“the 1990 Act”). He declined to do so. He furthermore declined to make a restriction order pursuant to s. 160(9A) of the 1990 Act.
3. The Director contends that the judge was in error in making the orders which he did and asks this Court to so find and reverse the order of the High Court. He also takes issue with a number of statements contained in the judgment under appeal which he believes give rise to confusion which is undesirable in the context of corporate regulation.
Relevant legislation
4. Section 160(2)(h) of the 1990 Act, provides as follows:-
“Where the court is satisfied in any proceedings or as a result of an application under this section that -
. . .
(h) A person was a director of a company at the time of the sending after the commencement of s. 42 of the Company Law Enforcement Act 2001, of a letter under subs. (1) of s. 12 of the Companies (Amendment ) Act 1982, to the company and the name of which, following the taking of the other steps under that section consequent on the sending of that letter, was struck off the register under subs. (3) of that section; . . . the court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.”
5. This particular subsection was introduced to s. 160 of the 1990 Act, as a basis for disqualification by s. 42(b)(ii) of the Company Law Enforcement Act 2001 (the 2001 Act).
6. In considering an application under s. 160(2)(h), the provisions of subsection (3)(A) (which was also inserted by the 2001 Act) have to be borne in mind. It provides as follows:
“The court shall not make a disqualification order under paragraph (h) of subsection (2) against a person who shows to the court that the company referred to in that paragraph had no liabilities (whether actual, contingent or prospective) at the time its name was struck off the Register or that any such liabilities that existed at that time were discharged before the date of the making of the application for the disqualification order.”
7. The terms of s. 160 (3)(A) make it clear that s. 160(2)(h) is concerned with insolvent companies. A respondent to a s. 160(2)(h) disqualification application who can demonstrate that the relevant company had no liabilities at the time its name was struck off the Register or that any such liabilities were discharged before the date of making the application for the disqualification order is provided with a defence by virtue of s. 160(3)(A).
8. The 2001 Act created the position of the Director. He is independent in the performance of his functions which include the enforcement of the Companies Acts.
9. An important provision of the 2001 Act is s. 56. Section 56(1) provides:
“56.—(1) A liquidator of an insolvent company shall, within 6 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.”
Subsection (2) provides:
“(2) A liquidator of an insolvent company shall, not earlier than 3 months nor later than 5 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.”
10. Section 56 created an obligation on all liquidators of insolvent companies to report to the Director and to bring the prescribed application unless relieved of the obligation to do so by the Director.
11. In the event of a liquidator bringing an application under s. 150, the court is obliged to make the order unless the directors can show that they acted honestly and responsibly and that there was no other reason why it would be just and equitable that they should be subject to restriction.
12. Directors of insolvent companies could of course avoid the provisions of s. 56 by not placing the insolvent company into liquidation at all. By simply allowing the company to be struck off the Register for failure to file an annual return, they would not fall to be investigated by a liquidator under s. 56 of the 2001 Act. It appears clear that the introduction of s. 160(2)(h) was with a view to ensuring that directors of insolvent companies who permitted them to be struck off for failure to make returns rather than putting them into liquidation would not, by so doing, avoid the rigours of the regulatory regime bolstered by the introduction of the 2001 Act.
13. Section 160 (2)(h) has as its focus directors who, through culpable inaction, have allowed an insolvent company to be stuck off the register. They ought to have the company wound up. By failing to do so, they avoid scrutiny of a liquidator under s. 56 of the 2001 Act. The enactment of s. 160(2)(h) seeks to address this abuse.
The Annual Return
14. Section 125(1) of the Companies Act 1963 (the 1963 Act) requires every company to make a return in the prescribed form once every year.
15. Section 383(3) obliges each director and secretary of a company to ensure that the requirements of the Companies Act are complied with by the company. The combination of these two sections imposes the obligation on each director and secretary to ensure that annual returns are filed in respect of each company.
16. The company’s annual return provides information which may be of use to persons dealing with the company. A failure to make such a return deprives those persons of this information. When there is a failure for one or more years to make an annual return, the Registrar of Companies is entitled to strike such company off the register. By so doing, those who control the company lose the privilege of incorporation.
17. There is a rather elaborate statutory procedure prescribed which precedes the striking off of a company. It includes the sending of a letter to the company specifying that unless the outstanding returns are delivered within one month, a notice may be published in the CRO Gazette with a view to striking the name of the company off the register. If the CRO is told that the company is not carrying on business or if it fails to deliver the annual returns, then the necessary notice in the CRO Gazette may be published. The contents of that notice specify that at the expiration of one month from the date of the notice, the name of the company will, unless all outstanding returns are delivered, be struck off the register and the company will be dissolved.
18. As is clear from the terms of s. 160(2)(h), a person who was a director of a company at the time of the sending of the letter prescribed by s. 12 of the Companies (Amendment) Act 1982 (the 1982 Act) may be disqualified for his default.
19. Such persons are also, of course, liable to criminal prosecution in respect of their default, but that has no relevance to the issues in this case.
20. The interplay of these various statutory provisions make it plain that directors who do not bring about the winding up of an insolvent company, but rather allow it to be struck off the register, cannot, by that device, escape the prospect of disqualification or restriction.
The Evidence
21. It is common case that an application under s. 160(2)(h) involves the court engaging in a two-step inquiry. The first step requires consideration of whether or not the court has jurisdiction to make the order which is sought. This creates no difficulty in this case because, on the evidence, the respondents accept that all of the formal proofs had been made out and that therefore the High Court had jurisdiction to make the order sought.
22. The second stage of the inquiry involves a consideration of whether or not the court should disqualify the directors, or, as an alternative, restrict them under the provisions of s. 150. Such a decision involves the exercise of a judicial discretion which was exercised by Barrett J. in the manner complained of by the Director.
23. It is necessary to examine the evidence which was before the judge when he made his order.
24. Apart from the formal proofs which conferred jurisdiction on the court and which are not in issue, there was uncontested evidence that in the case of Walfab Engineering Ltd., there was an unsatisfied judgment registered against it for the sum of €954 in favour of Country Clean Recycling Ltd. The judgment was dated 15th April 2010.
25. In the case of RPB Products Ltd., there was a judgment for in excess of €70,000 in favour of the Collector General of Revenue of 21st September 2009 which had been satisfied to the extent of €18,895. There was a further judgment for a sum of in excess of €13,000 in favour of the Collector General in respect of which a sum of €4,949 had been discharged. There was a further judgment of 17th January 2011 in favour of a company called Killarney Advertiser Ltd. for €547 which had not been discharged at all. There was a further judgment for €35,572 in favour of the Collector General of 26th October 2011 which was wholly unsatisfied. Finally, there was a judgment for €1,072 of 3rd March 2010 in favour of Tex Oil Ltd. which remained unsatisfied.
26. The most recent annual return made in respect of RPB Products Ltd. was in respect of the financial year ending 30th September 2009 which showed creditors falling due within one year in the amount of €189,405 and creditors falling due after more than one year in the sum of €148,934.
27. In the case of Walfab Engineering Ltd., the annual return in respect of the financial year ending 30th April 2007 showed creditors falling due within one year in the amount of €299,399 and creditors falling due after more than one year in the sum of €12,272.
28. Two replying affidavits were sworn. One was sworn by the third named respondent, Patrick Walsh, on his own behalf an on behalf of the first respondent, Brendan Walsh. Both are metal fabricators by trade. In the case of RPB Products Ltd., these two respondents and another director formed the company in June 2002. Its business was importing and installing prefabricated stairways. Unfavourable conditions in the market resulting from the economic downturn caused an acute decline in the number of customers of the company. In addition, a number of debtors failed to honour their credit commitments. The company, as a result of this, ceased to trade on 30th April 2011. The first and third respondents took a decreasing role in the company from October 2008 when, at a directors’ meeting, it was decided that they would concentrate their efforts on Walfab Engineering Ltd. and try to trade through the difficulties. From that time, the day-to-day running of the company was carried out by these two directors and it is said it was their intention that they would resign their directorships but they failed to do so.
29. In the case of Walfab Engineering Ltd., the third respondent is a director with his wife, the second respondent. They became directors on 23rd October 1992, and on 21st January 2003 were joined by the first respondent as a director. They remained so until the company was struck off the Register of Companies. This was also a metal fabrication and manufacturing company. The company traded successfully until 2008. At the height of its existence, it had 13 fulltime employees. The economic downturn is blamed for the decline in the company’s fortunes, and by the time it ceased trading on 1st October 2011, there were just three employees left in the company.
30. Mr. Walsh did not dispute the failure on the part of each of the companies to file annual returns. In the case of RPB Products Ltd., the annual returns for the years 2009 and 2010 had not been filed. In the case of Walfab Engineering Ltd., there was a failure to file annual returns for the years 2008 and 2009. The reason given for this was “that the effect of the economic downturn had an acute and significant impact upon the company’s ability to trade due to the involvement and reliance of both companies in the building and construction sector and the demise of the company’s fortunes came about as a result”.
31. The third respondent, on his own behalf and on behalf of the first respondent, averred that they had at all time acted honestly and responsibly in relation to the companies. He said that the reasons that the companies were struck off the register was that they became insolvent as a result of the economic downturn and reliance upon business being generated by customers in construction, and in particular, the commercial construction sector. He said that as a result of the companies becoming insolvent, neither they nor the directors were in a financial position to afford to liquidate them as neither company had any assets. He described the withdrawal of overdraft facilities by a bank in respect of RPB Products Ltd. in November 2009. In January 2010, the banks to Walfab Engineering withdrew term loan facilities. The relevant facilities were secured by personal guarantees which were called in by the banks. In addition, equipment used by the companies was repossessed. He averred that the directors made increased efforts at cost savings and efficiency but without result.
32. He further averred that he and his fellow director, the first respondent, acted in the best interests of the companies in regard to compliance with their obligations as company directors. He said they made every honest and reasonable effort to continue to ensure the survival of their livelihoods and the business in which they had invested significant human and capital resources over the years. It was their genuine intention to keep trading into a position of recovery. They did not take any significant remuneration from the companies for a considerable amount of time before the companies were struck off the register. Directors’ loans in the amount of €120,000 existed at the time the companies ceased to trade.
33. The third respondent also swore that Catherine Walsh, the second respondent, is his wife and was a director of Walfab Engineering Ltd. since 1992. He averred that she did not take any part in the management of the company or play any role in its affairs during its period of incorporation. She was not involved in the company in any active manner and was not responsible for the consequences of what materialised.
34. He said that he and the first respondent took every step to ensure the survival of a family business that was exposed to a period of acute market decline.
35. In addition, he said that notwithstanding the fact that his and his fellow deponents’ obligations as company directors were paramount, there were other matters including the discharge of liabilities, satisfying customers’ orders and finishing works in progress and sustaining their livelihoods which concerned them.
36. The second affidavit was sworn by the second respondent, Catherine Walsh, who confirmed her directorship of Walfab Engineering Ltd. but was not in any way involved in RPB Products Ltd.
37. This deponent is a nurse by profession and has worked continuously and exclusively in that capacity since she qualified in 1988. She is the wife of the third respondent and the sister-in-law of the first respondent. Walfab Engineering Ltd. was operated as a family business. It was never her intention to be actively involved in the company and she took no active role in it. At no stage during the time when it was trading did she play any active part in the day-to-day management and affairs of the company save being made aware of the overall state of the company’s performance by her husband and fellow director. She never received any director’s remuneration, drawings, wages, salary or otherwise from the company. The accounts of the company were presented to her by the company accountants for signature during the initial years of trading. During the last ten years of the company’s trading, these accounts were signed by the first and third respondents only.
38. She admits that there was a failure on the part of Walfab Engineering Ltd. to file annual returns for the years 2008 and 2009.
39. She averred that the detriment caused to the business by the external economic circumstances became an insurmountable challenge for the company to continue to trade. Thus, despite strenuous efforts of which she was aware, the company became insolvent. She had no active involvement in the company’s affairs and had no role in the management of it. She said that she always acted honestly and responsibly in relation to the conduct and affairs of the company.
40. It was in the light of this evidence that the judge made the order under appeal.
41. Because of the criticism which is made by the Director of the judgment of Barrett J., it is, I think, necessary at this stage to refer to the state of the case law on s. 160(2)(h) prior to that judgment.
Case Law
42. The first reserved judgment on the meaning and application of s. 162(2)(h) was that of Finlay Geoghegan J. in Re Clawhammer Ltd. [2005] 1 IR 503. There had been a previous ex tempore judgment of Laffoy J. given in November 2004 in a case called Re Norse Security Ltd. which is in fact referred to in Clawhammer.
43. The Clawhammer case involved three separate applications brought by the Director. Finlay Geoghegan J. considered all three together and construed the relevant statutory provisions in order to provide guidance in respect of future applications.
44. In the course of her judgment, she identified the purpose of these statutory provisions where she said:
“13 Counsel for the Director submitted that the court should have regard to the scheme of the Companies Acts and in particular Part VII of the Act of 1990 in considering the appropriate order. Further, it was submitted that the Oireachtas, by including in s. 160(2)(h) of the Act of 1990 the possibility of disqualification in the circumstances set out therein reflects a serious legislative concern about the practice whereby to the detriment of creditors, insolvent companies are allowed by their directors to be struck off the register rather than be wound up in a proper fashion. The concern for the position of creditors is reflected in s. 160(3A) of the Act of 1990 which permits directors to escape either disqualification or restriction under the section where they can show that there were in fact no creditors at the time of strike off or that such creditors have been discharged prior to the making of the application.
14 I accept the submissions. There is potential prejudice to creditors of an insolvent company if the directors, by default, permit it to be struck off the register rather than taking steps to wind it up. In such circumstances such assets of the company as remain are not applied, as a matter of course, in the discharge of creditors according to statutory priorities. Even directors who seek to discharge liabilities of the company may do so in accordance with their own preferences and possible perceived future commercial needs or future commercial intentions or to escape liabilities under guarantees. It also may be of benefit to the directors in the sense of escaping the scrutiny of their conduct of the company's affairs which might follow an investigation by a liquidator including the possibility of being fixed with personal liability for liabilities of the company in circumstances where same is mandated by the Companies Acts. Accordingly, I accept the submission made on behalf of the Director that the Oireachtas regards the fact that directors may have permitted a company to be struck off the register as a result of their failing to make annual returns as more than a technical breach of their obligations under the Companies Acts.”
45. Paragraph 18 of the Clawhammer judgment, sets out the judge’s conclusions as to the exercise by the court of the jurisdiction conferred under s. 160(2)(h) of the Act. The judge set them out in numerical order as follows:
“1. Where the Director satisfies the court on the necessary proofs under s. 160(2)(h) of the Act of 1990 and the respondent directors do not offer any exculpatory evidence to the court either as to their involvement in the company, the circumstances leading up to the striking off of the company or the outstanding liabilities of the company an order of disqualification is probably in general justified.
2. In any application where the respondent directors appear and offer evidence to the court it will be appropriate to take that evidence into account in determining whether or not to make a disqualification order or a declaration of restriction.
3. Where the respondent directors adduce evidence of the likely quantum of the undischarged liabilities of the company or their role in relation to the company or other circumstances leading to the striking off of the company, it will be appropriate for the court to take such facts into account in determining any period of disqualification. Similarly it will be appropriate for the court to take into account any impact on the respondent directors of the making of a disqualification order in the context of any evidence offered of future proposals to earn a livelihood.
4. The scheme of s. 160(2)(h) of the Act of 1990 is such that the Director may satisfy the court that the circumstances for the making of a disqualification order exist without the court having any evidence of the extent of the liabilities of the company in question or any information as to the role of the respondent directors in the affairs of the company or leading up to the striking off of the company other than that such person was a director of the company. It appears appropriate that the court should attempt to apply a consistent period of disqualification in such cases.
5. In determining a period of disqualification the court must have regard to the fact that the Oireachtas intended such order as a more serious sanction than a declaration of restriction under s. 150 of the Act of 1990. This follows from the express wording of s. 160(9A) of the Act of 1990.
6. The mandatory period for the declaration of restriction under s. 150 of the Act of 1990 is five years.
7. Whilst a full disqualification order is in its terms more restrictive than a declaration of restriction, in practice the latter may operate to prevent certain respondents from acting as directors. This depends upon the particular circumstances of a respondent director. In the absence of a respondent putting before the court any relevant evidence, it is difficult to conclude that a disqualification order for any period less than five years will be a more onerous sanction for the respondent than a declaration of restriction which must be for five years.
8. If a respondent, by failing to offer any evidence to the court has over-looked putting before the court evidence which might have persuaded the court to either make a disqualification order for a lesser period or grant a declaration of restriction, there is available an application for relief under s. 160(8) of the Act of 1990.
9. Hence in the absence of any relevant evidence in relation to a respondent, other that the minimum proofs to satisfy s. 160(2)(h) of the Act of 1990, a period of disqualification for five years appears appropriate.”
46. The approach set out by Finlay Geoghegan J. in para. 18 of her judgment is one which has been followed in all subsequent applications under s. 160(2)(h).
47. Since the decision in Clawhammer, the Director has obtained a total of 114 disqualification orders and nine restriction orders in all of which the Clawhammer principles were applied
48. One commentator, Dr. Deirdre Ahern in her book ‘Director’s Duties, Common Law and Practice’ (Dublin, 2009), says that “the Clawhammer propositions have been regarded as authoritative ever since”.
49. The only departure from the application of those principles is that authored by Barrett J. in the present case and his decision in Chercrest Ltd. [2014] IEHC 363.
50. Before embarking on a consideration of the judgment under appeal, I list a number of authorities which were cited in argument which are enlightening and which are entirely consistent with the principles identified in Clawhammer. The court was referred to Re CB Readymix Cahill v. Grimes [2002] 1 IR 372; Re Wood Products Ltd; Director of Corporate Enforcement v. McGowan [2008] I.R. 598; Re NIB: Director of Corporate Enforcement v. Byrne [2010] I.R. 222; Re Kentford Securities Director of Corporate Enforcement v. McCann [2011] 1 IR 585 and Re NIB: Director of Corporate Enforcement v. Seymour [2011] IESC 45. It necessary to mention just one of those decisions at this juncture.
51. In Kentford, O’Donnell J. examining the qualification regime under s. 160, said it was important to consider it in its entirety. He went on:
“[32] It seems clear that the complexity and variety of s. 160 cannot be reduced to a single touchstone whether identified as the ‘primary purpose’ or the ‘only function’ of the Act of 1990. Instead, the Act of 1990 ranges from very serious matters requiring mandatory disqualification to matters which might, in certain circumstances, be regarded as regulatory, posing no immediate or obvious threat to the public. It is also significant in my view that the deemed disqualification under s. 160(1) is mandatory. The consequence of mandatory disqualification follows upon the conviction irrespective of the nature of the matters giving rise to the conviction, their age or any prediction as to the future risk to the public from the individual concerned.”
52. Later in the same judgment, O’Donnell J. had this to say:
“[38] A consideration of the structure of the subparagraphs of s. 160(2) is useful in seeking to interpret the subparagraphs in issue in any individual case. It is noteworthy that only subs. (d) and (e) refer expressly to the concept of unfitness. It has been observed that in one sense s. 160(2)(d) can be said to encapsulate all the other grounds. Looked at in another way, this subsection could be said to be a catch all provision capturing conduct not specifically identified in the other subsections, but which may nevertheless justify disqualification subject to the court's discretion. It is important, therefore, that the Companies Act 1990 specifies conduct in the other subsections of s. 160(2) which the Act itself appears to consider to render a person, presumptively at least, unfit to be a director. In that way, subs. (d) sheds light on the other subsections. By the same token, the other subsections give some indication of the type of conduct unspecified in subs. (d) itself, which would justify the making of a disqualification order under that subsection. Given the vagueness of the concepts being discussed, the perspective thus provided offers a valuable degree of focus to an inquiry under s. 160 of the Act of 1990.”
53. These observations of O’Donnell J. appear to me to demonstrate that the decision in Clawhammer is in accord with them. Applying the observations of O’Donnell J., it is clear that s. 160(2)(h) identifies conduct which, by itself, the legislature identified as rendering a director presumptively unfit for such office. That intent on the part of the legislature finds expression in Clawhammer and particularly at para. 18.1 where Finlay Geoghegan J. said that a person against whom the proofs were duly satisfied under s. 160(2)(h) ought, in general, to be disqualified in the absence of exculpatory evidence. In addition, she correctly identified, at para. 18.3 of her judgment, the matters that are appropriate for consideration and which might influence a court not to make a disqualification order.
The Judgment under Appeal
54. Barrett J. correctly decided that he had jurisdiction to make a disqualification order. In so doing, he expressly followed the views expressed by O’Donnell J. in Kentford that an application of the type in suit is a “two-stage structure”. The Director accepts that this was a correct approach on the part of the judge. Thereafter, however, the Director parts company with the judge and contends that he fell into error in the construction which he placed on s. 160, generally, and in particular, s. 160(2)(h). The Director also contends that the judge misdirected himself concerning the nature of the discretion given to him and the matters to which he should have regard in the exercise of that discretion.
55. It is clear from the judgment under appeal that the trial judge, although he considered the decision of Finlay Geoghegan J. in Clawhammer, departed from the guidance given by her. That departure is notified from an early stage in his judgment where, at para. 3, he says:
“Finlay Geoghegan J. delivered her judgment in Clawhammer in early 2005, some years in advance of the financial maelstrom that afflicted the State from late 2008 onwards. While her observations are as true now as they were then, the practical context in which s. 160 applications fall to be considered has changed utterly. In this regard, it is worth noting that the courts do not administer justice blinkered from general facts of which they are entitled to take judicial notice such as the collapse of the national economy around 2008, the protracted financial downturn that followed, and the adverse financial consequences that all of this has entailed for many people, including the respondents and indeed the creditors of the companies of which they were directors.”
56. Whilst it is of course true that courts do not decide cases in a vacuum or are unaware of general facts such as the serious downturn of the economy, there is, in my view, no justification for that to alter or displace the well-established interpretation or implementation of a statutory provision such as s. 160.
57. A “financial maelstrom” does not change the purpose of s. 160 which is the promotion of proper corporate governance (in this regard see the observations of Fennelly J. in Re Wood Products and O’Donnell J. in Kentford).
58. Neither does a “financial maelstrom” alter the obligations upon directors in circumstances where companies under their control become insolvent. In such a circumstance, they should take the necessary steps to bring about the company’s winding up. They cannot, as an alternative, fail to carry out their obligations by not making annual returns and waiting for the company to be stuck off the Register. If they do, then they are likely to face an application of the sort in suit. Difficult trading conditions or financial pressure does not provide a form of absolution from the statutory duties undertaken by persons when they decide to become directors of a company.
59. At para. 8 of his judgment, the trial judge considered matters which he regarded as pertinent to the exercise of his discretion. The first of these was what he described the “scale of enterprise and qualification of directors”. He pointed out that the courts:
“In applying the law are of course sensitive to the personal circumstances and social background of persons who present before them. This is what makes our courts hallowed places in which, subject at all times to what the law requires, it is sought to dispense measured justice and avoid unmerited harshness of treatment.
In the instant case, Messrs. Brendan Walsh and Patrick Walsh are metal fabricators by trade and, though clearly commercially astute, they are not professional directors, do not possess professional qualifications, and have never served at the helm of large or quoted enterprises. Mrs. Catherine Walsh is married to Mr. Patrick Walsh and, it appears, largely because of that was appointed a director of Walfab Ltd., a family enterprise, perhaps to satisfy the minimum two-director requirement that arises under law. Certainly, she never took an active part in the operation of Walfab.”
59. At para. 9, he then considered what he described as the “context in which director transgressions occur”. He said:
“If justice can be tempered by reference to context, and it both can and should, then it follows that it must also be capable of being tempered by reference to the times, given that the times form a part of the context against which the facts of the case unfold. In this case, the relevant facts unfolded in unprecedentedly turbulent times, when the respondents and the companies of which they were directors were confronted with economic challenges of such a scale and swiftness that customary practices such as the filing of returns may not have had the priority to some, the respondents among them, that legal requirements ought generally to have for all. The respondents’ failure to make the necessary returns and their apparently complacent acquiescence in the strike off process is undoubtedly reproachable but needs to be viewed in context . . .”
60. For my part, I cannot agree that the factors identified by the trial judge can be regarded as relevant to the exercise of his discretion. The whole thrust of the legislative provision is to ensure that all directors of all companies comply with their obligations. It matters not that they be directors of family companies, or be at the helm of large or quoted enterprises. Neither do the qualifications of the directors or the economic challenges that the companies may be facing affect the obligations of directors to act responsibly in respect of an insolvent company.
61. In the following paragraph of his judgment, the trial judge says:
“It may be, it almost certainly is, that they should have sought to put the companies into liquidation sooner and so ensure an orderly wind up of the companies’ affairs in accordance with the law pertaining to company liquidations.”
He is undoubtedly correct that they ought to have put the companies into liquidation, but it is not a question of doing so “sooner” because, in fact, they never wound up the companies at all.
62. Later, in this part of his judgment, the trial judge said:
“One might criticise the respondents’ behaviour in failing to file their annual returns as foolish, unwise or reproachable. However, when put in context, it is also to some extent understandable. It certainly does not appear to this Court to be of such a nature as to require that the court must exercise its discretion so that a disqualification order now follows.”
The approach of the trial judge, as identified in the last part of the judgment from which I have quoted, seems to be contrary to that identified by Finlay Geoghegan J. The failure of the respondents to file annual returns or to wind up the company would be such as, according to para. 18.1 of the Clawhammmer judgment, to normally render a disqualification order appropriate.
63. The next factor identified by the trial judge at para. 11 of his judgment which ought to be borne in mind in applications made under s. 160(2)(b) is the past behaviour of respondents. In support of this he cites from the judgment of O’Donnell J. in Kentford where that judge said:-
“In my view, it is clear from an analysis of the Act of 1990 that that Act directs attention to that past conduct as certainly the best, if not the only, guide to the necessity for disqualification.”
64. In his purported application of that dictum, the trial judge said:-
“Apart from the failure as regards the submission of annual returns which led in turn to the eventual strike-offs, the court's attention has not been drawn to any other misbehaviour on the part of any of the respondents as directors during their relatively long tenure as directors. This long period of good behaviour is a relevant factor when deciding whether any of them should be exposed to the severity of a disqualification order and inclines this Court to the view that they should not. Neither in this nor in any other respect does it appear to this Court that the behaviour of any of the respondents to these proceedings comprises that egregious behaviour at which s.160 is aimed.”
65. I am of the view that s. 160(2)(h) does not impose any burden on the Director to establish any instances of past bad behaviour in order to bring about the making of a disqualification order. As was pointed out by O’Donnell J. in Kentford (at para. 32 already quoted) there is no single purpose which underpins section 160. Each of the wrongdoings identified in it are instances of conduct which warrant disqualification. The intent of the legislature runs the risk of being frustrated if an obligation is placed upon the Director to put before the court evidence of the entire past behaviour of directors. Commenting upon the failure to draw attention to any other misbehaviour by the respondents is to place an unnecessary and, indeed, unworkable burden on the Director. He can have little knowledge about the affairs of the companies and the director’s behaviour because no annual returns have been made. As the companies have not been placed in liquidation there is no s. 56 report from a liquidator available to him. In many cases, the directors will not be in a position to form any view as to how directors have carried out their obligations in the past.
66. As is clear from the foregoing, I am of opinion that the trial judge was in error in his departure from the Clawhammer principles. Later I will consider the appropriate order to make on a proper application of the Clawhammer principles to the facts of this case. Before doing so however, it is necessary to address another aspect of the judgment which is also criticised by the Director.
Passive Directorships
67. The Director makes complaint about the trial judge’s approach to the position of Mrs. Catherine Walsh. At para. 15 of his judgment he said:-
“One of the points touched upon in these proceedings is the extent to which a married woman, who acts as the second-named director of a company solely to satisfy the minimum two director requirement under the Companies Acts, and who in point of fact does nothing in relation to that company, can rely upon the passive role that she has consistently played to justify the non-issuance of an order against her under s.160 of the Act of 1990. As the court considers that in any event no liability should attach to any of the respondents, it is not necessary to render judgment on the contention made in respect of the second-named respondent that she was in effect only a passive director of Walfab and ought not to be exposed to liability as a consequence. That said, it does not appear that Ms. Catherine Walsh in her actions as director was or is tainted with that ‘real moral blame’ to which reference was made by Carroll J. in the renowned case of In Re Hunting Lodges Limited (in liquidation) [1985] I.L.R.M. 75 at p.85 as the basis for imposing personal liability on a purportedly passive director.”
68. The Director contends that this is an incorrect approach and runs contrary to authority.
69. The first thing to be said is that Re. Hunting Lodges was an application under s. 297 of the 1963 Act in which personal liability was sought to be attached to directors by reason of their participation in a scheme of fraudulent trading. The factors which are relevant to a consideration of personal liability being found against directors for fraudulent trading have little to do with the topic of disqualification or restriction under ss. 160 or 150 of the 1990 Act.
70. It would be contrary to the whole notion of proper corporate regulation that passive directors would be exonerated from liability or relieved from disqualification or restriction on the basis of the passive nature of their role. There are a number of cases where that is made clear.
71. In Re. Costello Doors (High Court, 21st July, 1995) Murphy J. did not accept that a director could be excused from acting responsibly merely because he or she accepted the office to facilitate the proprietor without being prepared to involve him or herself in any aspect of the management of the company. Similarly in Re. Vehicle Imports [1985] ILRM 75, the wife of an executive director who alleged that she was just a named director with no involvement in the company was unsuccessful in persuading the judge that director’s duties did not apply to her. He held that there was no doubt that director’s duties apply equally to non executive as to executive directors, but on the facts of the case he found it was inappropriate to make a restriction order against her because she had adopted a responsible position in opposing the company’s increased borrowings. These decisions were given in the context of s. 150 restrictions, but I am of opinion that no different test would be appropriate in the context of a s. 160 application. All directors whether passive or otherwise are required to undertake all reasonable steps to file annual returns.
72. There is no warrant to limit the disqualification or restriction of passive directors pursuant to s. 160(2)(b) to one where there is a “real moral blame” on their part shown.
Section 160(9A)
73. Section 160(9A) provides that:-
“In considering the penalty to be imposed under this section, the court may as an alternative, where it adjudges that disqualification is not justified, make a declaration under section 150.”
74. In the judgment under appeal, the judge at para. 13 indicated his view that this was not an appropriate case to issue a disqualification order against any of the respondents. He then cited s. 160(9A) and said at para. 14 as follows:-
“The use of the word "may " in the above-quoted text points to the power under s. 160(9A) being a discretionary power; the reasoning of Murphy J. in Business Communications and McCracken J. in Re Newcastle Timber , considered above, appears to put this beyond doubt. The discretion arising, however, seems to be confined to the court's electing whether or not to consider if a s.150 disqualification (sic) falls to be made. Once the court goes down the path of considering whether a s.150 declaration falls to be made, it seems from the decision of McCracken J. in Re Newcastle Timber, at p.592, that the court is trammelled by all the requirements of s.150, most notably that if the criteria set by that provision are satisfied the issuance of a restriction order is mandatory, a perhaps surprising turn of the law given that s.160(9A) confers a power that, as stated, is ultimately discretionary. Under s.150 of the 1990 Act, the court must grant a restriction order unless satisfied that any of a variety of circumstances identified in s.150(2) pertain, the relevant circumstances in this case being that the respondents acted (a) honestly and (b) responsibly in relation to the conduct of the affairs of the company(ies) of which they were respectively directors and (c) there is no other reason why it would be just and equitable that any of them should be the subject of an order made under s.150. Nor does it appear to the court that, apart from the issue of whether they each acted responsibly, there is any other reason why it would be just and equitable that any of them should be the subject of an order made under s.150. So the sole issue arising is whether they each acted responsibly.”
75. The judge then went on to hold that the directors had not behaved irresponsibly and declined to make an order under section 150.
76. The Director contends and I believe correctly, that the trial judge fell into error in holding that the court is “trammelled by all of the requirements of s. 150 when applying the provisions of s. 160(9A)”. In fairness to the respondents it must be said that they made no effort to stand over this part of the trial judge’s judgment and effectively conceded that he was wrong in his approach to section 160(9A).
77. In my view s. 160(9A) does nothing more than provide an option to impose a more lenient sanction than that prescribed under section 160. Thus, if there is an entitlement to make an order under s. 160(2)(h) there is, depending upon the facts, an entitlement to make an order under section 160(9A).
78. From its plain wording s. 160(9A) is concerned with a penalty to be imposed. The penalty need not be that prescribed under s. 160 but, as an alternative, the court may adjudge that a declaration under s. 150 will suffice.
79. Section 150 insofar as it is material recites:-
80. The application for the declaration under subs. (1) may be made to the court by the Director, a liquidator or a receiver.
81. Utilising the ordinary rules of statutory construction it is clear that the meaning of s. 160(9A) is that in applications made to the court under s. 160, the court is given a discretion to make a declaration under s. 150 as an alternative to making a disqualification order where it adjudicates that a disqualification order is not justified.
82. It is, in my view, incorrect to suggest that s. 160(9A) allows the court to make a s. 150 declaration only where such could be made on foot of a s. 150 application. I find nothing in the subsection or authorities to support that view of the trial judge. In fact all of the authorities are in the opposite direction. In Clawhammer, Finlay Geoghegan J. said
“Section 160(9A) of the Act of 1990 enables the court, on an application for disqualification, in certain circumstances in the alternative to make a declaration under s. 150 of the Act of 1990.
83. Later in her judgment she said:-
“Section 160(9A) of the Act of 1990 clearly envisages that a declaration of restriction under s. 150 of the Act of 1990 is to be considered as a lesser sanction than a disqualification order. It enables the court ‘as an alternative, where it adjudges that disqualification is not justified, make a declaration under s. 150’.”
84. A similar expression of view was made Laffoy J. in Re. Wood Products [2005] IEHC 41.
85. But perhaps the best example to demonstrate the incorrectness of the trial judge’s view that he was trammelled by all of the requirements of s. 150 is to be found in the decision of the Supreme Court in Director of Corporate Enforcement v. Seymour [2011] IESC 45. In this regard it is important to bear in mind the s. 150 Act is situated in Part VII, Chap. 1 of the 1990 Act which is headed “Restriction on Directors of Insolvent Companies”. Section 160 is situated in Chap. 2 which deals with disqualification generally. Applications under s. 150 are limited to directors, but s. 160 applications are not so limited. Mr. Seymour faced a s. 160 application and was not a director of the company (National Irish Bank) in respect of which wrongdoing was alleged against him. He was in fact a former chief executive of that entity. The Supreme Court, per Macken J., for reasons which are explained in her judgment declined to make a disqualification order. Instead she said:
“I consider that a less draconian order, to be made pursuant to s. 150 of the Act of 1990, may and should be properly be made. In the circumstances, I would set aside the High Court order and substitute for it an order restricting the appellant, pursuant to s. 150 of the Act of 1990 for a period of five years.”
86. If the trial judge’s view of s. 160(9A) was correct the Supreme Court could not have made the order which it did in Seymour’s case.
87. In these circumstances I am satisfied both by the application of the ordinary rules of statutory construction and a consideration of the authorities, that s. 160(9A) unambiguously does no more than permit the court to impose the lesser sanction of a s. 150 declaration on a s. 160 application in an appropriate case.
This case
88. I now turn to the exercise of judicial discretion having regard to the facts of this case.
89. I have already reproduced the evidence that was put before the court by each of the respondents. The first and third respondents were directors of both companies whilst the second respondent was a director of just one ie. Walfab. The companies were insolvent with substantial judgments outstanding.
90. However, applying the test identified in Clawhammer and on a consideration of the affidavit evidence which has been filed by the respondents and the explanations given, I am inclined to the view that this is a case where the court ought to exercise its discretion under s. 160(9A) of the Act and not make a disqualification order. Instead there should, in my opinion, be a declaration of restriction under s. 150 for a period of five years in respect of each of the respondents.
Result
91. In my opinion, this appeal ought to be allowed and the order of the High Court should be set aside.
92. In lieu thereof there should be substituted, pursuant to s. 160(9A), a declaration of restriction under s. 150 in respect of all three respondents for the mandatory period of five years from today.
