High Court of Ireland Decisions

1. These are applications by George Maloney, the Official Liquidator of each of the companies named in the title hereof (hereinafter called the “the Liquidator”) for Orders under Section 160 of the Companies Act, 1990 or alternatively under Section 150 of the Companies Act, 1990 restricting or disqualifying George Smullen and Madeline Smullen as company directors. Both of the companies in the title hereof named (and hereafter called respectively “Newcastle” and “Abwood”) are being wound up by the Court, the Liquidator is Liquidator of both companies and George Smullen and Madeline Smullen are Directors of both companies, and accordingly these applications have been heard together by the consent of all parties. Counsel for the Liquidator has made it quite clear that he is primarily seeking an Order of disqualification pursuant to Section 160.

2. Newcastle was incorporated on 9th October, 1987 and its primary business was operating a sawmill from a property in Glenealy, Co. Wicklow. By Order of the High Court dated 2nd November, 1998 made on the application of the Collector General, Newcastle was wound up and the Liquidator was appointed official Liquidator. At the date of the winding up the company had virtually no assets, as its premises had already been sold to satisfy a secured creditor, and had liabilities amounting to some £230,000. By far the largest creditor was the Revenue and trade creditors amounted to less than £24,000.

3. Abwood was incorporated on 16th October, 1989 and its principle business was the manufacture and sale of garden sheds and fencing. By Order of the High Court dated 1st November, 1999 Abwood was wound up and the Liquidator was appointed official Liquidator. According to its statement of affairs it had assets of some £17,700 and liabilities of almost £175,000, of which just over £50,000 was due to George Smullen and just over £120,000 was due to the Revenue. A sum of £3,600 was due to trade creditors.

4. A very important distinction between these two sections is that under Section 160 where, as in the present case, an application is made by a Liquidator for a Disqualification Order, the onus is clearly on the Liquidator to satisfy the Court that the conditions of the section have been complied with, while on the other hand, under Section 150, the Court must make a Restriction Order unless it is satisfied that the person acted honestly and responsibly, and therefore the onus is on the Director concerned to satisfy the Court as to his honesty and responsibility. It is probably also relevant to note that Section 150 applies only to Directors and secretaries of companies, while Section 160 applies to a much wider range of persons connected with a company. Even more rellevant in the present case is that the use of the word “may” in Section 160 gives the Court a discretion which does not exist under Section 150.

5. The Liquidator has identified five matters in respect of which he claims that the Directors did not act honestly and responsibly, and I would propose to deal with them individually.

6. The Directors claim that they employed a full-time bookkeeper and full and proper records were maintained, but that they were destroyed in a fire in Newcastle's premises after it ceased trading but before it was wound up. They also point out that there were a number of inspections of the records of the company by the Revenue during its period of trading. There is no doubt that such a fire did take place, and there is no suggestion that this fire was caused by anything other than vandalism. It is now really impossible to say what books and records did exist.

7. There is no doubt that annual returns were not filed in the Companies Office by either company for many years, and indeed Abwood was struck off for failure to make returns. There was a clear default on the part of the Directors in this regard. With regard to Revenue returns, it is clear that at least some returns were made, and although there certainly would appear to be discrepancies in relation to these returns, these do not appear to be unduly serious.

8. In my view this is by far the most serious allegation against the Directors, and in effect it is conceded by the Directors that for the years 1992 to 1995 inclusive Newcastle did trade insolvently without discharging liabilities to the Revenue Commissioners, and indeed by implication a similar admission appears to be made in relation to Abwood for the years 1993 and 1994. The Directors blame the downfall of the company on a fire in the company’s premises in 1991, and the fact that the premises were under insured, and really only seek to justify the insolvent trading by averring that they believed the company’s problems were not insuperable and that its trading performance could be turned round. I am inclined to the view that this was a genuine, although highly unrealistic, belief, in that the Directors do appear to have invested some £60,000 of their own money in the company during this period, all of which has been lost. The fact remains that the trading losses were of a considerable magnitude and the clear implication is that there was a deliberate policy not to discharge the Revenue debts.

9. It is again conceded by the Directors that comparatively small sums were paid to trade creditors from money that came in from debtors after the company ceased to trade, and that again the Revenue liabilities were completely ignored. While the amounts involved were not great, it was clearly in the Directors’ interest to keep trade creditors happy so that they could continue in the same kind of business in the future.

10. The property in Glenealy was mortgaged to Lombard and Ulster Bank and Ulster Bank, and when the company ceased trading, the Banks threatened to appoint a Receiver. The banks agreed to accept the sum of £127,000 in full and final settlement of the liabilities to them, which liabilities in fact amounted to over £200,000. Accordingly, Mr. Smullen assumed the liability for the £127,000 and in effect purchased the property from the company for this sum. Before doing so he took the precaution of obtaining two valuations, one of which was for £95,000 and the other for £100,000. It should be said that Mr. Smullen was in any event bound to discharge this money as he had given personal guarantees to the Bank. However, while the procedures which were followed may have been somewhat irregular, the net effect was that Mr. Smullen discharged the debts due to both Banks, and the Banks agreed not to make any further claim as unsecured creditors for the balance against the company. It seems to me that, however unusual the arrangement, it has not in any way prejudiced the rights of any creditor, and may indeed be said to have been for the benefit of the creditors. I think the only possible criticism is that the Revenue, as by far the largest creditor, were not informed by the Directors of their actions. However, I do not think that there was any irresponsibility involved.

11. To sum up, therefore, insofar as the proceedings under Section 160 are concerned, the Liquidator has discharged the onus on him in relation to the failure by the company to make company office returns, the fact that the company traded while insolvent for some 4 years and the fact that after the company ceased to trade, they discharged trade creditors in priority to the Revenue.

12. The primary questions remains as to whether these actions on the part of the Directors amounted to a breach of duty or were actions which made the Directors unfit to be concerned in the management of a company, and secondly, whether, if so, I should exercise the undoubted discretion given by making an Order under the section.

13. The approach to be taken by the Court has been very clearly set out by Browne-Wilkinson V. C. in In Re: Low-line Motors Limited (1988) B.C.L.C. 698 in a passage which has been approved and applied by the late Shanley J. in La Moselle Clothing Limited (in Liquidation) and Anor. -v- Soualhi (1988) 2 ILRM 345, by McGuinness J. in the Supreme Court in Re: Squash (Ireland) Limited (unreported 8th February, 2001) and by Smyth J. in C.B. Readymix Limited (unreported 20th July, 2001). This passage reads:-

14. While these comments were made in the context of slightly different legislation in the United Kingdom, I, like my colleagues, have no doubt that it is the proper approach to be taken both under Section 150 and Section 160. As I have already said, many faults can be found in the conduct of the Directors in the present case. I have no doubt that they acted incompetently, and, particularly in relation to insolvent trading and preference of trade creditors, I think they behaved irresponsibly. However, the Liquidator has not satisfied me that the Directors were so much in breach of their duties, that they are unfit to be concerned of the management of a company, particularly in view of the undoubted discretion which I have in this regard. The Liquidator did rely to a considerable degree on the fact that the Revenue debts remained unpaid, and cited a number of authorities as to the importance of this aspect of the case, but taking the overall behaviour of the Directors I do not think it could be said that a Disqualification Order is necessary to protect the public against their future conduct. I say this particularly as it is now some six years since Newcastle ceased trading, during which time George Smullen has been intimately concerned in the management of another company, which appears to be trading successfully and is complying with its obligations to the Revenue. Accordingly, I will refuse an Order under Section 160.

15. I do feel, however, that the Directors have been sufficiently irresponsible to warrant a Restriction Order being made under Section 150. To trade while insolvent for 1 year, or perhaps 2 years, in the hope that the company may trade out of its problems is understandable, but to have kept Newcastle trading insolvently for some 4 years, and allowing Revenue debts to build up, appears to me to be totally irresponsible. I do not have the same discretion under Section 150 as I have under Section 160, and the Directors have not satisfied me that they acted responsibly, and accordingly I think I am bound to make an Order under Section 150. I would point out, of course, that this is not an absolute disqualification from acting as a Director, provided the company concerned has a sufficient capital to satisfy this section. I should say that, while I realise that Mrs. Madeline Smullen played little or no part in running these companies, I think that the Order must in the circumstances of this case be made against her as well.