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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Kavanagh v. Riedler & Ors [2004] IEHC 334 (27 May 2004)
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Cite as: [2004] IEHC 334
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THE HIGH COURT
[2004] IEHC 334
[2003 No. 234 COS]
IN THE MATTER OF RMF (IRELAND) LIMITED
(IN VOLUNTARY LIQUIDATION)
AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001
BETWEEN
TOM KAVANAGH
APPLICANT
AND
JOSEF RIEDLER, JUERGEN WEISSMAN, PATRICK COADY, KLAUS RAUCH, JOHN TWOMEY, AND RAY BUSHE
RESPONDENTS
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 27th day of May 2004.
The applicant is the liquidator of RMF (Ireland) Limited (in voluntary liquidation) ("the Company"). The resolution that the Company be wound up was passed on 27th November 2001. The applicant sought a declaration that each of the respondents be restricted under Section 150 of the Companies Act 1990, not having been relieved from his obligation to bring this application pursuant to Section 56 of the Company Law Enforcement Act 2001.
The applicant has averred to the fact that the fourth named respondent is deceased. The applications against each of the remaining respondents other than Mr. Patrick Coady the third named respondent have already been disposed of. The court was satisfied on 30th July, 2003 that the fifth named respondent Mr. John Twomey was not a director of the company within 12 months of the date of commencement of the winding up. Declarations of restrictions were made on 28th January, 2004 in respect of the first, second and sixth named respondents.
Background Facts
The company was involved in road haulage, international haulage, warehousing and logistics. The first, second, fourth and sixth named respondents appear to have been the executive directors of the company. The applicant, in his grounding affidavit identified a number of factors which in his view caused the insolvency of the company including poor management, loss of key agencies and contracts, loss of staff to competitors and increases in overheads. The final deficit appears to have been in the order of €3.5 million.
Mr. Coady has sworn an affidavit setting out his involvement in the company. The facts stated therein have not been disputed. It appears therefrom that he became a director of the company and acquired a shareholding at a cost of IR£191,000 in September 1997. The first named respondent Mr. Riedler was a personal friend and it was through him that Mr. Coady became involved in the company. In May/June 2000 Mr. Coady acquired a further 21.66% of the company from BTG Internationale Spedition Gmbh at a cost of DM 500,000.
It was agreed that Mr. Coady be a non-executive director of the company. He states that when he first became involved with the Company that he was an experienced business man with extensive interests, primarily in construction and the motor trade but with no experience of the type of business operated by the Company. He exhibited the notepaper of the Company which clearly indicates that he is a non executive director. He avers to the fact that he kept himself appraised of the company's affairs primarily through contact with Mr. Riedler but from September/October 2000 became more actively involved until his resignation in June 2001. It appears that in September/October 2000 after Mr. Coady's further investment in the Company he became aware of a factoring agreement between the Company and Bank of Ireland Commercial Services in relation to the Company's debtors. He became concerned that such a factoring agreement was necessary and began to examine the finances of the Company in greater detail. He thereafter assisted the executive directors in organising a refinancing arrangement with Bank of Scotland. He states that this was to the net benefit of the company by approximately €1 million. He continued to monitor the finances and when these did not appear to be improving he then engaged a Mr. O'Meadhra a Chartered Accountant to carry out a review. Together with Mr. Riedler and the then financial controller of the Company he had an initial meeting with Mr. O'Meadhra. Subsequently Mr. O'Meadhra reported back to Mr. Coady, Mr. Riedler and Mr. Bushe and concluded that the financial records of the company were incomplete and that the asset register was "utterly incomplete and unreliable". It appears that Mr. O'Meadhra advised the Company to bring the records up to date to enable him to complete a full statement of affairs and expressed a preliminary view that the Company had sustained substantial losses in the year ending 31 December 2000.
Mr. Coady states that in the light of Mr. O'Meadhra's review and conclusion he informed Mr. Riedler that he was resigning as a director and completed an appropriate company's office form in relation to his resignation and that he understood the Company's solicitors were to file this in the Company's Registration Office. Mr. Coady accepts that this was not done prior to the liquidation of the Company.
Mr. Coady states that notwithstanding his resignation he continued to give some assistance to the directors of the Company in the summer of 2001 and in particular in relation to a potential merger with another haulage company. Mr. O'Meadhra appears to have continued to be involved and to have given advises and assistance. This merger did not proceed and ultimately the Company was wound up.
Applicable Law
It is not disputed that the Company is insolvent and that Mr. Coady was a director of the Company within 12 months of the date of commencement of the winding up. Accordingly s. 150 of the Act of 1990 applies to the Company and to Mr. Coady and this court is obliged pursuant to s. 150(1) of the Act of 1990 to make a declaration of restriction unless the court is satisfied "as to any of the matters specified in sub-s. (2)". Relevant to this application are the matters in sub-s. (2)(a) which provides
"That the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section."
The onus of establishing that he acted honestly and responsibly is on Mr. Coady. The practice direction of the President of the High Court requires a liquidator in an application under s. 150 of the Act of 1990 to put before the court those matters which he considers the court should take into account in determining whether the director acted honestly and responsibly and also any matter which he considers might be relevant to a determination as to whether there is any other reason why it would be just and equitable that the director should be subject to the restrictions imposed by
s. 150. In practical terms therefore a respondent must primarily deal with the matters raised by the liquidator and will also put before the court any other matters which he or she considers relevant to a consideration by the court of the overall conduct of that person during his or her tenure as a director of the company in accordance with the decision of the Supreme Court in Re: Squash Ireland Limited [2001] 3 IR 35.
Conclusions
The liquidator in his grounding affidavit sets out four matters for the attention of the court in the context of this application. Two of the matters raised specifically relate to respondents other than Mr. Coady. The more general matters which potentially relate to the issue as to whether Mr. Coady acted responsibly as a director of the Company are:
"(a) The Company had net assets in December 1999 of approximately €1.57 million and the final deficit less than 2 years later is over €3.5 million which means that the Company made average losses of approximately €220,000 per month for a period of 23 months;
(b) The directors of the Company failed to ensure that tax returns were made on behalf of the Company. P35 returns for the year ended 5 April 2001 and the period to 27 November 2001 were not completed. This has also impacted on former employees who have attempted to claim social welfare and increased the work required to be done by members of my staff. The directors have failed to provide me with the Company's records which has meant that I have been unable to complete the Company's returns."
No issue is raised as to the honesty of Mr. Coady nor is there any fact raised which gives rise to a suggestion that there is any other reason for which it would be just and equitable to make a declaration of restriction against Mr. Coady. The only issue is whether, notwithstanding the matters referred to above by the liquidator Mr. Coady in his affidavit has discharged the onus of establishing that he acted responsibly as a director of this company in relation to the conduct of its affairs.
As already indicated it was agreed that Mr. Coady be a non executive director of the company. It is also clear that he was an experienced business man but without any specific experience of the type of business carried on by this company. The distinction between executive and non executive directors is well established in commercial life, if not expressly recognised in the relevant company's legislation. In considering whether a person has acted responsibly whilst a director of the company it appears to me that this court must recognise the distinction between executive and non executive directors. A person may, from to time be appointed as a non executive director to bring a particular expertise to a board of directors. Where this is done it appears appropriate to consider such persons conduct as a director inter alia in relation to any such particular agreement or purpose. However, every person who agrees to become a director of a company, whether executive or non executive or for the purpose of bringing a particular skill to the board of directors must discharge the general duty of a director which has been summarised by Jonathon Parker J. in Re: Barings plc & Ors (No. 5) Secretary of State for Trade and Industry v. Baker & Ors (1999) 1 BCLC 433 3 and cited with approval in Re Vehicle Imports Limited (Unreported The High Court Murphy J. 23 November 2000) as follows:
"Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them."
In relation to the obligation of a director to supervise and control the affairs of the company it is well established that directors may collectively delegate to executives or management certain functions but that such delegation does not absolve
the directors from their obligation of ultimate supervision. In considering whether a non executive director has acted responsibly for the purposes of s. 150 of the Act of 1990 it appears to me that the courts should also recognise that, in general, a non executive director is entitled both to rely upon information provided by his fellow executive directors and to rely upon the executive directors carrying out what might be considered to be normal executive or management functions. There may be factual circumstances which will put a non executive director on notice that he should not continue to rely either upon information provided or upon executive duties being properly performed and require further action from him or her.
I have concluded on the facts of this case that Mr. Coady has discharged the onus of establishing to the satisfaction of the court that as a non executive director of this Company he has at all relevant times acted responsibly in relation to the conduct of its affairs. In relation to the first matter raised by the liquidator which essentially relates to the general financial supervision of the Company it appears from Mr. Coady's affidavit that he did discharge the first duty identified above of keeping himself informed as to the financial affairs of the Company. Further, when in September/October 2000 he became aware of potential difficulties in relation to the financial affairs he took significant steps to deal with the matter. He participated in organising refinance in a way which probably went beyond his agreed role as a non executive director and also subsequently organised the review by the independent chartered accountant. This discharged the second duty identified, to join with his co-directors in supervising and controlling the financial affairs of the company.
Ultimately when Mr. O'Meadhra, the accountant reported Mr. Coady decided that he must resign as a director of the Company. On the particular facts of this case it appears to me that the court should not be precluded from being satisfied that Mr. Coady acted responsibly by reason of his resignation as a director.
He had arranged through the review carried out by Mr. O'Meadhra to have advice given to the board of directors and in particular the executive directors of the Company as to what should be done to address the inadequate records and financial position. Having taken such steps he cannot be considered to have been under a duty to remain as a director.
In relation to the failure of the Company to make tax returns, it again appears to me on the facts of this case that Mr. Coady as a non executive director was entitled to rely upon the executives of the Company making tax returns in accordance with the Company's obligations under the relevant legislation. It is not suggested that the fact that these returns had not been made was brought to the attention of Mr. Coady or that he in any way condoned the failure to make these returns. The actual making of returns is primarily an executive matter. Insofar as the continuing directors have failed to provide records to the liquidator this again does not appear to be a matter for which Mr. Coady can be considered to be responsible.
Accordingly I will dismiss the application against Mr. Coady.