High Court of Ireland Decisions

 


HC 178/04

2003 247cos

THE HIGH COURT

DUBLIN

IN THE MATTER OF COLM O'NEILL ENGINEERING SERVICES (IN VOLUNTARY LIQUIDATION) AND IN THE MATTER OF THE COMPANIES ACT, 1963 TO 2001 AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT, 1990

EX-TEMPORE JUDGMENT DELIVERED BY

MS. JUSTICE FINLAY GEOGHEGAN

ON FRIDAY, 13TH FEBRUARY 2004

MS. JUSTICE FINLAY GEOGHEGAN DELIVERED HER JUDGMENT ON FRIDAY, 13TH FEBRUARY 2004, AS FOLLOWS

MS. JUSTICE FINLAY GEOGHEGAN: This is an application brought under Section 150 of the Companies Act, 1990 by the liquidator of Colm O'Neill Engineering Services Ltd ("the Company") for a declaration of restriction of the four named Respondents, each of whom were directors of the Company. It is not disputed that the Company is insolvent; nor is it disputed that each of the respondents was a director of the Company within twelve months of the commencement of the winding up. Accordingly, Section 150 applies to the Company and the respondents.

Having regard to the terms of Section 150, it imposes a mandatory obligation on this Court to make the declaration of restriction unless the Court is satisfied that the director 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 Section 150. It is well established on the authorities that the section places the onus on the directors of establishing to the satisfaction of the Court that he or she has acted honestly and responsibly if they are to escape the declaration of restriction.

In accordance with the practice direction of the President of the High Court, the liquidator is required to set out before the Court the matters which the liquidator considers, having regard to the investigations which he has carried out in the Company, should be considered by the Court under the section. That has been done very clearly by the liquidator in this instance. Whilst the liquidator sets out the matters, the onus remains on the directors in relation to those matters to satisfy the Court that they have acted honestly and responsibly.

In considering the matters raised by the liquidator in relation to the four respondent directors, I think it is necessary just briefly to consider the legal framework which has been established by S.150 and the authorities on the section. Firstly, it is well established that the purpose of the Section is to protect the public against the future supervision and management of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors and others. It is also established that it is not the purpose of the Section to punish the individuals concerned.

It is also, it appears to me, established on the authorities that, as it was put, by Murphy J. in Business Communications Limited, that ordinary responsibility of directors will entail compliance with the principal features of the Companies Acts and maintenance of the records required by those Acts. That conclusion of Murphy J. was following a citation by him in that judgment of an extract from a judgment of Henry LJ in Grayan Building Services Limited [1995] 3 WLR 1 where in relation to the English provisions on disqualification, he stated:

"The concept of limited liability and the sophistication of our corporate law offers great privileges and great opportunities for those who wish to trade under that regime, but the corporate environment carries with it the discipline that those who avail themselves of those privileges must accept the standards laid down and abide by the regulatory rules and discip1ines in place to protect creditors and shareholders."

I think it fair to observe that the present corporate environment as set out in the current companies legislation is an environment of strict obligations on persons who are to be directors of companies with limited liabilities. It is also, I think, correct to observe that the responsibility which must be established by directors goes beyond the simple compliance with Companies Act obligations or regulatory obligations, and this is clear from the well known matters set out originally by Shanley J. in the decision in La MoseLLe Clothing ltd. -V- Soualhi [1998] 2 ILRM 345 and cited with approval by the Supreme Court in Re Squash Ireland Ltd. [2001] 3 IR 35.

It is clear from those matters to which the Court must have regard that there may be circumstances in which directors have acted so incompetently as to amount to irresponsibility. Also, that directors who have displayed a lack of commercial probity or want of proper standards may not be considered to have acted responsibly, and that is in addition to compliance with the Companies Acts.

What is also clear from the decisions to date is, firstly, that simply bad commercial judgment does not and will not be considered by the Court to amount to a lack of responsibility by directors. Further, that the Courts must be careful in considering applications under this section not to, as was described in one judgment, permit the conducting of witch hunts against directors and, perhaps more importantly from the Courts' perspective, not to view the matter with the inevitable benefit of hindsight which arises in the course of the liquidation. This latter obligation is sometimes difficult to observe and practice as the actions or inactions of the directors which it is being suggested may indicate a lack of responsibility are inevitably being considered by a liquidator with the benefit of hindsight and it is, perhaps, difficult for the Court to avoid looking at it on occasion from that perspective. It appears to me that the actions of the directors must be looked at on the basis of the companies being a going concern and insofar as it is possible, for the Board to conduct that artificial exercise to consider the alleged actions or inactions in the context of the company as a going concern and prior to the commencement of a winding up.

On the facts of this case, the liquidator has, essentially, raised two separate matters for consideration, two entirely distinct matters for consideration in relation to the responsibility of the four Respondents prior to the date of commencement of the winding up. The first relates to the possibility that the directors failed to obtain sufficient financial information for consideration by the Board from the executives of the company and, effectively, failed to recognize in due time the deteriorating financial situation of this company and failed to take appropriate steps.

The second and quite separate matter relates to the establishment by the directors in 1999 of an associated company, referred to as "Complete", and the investment of monies by this company in Complete and the adequacy of the recording of financial transactions between this company and Complete.

There is a third matter then raised by the liquidator which goes to the second matter which a Court must consider as to whether there is any other reason why it would be just and equitable that the directors should be subject to the restriction imposed by the Section and there is an allegation of non-effective cooperation in the course of the liquidation against certain of the directors.

This company was established in 1974 and it provided general mechanical services in relation to heating, plumbing and ventilation, in particular. The brief facts pertaining to the four directors are as follows:

Mr. Colm O'Neill was the Managing Director from the outset of the company and it is quite clear on the facts that he was the prime mover and the company bears his name. Unfortunately, in June 2000 he was diagnosed with cancer and underwent treatment during the following year. He states on affidavit that his cancer was, in June 2001, unfortunately, deemed to be incurable and he was thereafter given certain treatment to provide him with comfort and an extension of life. He indicated in November 2001 that he proposed resigning as an executive director, with effect from the beginning of 2002, and remained as a non executive director.

Mr. Ruari O'Neill, who is his son, joined the Board in October 1999, initially for a time as an executive, but for some considerable period prior to the commencement of the winding up he had been a non executive director of this company. He was an executive, and still is an executive, of the company Complete. I think it is fair to say that in the final period of the company by reason of his father's illness he did attempt to take over certain of the burden of his father.

Mr. Oliver Reddy joined the company in 1990 as a director. He was an executive director and he was the contracts administrator of this company.

Dr. Patrick Galvin joined the Board as Chairman and non executive director in October 1999 pursuant to an agreement which is exhibited. Dr. Galvin is a person with considerable corporate governance, experience and, in particular, experience as both executive and non executive directors of a number of well known PLCs in this country. He joined the Board by reason of the fact that he had had an association as a mentor with Ruari O'Neill at the time Ruari O'Neill was studying in the Smurfit Business School, and he joined at a time of the establishment of Complete, to which I will refer.

I think the last factual matter against which the matters raised for consideration were considered by me relates to the undisputed averment of the liquidator both that this company had complied with its statutory obligations and that the books and records kept by the company were reasonable. Against that factual background, in relation to the first matter raised by the liquidator and pursued – there were other matters, I should say, raised on the affidavits, but pursued at the hearing relating to the inadequacy of the financial information and, effectively, the alleged incompetent manner in which the Board considered financial information in the last year or 18 months of the life of this company, I have concluded that insofar as there may have been any inadequacy, such inadequacy of the actions of the Board could not be considered to be either incompetent, as such, or certainly not incompetent so as to amount to irresponsibility.

Any consideration of those facts must be viewed on the basis, firstly, there was no executive director who was the direct financial controller of the company, and it is clear from the Board meetings that Mr. Reddy in the last periods of time brought the financial information to the Board. Notwithstanding that there wasn't a financial director as such, it is also clear that the Board took steps to strengthen the financial reporting to the Board in the last period of the company. On the advice of their auditors, they appointed one individual. They were unsatisfied with that individual. They had him replaced by Mr. Bob Scott in the latter period of the company, but Mr. Scott, whilst the financial controller, was not a member of the Board. I am satisfied that there was no incompetence and certainly not irresponsibility in respect of that matter by the directors.

Insofar as the second matter, which are all matters surrounding the establishment of Complete, are concerned, I have formed the view that, firstly, it could not be said to have been an irresponsible act by these directors to have established Complete in 1999. It appears to me that they have well established on their affidavits that they went about this in a careful way. They brought in Dr. Galvin as a very experienced, independent non executive person into the Board of this company, partly for the purpose of considering the establishment of Complete.

Secondly, insofar as it is suggested that these directors were irresponsible in diverting monies of this company to Complete, on the facts it would appear that the net investment of this company was in the order of €240,000 over the period between 1999 and the date of commencement of the winding up, which was in May 2002. During that period, Mr. Colm O'Neill introduced additional loan monies to the company and also left behind pension contributions to which he was entitled and I think that the total figure from Mr. Colm O'Neill is in the order of €230,000. In the same period, Mr. Oliver Reddy left behind pension contributions which he was due from the company for a considerable period of time in the order of €126,000. So that the total monies introduced by the directors, even if I am slightly wrong in those figures, I am satisfied on the affidavits, and it was common case, well exceeded the net investment in Complete.

The third matter related to the adequacy of the recording of transactions between Complete and this company, and this is a matter which goes to the additional matter raised by the liquidator as to the post liquidation co-operation. On the facts, I have reached the following conclusions: Firstly, I must consider it against the liquidator's views that there were reasonable books and records in this company. Secondly, insofar as the inadequacy has been raised by the liquidator, it appears to relate to the back-up documentation and clarity of the entries made in relation to these transactions.

As far as the directors of this company are concerned, it is established that they had organised that there be kept proper books and records of this company. The detailed recording in those books and records and the manner in which the detailed information is recorded and kept is, it appears to me, an executive matter. Insofar as responsibility rests with a senior executive of the company, that would have rested with the financial controller who, in the latter days, was Mr. Bob Scott. I am satisfied that the directors cannot be said to have been in any way irresponsible in relation to that matter. Therefore, in terms of the four directors' conduct as directors of the company up to the date of liquidation, I formed the overall view that they have discharged the onus placed on them of establishing that they have acted responsibly.

I now turn to the other matter raised by the liquidator for consideration as to the alleged lack of effective cooperation. Whilst the liquidator maintained the claim against all the directors, I think it is fair to say that the claim against Dr. Galvin was not seriously pursued and I am satisfied on the facts that there can be no suggestion that Dr. Galvin did not, when requested, cooperate with the liquidator. I am also satisfied on the facts that insofar as Mr. Oliver Reddy was asked to provide information in the early days that he did make himself available. He assisted, in particular, in relation to the debtors of the company and that he made himself and left himself available to the liquidator and was, after the initial stages, effectively not contacted again.

The primary dispute in this matter is between the liquidator and Mr. Ruari O'Neill and it appears to me that it is an unfortunate dispute on the facts of this case. The submission made on behalf of the liquidatior in relation to Mr. Colm O'Neill is that it was accepted that by reason of his illness that he was not in a position to give substantial assistance to the liquidator. But the contention made was that as his son, Mr. Ruari O'Neill, voluntarily sought to relieve his father from that obligation and give in his place assistance to the liquidator, that if he failed, that such failure must be regarded as the responsibility of Mr. Colm O'Neill. I cannot accept that submission as a matter of law on the section and, therefore, it seems to me that there can be no suggestion that in relation to Mr. Colm O'Neill on the facts of this case, where he was prevented by serious and terminal illness from providing effective assistance, it could be considered just and equitable to make the declaration of restriction.

So that leaves Mr. Ruari O'Neill, and whilst it is undisputed and must be undisputed that there has been considerable delay in the provision of or in the identification of the precise balance between Complete and this company at the date of commencement of the winding up, it appears to me that there are faults on both sides, of the liquidator and Mr. Ruari O'Neill, in relation to the manner in which this manner has been dealt with over the period. I wouldn't seek to attribute the relative proportions of blame, but insofar as Mr. Ruari O'Neill is concerned, I am satisfied that he was a non executive director of the company. He undertook to try and provide assistance in relation to matters about which he did not have detailed knowledge by reason of his father's illness. He, together with his fellow directors of this company, took a step that appears to me to have been totally consistent with acting responsibly -- namely, they retained at the expense of Complete Mr. Scott, the financial controller, for a period of three months so as that he would be able to provide the liquidator with detailed information such as he sought.

The detailed information was not sought within that three month period by the liquidator, but at a much later time when Mr. Scott had left. Whether it was made entirely clear to the liquidator that he had this three month window of opportunity, I am not clear and this may have to some extent contributed to the subsequent unfortunate wrangle. But I am satisfied on the facts that there is no other reason for which it would be just and equitable to make the declaration of restriction in respect of Mr. Ruari O'Neill.

Therefore, I have dismissed the application as against all four directors.

END OF JUDGMENT