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Cite as: [2009] IEHC 397
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Judgment Title: MDN Rochford Ltd -v- Companies Acts Composition of Court: Judgment by: Mac Menamin J. Status of Judgment: Approved | |||||||||||||||||||||||||||||||||||||||||||
Neutral Citation Number: [2009] IEHC 397 THE HIGH COURT 2008 521 COS IN THE MATTER OF MDN ROCHFORD CONSTRUCTION LTD (IN LIQUIDATION) AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001 BETWEEN/ KENNETH FENNELL APPLICANT AND
MICHAEL ROCHFORD AND DAVID ROCHFORD RESPONDENTS JUDGMENT of Mr. Justice MacMenamin delivered the 18th day of August, 2009
1. Section 150 of the Companies Act 1990 provides:-
(2) The matters referred to in subsection (1) are— (a) 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, …” MDN Rochford Construction Limited 4. The respondents were registered in the Companies Registration Office as the directors of the company at the date of the commencement of the winding up. Their father, Noel Rochford resigned as a director on 26th September, 2007. The respondents were joint managing directors since its incorporation. It is not contested they were directly responsible for Constructions day to day running. 5. The liquidator has provided two reports to the Director of Corporate Enforcement (the Director) pursuant to s. 56 of the Company Law Enforcement Act 2001. Having completed his investigations he sought relief from the Director of the obligation to bring this application in respect of the applicants’ father, Mr. Noel Rochford only. He was not relieved of such responsibility in relation to the respondents. The statement of affairs 7. The statement of affairs as of 4th January, 2008 set out the following estimated figures:-
9. The directors arranged for a new auditor to be put in place in mid 2007. In late November of that year the new auditor presented the respondents with management accounts for the period ended 30th September, 2007. The respondents say they only then realised the full extent of the company’s financial situation. 10. It appears that the relationship between the company and Dublin City Council deteriorated throughout 2007. This is said to have had an adverse effect on cash flow as the company found it difficult to secure prompt payment. The apparent financial position for years 2005/2006 12. For the following year ended 31st December, 2006, it was stated that the company made an apparent profit of €5,523.00 from a turnover of €836,748.00. The net asset position of the company as of 31st December, 2006 was €7,292.00. During that period the main costs incurred by the company were:
14. It is necessary then to look at a number of specific features which contributed to the decision to wind up the company. Extent of the company deficit Dealings with Dublin City Council 17. The liquidator asked the respondents to clarify the situation. He was informed by the first named respondent that the payments had always been made to “Bathroom” as it, (by way of distinction from the subject company) held a valid C2 certificate, that is a certificate of authorisation issued by the Revenue Commissioners demonstrating tax compliance. This procedure was at variance from that laid down in relation to C2 certificates pursuant to s. 531 of the Taxes Consolidation Act 1997. In itself however this was not a criminal offence. Even as of the time of this hearing the respondents appeared to be under a misapprehension as to whether Construction held a valid C2. Ultimately it was properly conceded the subject company did not. Failure to file Revenue returns and to discharge Revenue liabilities 2005 VAT returns and payments 2006 VAT returns and payments 2007 VAT returns and payments 22. Thus, for the entire period of its trading the company had incurred VAT liabilities of €45,406.00. 23. Unfortunately however, these figures do not paint the full picture. One turns then to the company’s PAYE/PRSI record. From 1st January, 2006 until 31st December of that year, the company filed PAYE/PRSI returns reflecting a liability of €68,868.08. But only a total of €40,970.00 was paid during that period, leaving a balance outstanding of €27,898.08. From 1st January, 2007 until 31st December, 2007, the company’s PAYE/PRSI liability was €33,612.00, from which the Revenue authorities collected only €9,576.00, leaving a balance of €24,036.00. Thus, under this heading, the company owed the Revenue a total of €51,934.08 over its entire operating period. 24. During the same period of operation the company also incurred a CT (Corporation Tax) liability of €1,049.00. In summary therefore, on an age analysis of Revenue debt, the company owed a total of €98,389.08 for VAT, PAYE/PRSI and Corporation Tax liabilities. None of this was reflected in the company’s trading figures. 25. Of the VAT figure, €23,680.00 is based on estimates from the Revenue Commissioners. The Revenue Commissioners were obliged to raise these estimates as the company did not submit VAT returns from 1st November, 2006 onwards. The liquidator has been unable to complete these returns with any degree of accuracy due to the lack of information within the books and records of the company in his possession. 26. The liquidator comments that the liabilities owing to the Revenue Commissioners related to liabilities raised on returns since late 2006 when the company was experiencing significant cash flow difficulties. He comments that the respondent directors were, or should have been, fully aware of the relevant Revenue returns not being submitted and of the build up in Revenue liabilities and also that they could not have reasonably believed that the company would be in a position to discharge its debts as they fell due. Failure to keep proper books and records 27. The liquidator states that he has reviewed such books and records as were available but has been unable to identify a number of smaller transactions in 2006 due to the lack of relevant records. He notes that the company’s audited accounts did not contain any qualification, so he assumes that the records were at one stage properly maintained despite the lack of records being made available to him. 28. He has however been able to retrieve a nominal ledger from the company’s accountant for the year ended 31st December 2007, but has been unable to access any information regarding tax returns for payments for 2006. On collection of the books and records he found it to be lacking a cash payments receipts book and cheque books. He requested these books from the respondents, which he described as “basic” and was informed that all available books and records had been retrieved by his staff. He comments therefore that in his opinion the books and records were not adequately maintained for the period beginning 1st January, 2006 to 31st January of that year. Preparation and filing of statutory returns and audited accounts Preparation of management accounts Failure to register with the Construction Workers Pension Scheme Material differences 33. “Bathroom” was placed in liquidation on the same date as the subject company. The applicant was appointed liquidator of both companies. He states that although this materially affects the debtors figures stated in the director’s estimated statement of affairs it also reduces the amount “Bathroom” might be owed by the subject company as an unsecured creditor in the sum of €72,694.00. The directors’ financial contributions The director’s honesty The replying affidavit of Michael Rochford 37. Mr. Rochford further asserts that the financial problems which the company encountered in late 2007 were “in reality solely and exclusively attributable to trading losses in the calendar year 2007”. It is important to note that, as is clear from the liquidators report at the end of 2006, the company had made a profit of €5,523.00. In 2007 the company saw a very significant increase in work load and the company was extremely busy with new contracts. In or about the middle of June 2007 the respondents decided to change the company’s accountants: “as we believed that we needed greater financial advice, guidance and assistance than we had been getting at the time”. Mr. Rochford goes on to state:
39. It was accepted finally that the C2 certificate of Rochford Bathroom and Tiling Ltd. was used by the subject company for the purposes of securing work from Dublin City Council. But Mr. Rochford states:
Consideration of the respondents replying affidavit
41. Second is the undisputed fact, that the respondents invested a combined total of €96,000.00 into the company, apparently on the advice of their previous accountants as well as having personally guaranteed a substantial portion of the AIB loan. 42. Third, Mr. Rochford seeks to rebut the contention made by the liquidator to the effect that the respondents should have involved themselves more in understanding how the company was financed and operated. He contends that the company found itself in an impossible position since applying too much pressure to Dublin City Council for payment risked alienating that source of work upon which the company was reliant. This was to be seen in light of the fact that the company at the time of liquidation had “projects with a value of approximately €250,000.00 which consisted of two private jobs and one job for Dublin City Council”. Mr. Rochford comments: “notwithstanding the existence of these projects the advice was nonetheless to place the company into liquidation”. The decision to place the company in liquidation in hindsight was a course of action which he now regrets. It is in these circumstances that Mr. Rochford suggests that there was “a lack of reality” in the liquidator’s assertions. Issues which arise from the evidence
(b) whether the issue of irresponsibility arises, particularly when one takes into account that the average monthly turnover of €52,886.94 gave rise to a monthly loss of €26,281.00 over the same period; (c) whether it is tenable to suggest that in the circumstances the respondents met with their previous accountants once a month to “pay all appropriate taxes and to review the company’s accounts”; (d) whether, in particular, it can be said that the deficit of the company whether due to tax liabilities or otherwise, arose only in 2007; (e) whether inferences may properly be drawn from the fact that the respondent contended, up to the hearing, that the subject company actually did have a valid C2 certificate. It was properly conceded by counsel for the respondents that this was incorrect and that the company never had such a certificate; (f) whether the above quoted averments support or undermine the proposition that the directors acted “responsibly”; (g) whether these averments reveal the directors held the requisite degree of knowledge and insight in the administration of the affairs of the company. The general legal principles applicable to this application 45. Excluding financial probity therefore relevant factors to which the court will have regard in this case are the extent: · of compliance with any obligation imposed under the Companies Acts 1963 – 1990; Directors powers to delegate not an abrogation of responsibility 47. Applying principles from Barings plc and others, Secretary of State for Trade and Industry v. Baker & Others [1999] 1 B.C.L.C. 433. Murphy J. identified the following pointers regarding delegation in Vehicle Imports:-
B. the fact that some delegation is always essential if company business is to be carried out effectively; C. that delegation is not to be equated with the absence of a continuing duty to supervise; D. nor is such delegation to be equated with abrogating responsibility for delegated functions; E. the extent of the duty may be assessed in accordance with the size and nature of the business; F. the level of reward a director might be entitled to receive; G. the general principle that directors have, collectively and individually, a continuing duty to acquire and maintain sufficient knowledge and understanding of a company’s business. The power to delegate is not to be seen as an abrogation of the powers and duties of a director; the extent of the duty is to be determined on the facts of each individual case. (See also Cooke’s Events Company Ltd. [2006] 1I.L.R.M. 191 at 208, MacMenamin J.) 48. Finally, non-compliance with tax legislation is not in itself sufficient in order to determine whether a director acted irresponsibly (Digital Capital Partners (in voluntary liquidation) [2004] 2 I.L.R.M. 35, Finlay Geoghegan J.) In relation to such liabilities, there must be something more than mere limited failure to discharge liabilities over a period to indicate that the directors have acted irresponsibly. Application of the principles to the instant case 50. All business and financial enterprises commence on the basis of optimism. But the issue of profitability lies at the essence of a company, whether it be great or small. If a business is loss making from the outset, and then increasingly so, its future is placed in doubt. The question of solvency will inevitably arise. One test which must be applied as to directors’ responsibility is the extent to which they were alert to this key issue, and ensured that there were available to them management accounts so as to ascertain whether, on a month by month basis, a company was trading profitably. This is not to impose a counsel of perfection on directors. It is mere prudence in order to ensure that an enterprise is not engaging in over-trading, and that increased turnover is not misconceived as increased profitability. It is by no means unusual in applications of this type for directors to have confused one for the other. Monthly management accounts, and a clear assessment of where the company is going, are as essential to company directors as navigation instruments are to a pilot. Directors cannot excuse the fact that they were, for an extended period, “flying blind”, by asserting that their duties had simply been delegated to “someone else”. Accounts cannot be manicured by ignoring liabilities to the Revenue or elsewhere. 49. These considerations apply specifically here, when such documentary evidence as is available does not even begin to indicate that the directors were, in fact, engaging in a continuing assessment of their company’s profitability, or that they were, in fact, meeting their then accountants to pay tax liabilities as they fell due. If they had been engaged in such a process they “failed to see the writing on the wall”. If such meetings were in fact taking place for such a purpose, the consistent non payments to the Revenue would have been apparent to all present. There is no evidence the directors adverted to these issues at all. This was irresponsible. The irresponsibility is exacerbated when the issue of solvency was of fundamental importance from the beginning. The position was worsened by the fact that the directors were apparently blind to it. It goes significantly beyond “tipping point” when the directors (then and now) appear still to confuse the total turnover figures which might have been achieved from potential future contracts, as being in themselves entirely potential profit, sufficient to redress losses from previous years. 50. While each case must be judged on its facts, there comes a point where optimism becomes hubris, and where belief that a company can trade out of its difficulties is simply wilful self-delusion. Commercial acumen is necessary. Hope must be matched by verification and objectivity. The absence of all of these necessary characteristics constitutes irresponsibility. They were unfortunately absent here. 51. The facts show that, in fact, the company was never profit making as the directors claim. They never took into account tax and VAT liabilities. Why, is unexplained. If they had, they would have known that they were progressively in a worsening loss making situation. If they had directed their minds to this fact, the alarm bells should have begun to ring as the turnover of the company increased. The respondents could, and should have asked themselves whether the turnover was giving rise to real profit in a low margin environment. Even now they do not seem to appreciate the difference between profit and turnover. The problem could have been identified by the directors properly informing themselves as to the financial state of the company. While, for a short period of time, one might excuse difficulties derived from changing accountants, there is yet a further point in this context which raises difficulty for the respondents. 52. The respondents’ reasons for their change of accountants are unexplained. A “problem with an accountant” can have manifold causes. To be a justification for default there should be a full explanation of what, precisely, was the problem. Hypothetically, if such a problem was in fact non payment of accountant’s fees, then it is no explanation at all. If alternatively there are faults which lay at the door of the accountants, this should be explained. Moreover, the nature of the delegation cannot preclude the directors knowing about the deficits in VAT and PAYE/PRSI returns, outlined earlier in this judgment. This was not a function that could be entirely delegated to accountants in a very small company employing six or eight workers. The ultimate responsibility for ensuring such revenue payments and compliance lay with the respondents, and no one else. The apparent lack of awareness of the C2 certificate is a further pointer to a culpable lack of knowledge of the company’s affairs. 53. This is not to apply a hindsight test, but to look at the situation from the standpoint of any responsible director engaging in prudent conduct of the affairs of a company. Granted the directors acted honestly. They have incurred substantial personal losses. But this I am afraid, does not exonerate them from a finding that there was a failure to discharge their duties with a proper level of skill, care and diligence. 54. The situation here is entirely distinct from entirely external causative factors as identified by Peart J. in Re Usit World plc [2005] IEHC. In this case, I am afraid, the issue of “causation” of the collapse of this small company can only be laid squarely at the door of the directors themselves. By way of its contrast with Usit, the collapse did not derive from an external cause such as the tragedy of 9/11 and its effect on world travel. Even had all the debts of this company (howsoever categorised) been brought in, they would have been insufficient to bring the company back into solvency. 55. It is of course true that the failure of a company is not ipso facto evidence of lack of responsibility by the directors. Courts must exercise extreme care not to engage in a retrospective “blame game”. The test must always be whether the directors acted prudently and responsibly, as seen in the context of the information which was, or should have been available to them at the time they made critical decisions, such as that to continue to trade when they were wilfully or negligently unaware of their company’s true position. Unfortunately, applying all these standards I must find that the respondents have failed in their duty, and that orders should be made pursuant to section 150. I make this order subject to one proviso however, having regard to the fact that no case is made that the respondents acted dishonestly. The extent of the sanction should be proportionate to the extent of the wrongdoing. 56. Section 152 (1) of the Act of 1990 provides:
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