Supreme Court of Ireland Decisions

The Supreme Court

1999/245

McGuinness J.

Geoghegan J.

Fennelly J.

In the matter of Squash (Ireland) Limited

And in the matter of the Companies Acts, 1963 to 1990

Between

David Balbirnie and Trevor Watkins

Appellants

And

Joseph Moreau

Respondent

Judgment of McGuinness J. delivered on the 8th day of February, 2001, [Nem Diss]

1.      The appeal concerns an application pursuant to s.150 of the Companies Act, 1990. Section 150 provides as follows:-

"(1) The court shall, unless it is satisfied as to any of the matters specified in subsection (2), declare that a person to whom this Chapter applies shall not, for a period of five years, be appointed or act in any way, whether directly or indirectly, as a director or secretary or be concerned or take part in the promotion or formation of any company unless it meets the requirements set out in subsection (3); and, in subsequent provisions of this Part, the expression 'a person to whom section 150 applies' shall be construed as a reference to a person in respect of whom such a declaration has been made.

(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, …"

2.      The remainder of the matters in subs. (2) do not concern us here. The section was referred to in a general way by Murphy J. in his helpful judgment in Business Communications Ltd. v. Baxter (Unreported, High Court, Murphy J., 21st July, 1995), in which he said at p. 5:-

"It is clear that Chapter 1 of the Companies Act, 1990, contains provisions of the utmost importance to the commercial community generally and in particular to those who have undertaken or propose to undertake the duties of' the director of' a company. In appropriate circumstances the Chapter applies to every insolvent company which is being wound up whether compulsorily or voluntarily... The next significant feature of the code created by Chapter 1 aforesaid is that the introductory words to s. 150, that is to say, the phrase 'the court shall' are clearly mandatory and leave the court with no discretion in those cases to which the Chapter applies unless the persons concerned establish that the case falls within one or other of three exceptions set out in sub-s. (2) of section 150. Again it is notable that the period of the restriction is the fixed period of five years and that, in the first instance, at any rate, the court has no discretion to impose a lesser restriction."

3.      In this case the respondent as liquidator brought the requisite motion before the High Court by motion on notice dated the 10th May, 1999, which was grounded on his own affidavit. In this affidavit the respondent set out the facts of the situation with what I feel was admirable fairness and impartiality. He expressed a degree of concern on some matters concerning the final months of the life of the company including in particular the fact that subscriptions were sought from sporting members of the company after the appellants had become aware that the company was on the verge of liquidation. But the attitude of the respondent throughout this affidavit is a very fair one in seeking the directions of the court as opposed to trying to criticise the appellants in any severe way. His affidavit cannot in any way be described as a "witch hunt" which was a form of affidavit deplored by Murphy J. in Business Communications Ltd. v. Baxter (Unreported, High Court, MurphyJ., 21st July, 1995).

4.      Affidavits were sworn by the appellants and the motion was heard by Morris P. on the 6th October, 1999. This court has had the benefit of counsels' agreed note of the proceedings before the President in addition to the affidavit evidence already provided. The learned President made an order on the 6th October, 1999, where he declared pursuant to s. 150(1) of the Companies Act, 1990:-

"that the said Mr. Balbirnie of 6 Pembroke Street, Dublin 2 and the said Trevor Watkins of 8 Knocknashee, Goatstown, Dublin 14, shall not for a period of five years from the date hereof be appointed or act in any whether directly or indirectly as a director or secretary or be concerned or take part in the promotion or formation of any company unless it meets the requirements set out in sub-s. (3) of the said section, reserving to them their right to apply under s. 152 of the said Act."

5.      It is clear from counsels' note of the proceedings before the learned President that what chiefly concerned him was the fact that subscriptions as a matter of routine were being sought during the end of November and early December, 1997, at the time when the appellants were becoming aware that the liquidation of the company was imminent. The appellants now appeal from the order of the President.

6.      The company itself had been in existence since the early 1970s and the appellants had been directors for some eighteen years. The company provided services of a sporting and leisure nature, principally squash but also other sports and leisure activities. The members paid either an annual subscription or a subscription for a somewhat lesser period. It is clear from the evidence before the court that at least some people paid a three months subscription. The company itself was very successful over a period of years and operated out of a number of venues. However, fashions in sporting and leisure activities changed and the company became less successful. New sporting outlets were set up and they had fewer members and were forced to shut down some of their premises. By the late 1990s it was clear that the company was in financial difficulties and in an effort to assist the company the appellants made loans themselves through a trust company known as Lower Mount Ltd. Apparently this was done in that manner on the advice of their solicitors, Messrs. Fry. The learned President appeared to have no concern about the loans having been raised in that particular way. At a later stage the first appellant did not draw down his salary as a director for a period of up to a year.

7.      One of the places out of which the company operated was a premises in Clontarf which they held on foot of a lease from the Department of Education. They had held that lease for many years and they believed that they held a valuable interest in the lease (because of their business user) under the Landlord and Tenant (Amendment) Act, 1980. On account of the financial difficulties of the company they wished to realise that valuable interest and they entered into an agreement with a building firm to sell the premises to the building firm for a sum of £700,000 contingent on them being able to deliver a freehold title. They then approached the Department of Education with a view to buying out the freehold so that they could sell on the propertv which would enable them to clear their debts with the Anglo Irish Bank who, as their chief creditor, held a debenture, with the Revenue Commissioners and with other creditors. However, in or about the 1st December, 1997, the Department of Education notified them that the relevant provisions of the Act of 1980 did not apply to State property and therefore they would not be able to realise what they saw as the main capital asset of the company which would enable them to meet their debts.

8.      When the appellants received the letter from the Department of Education, or rather from the Chief State Solicitor on behalf of the Department of Education, setting out this position they naturally sought counsel's opinion, which they received on the 10th December, 1997. Counsel confirmed that the position taken by the Department of Education was correct in law. It was clear at this stage that unfortunately the company had no future and matters then proceeded in aim orderly way to liquidation. During the end of November and early December, as I have said, the company sent out reminders and requests for subscriptions to its members. Presumably this was done as a routine matter by a member of staff of the company. The appellants said in evidence that they were happy enough about this situation, as, even had the premises been sold to Messrs. Cosgrave, the members would have had the advantage of those premises until August, 1998, at least, and on account of the large sum which the appellants had hoped to realise for the sale they would have been able to reimburse members for any remainder of the year's subscription.

9.      However. subsequent to the 10th December, when they received their own counsel's opinion, they ceased to seek subscriptions from any members. Counsel on behalf of the appellants referred the court in some detail to the history of the company and to the appellants conduct both over the eighteen years of their directorship and in the immediate run up to the liquidation. There is no suggestion that the appellants acted anything but honestly. Not only did they not gain anything from the company dishonestly; on the contrary they lost considerable sums of their own money and they had to meet the £30,000 deposit which was placed for the option by Messers. Cosgrave.

10.      The question before the court is whether they acted responsibly and this, as was correctly stated by counsel on behalf of the respondent, must be judged by all objective standard. In the case of all companies which have become insolvent it is likely that some criticisms of the directors may he made. Commercial errors may have occurred; misjudgments may well have been made; but to categorise conduct as irresponsible I feel that one must go further than this.

11.      In a number of judgments in the High Court both Murphy J. and the !ate Shanley J., have drawn attention to matters which are to be considered in deciding whether directors have acted responsibly. Features are mentioned such as having proper books of account, and whether the directors have sought proper professional advice, and whether they have abided by it. The situation is very well set out by the late Shanley J. in a passage which was opened to the court by counsel for the appellants in the case of La Moselle Clothing Ltd. v. Soualhi [1998] 2 ILRM 345 at p. 352 of that judgment the learned Shanley J. said:-

"In the case of In re Lo-Line Motors Ltd. [1988] B.C.L.C 698, Browne-Wilkinson V.C. said at p. 703:

'What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors amid other's ... Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate."

12.      The conduct referred to by Brown Wilkinson V.C. is similar to the conduct identified by Murphy J., namely, that a director broadly complying with his obligations under the provisions of the Companies Acts and acting with a degree of commercial probity during his tenure as a director of the company will not be restricted on the grounds that he has acted irresponsibly.

13.      Thus it seems to me that in determining the 'responsibility' of a director for the purposes of s. 150 (2) (a) the court should have regard to:

(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963-1990.

(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.

(c) The extent of the director's responsibility for the insolvency of the company.

(d) The extent of the director's responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.

(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards."

14.      I find this passage of considerable assistance in the instant case and applying the standards set out by Shanley J. to the facts I would say firstly that in speaking of his tenure as a director of the company I would agree with Shanley J. that the court should look at the entire tenure of the director and not simply at the few months in the run up to the liquidation. It appears from the history of the company that the appellants have always acted responsibly and honestly and have put the interests of the company in the forefront of their minds, even insofar as losing their own money in an effort to assist the continuation of the company.

15.      With regard to-

(a) The extent to which the director has or has not complied with the Companies Acts, there is no suggestion that there has been a failure to comply with the Companies Acts and indeed, it is clear that the company held many board meetings to deal with the problems that faced them. These board meetings were well documented by proper minutes and the company was run in a correct fashion.

(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility. Perhaps the plan put forward by the appellants in this company was overly optimistic but, had their' position in regard to the business lease on the Clontarf premises being correct, it was a sensible enough plan in view of the shrinkage of their business over the years. It is unfortunate that they did not identify the problem with regard to the lease at an earlier stage but it has to he said that at the time they had professional and legal advice which they took. They did not act contrary to the advice that was given to them. I do not feel that they could be described as incompetent to such a degree as would amount to irresponsibility.

(c) The appellants were not responsible in themselves for the insolvency of the company. This basically arose from the reduction of the business.

(d) They certainly were not responsible for the net deficiency. I would expect this to include some degree of dishonesty or something very near dishonesty if a director is to he held responsible for the net deficiency in the assets of the company.

(e) This is the factor that counsel for the respondent lays most emphasis on in his argument to the court in regard to lack of commercial probity and indeed this is the heading under which the matter of the subscriptions would arise. Counsel stresses that the appellants should have told the members at an earlier stage the financial position of the company. It is clear as I have said that this was also the main and indeed the sole matter of concern to the learned President of the High Court.

16.      I have little doubt but that the requests for subscriptions were sent out automatically through the staff of the company. It is probable that the appellants should have taken positive steps to stop these demands being sent out on the 1st December, when they received the notification from the Department of Education but it is, I think, understandable that they waited until they had their own counsel's opinion on the 10th December. Probably they were hoping against hope that it would turn out that the Department of Education's position was legally wrong. What they did was open to criticism but I do not feel that it was sufficient to be categorised as irresponsible.

17.      Having considered all these matters I would allow the appeal and reverse the order of the High Court.