Background to the Supreme Court Judgement
Tom Kavanagh was appointed liquidator of Tralee Beef and Lamb Limited (“the Company”) in January 2002. At the date of his appointment, the Company had four directors, including Simon Coyle, a prominent Chartered Accountant.
The Company was in the business of slaughtering cattle and lambs, and had been quite clearly affected by the BSE outbreaks and associated developments prior to its liquidation.
Under the Companies Acts, the liquidator was obliged to submit a detailed report on the stewardship of the directors. The liquidator had formed a view that Mr Coyle had acted honestly and responsibly in relation to the affairs of the Company. He petitioned the Director of Corporate Enforcement (“ODCE”) to be relieved from the statutory obligation to bring restriction proceedings in relation to Mr Coyle, but ODCE declined to relieve him. According to the Supreme Court judgment, ODCE gave no reasons for their decision and did not seek to be heard either before the High Court or before the Supreme Court on the hearing of the appeal.
As the liquidator was not relieved from the obligation to take a Section 150 Application against the directors of the Company, he was obliged to take such an application to the High Court, and to include Mr Coyle as one of the Respondents.
The Section 150 Application was duly heard by the High Court and judgement was delivered on 20 July 2004, at which time all of the directors of the Company were “restricted”.
Mr Coyle appealed the decision to the Supreme Court.
A feature of the Supreme Court case was that Mr Coyle’s appeal was unopposed, either by the liquidator or by ODCE. Under the relevant legislation, a liquidator is not obliged to defend an appeal, and similarly ODCE are not obligated to become involved. Given that the liquidator had found Mr Coyle to have acted honestly and responsibly in the first instance, he was unlikely to waste creditors’ monies on objecting to the appeal. The Court held that in view of the significance of the legal submissions and the legal issues raised by the case, that the absence of ODCE was “most unfortunate”.
Indeed, reading the judgement it is clear that the Supreme Court considered the case to be an important one, and there is the slightest hint of exasperation that ODCE did not take the opportunity to help clarify the law in the area by making opposing submissions.
The Supreme Court said that the statutory regime relating to the restriction of directors could be regarded as a draconian one for a number of reasons. These reasons included, firstly the mandatory obligation on a liquidator to bring an application, secondly that a restriction order must be made unless the director satisfies the Court that he acted honestly and responsibly, which is a reversal of the normal burden of proof, and lastly the Court observed that where the Respondent is a professional man, in this instance a chartered accountant, the effect of a restriction order would be much greater than if he was a “cowboy” director because of the reputational damage that would be caused. The Court said that while the legislation is draconian, that at the same time it is largely symbolic in that being restricted is of little practical effect, requiring only that any new Company of which the restricted person is a director be modestly capitalised, but is gravely damaging to the reputation of a person thus restricted.
The Court held that Mr Coyle had a legitimate ground of complaint on three grounds, which may be summarised as the “amplification” of the duties of a director, the specific position of Mr Coyle within the Company and conflict with a fellow director.
Amplification of duties
A feature of the original High Court decision was that it “amplified” the duties which a director should comply with, including what the High Court judge called “duties of loyalty based on fiduciary principles, developed initially by the Courts of Equity and duties of skill and care developed initially by the Common Law Courts from the principles in the law of negligence”. While the Supreme Court did not disagree with the content of the High Court’s “amplification”, it felt that in a hearing of great importance to Mr Coyle, where his reputation and professional standing were intricately involved, it was not appropriate to amplify the director’s duties or otherwise the criteria for imposing on him what is a very significant stigma, particularly where Mr Coyle had been expressly found to have been honest in his dealings.
According to the Supreme Court judgment, the amplification was made by the High Court Judge “after the hearing” which did not give Mr Coyle an opportunity to present “detailed argument as to the content and wording of the amplification” in circumstances where the effect of the High Court’s amplification would have a considerable significance for his reputation. This was a key factor underpinning the Supreme Court’s decision to allow Mr Coyle’s appeal as the Court was “gravely concerned about the justice of the procedures leading to the decision to restrict Mr. Coyle”.
The position of the Director
The Supreme Court effectively suggested that in looking to previous High Court cases for guidance that the size of the Companies involved needs to be taken into account. The Court said that duties imposed on a highly paid executive director of a vast bank may be of limited use in considering the common law duties of a non-executive director appointed to keep BES investors informed in relation to the workings of a small company. The Court said that care must be taken to avoid being unrealistic in relation to a small meat Company in rural Ireland ran effectively by a sole executive director.
Conflict with fellow Director
The High Court judge remarked that there was considerable conflict in affidavits between Mr Coyle and the managing director. It appeared to the Supreme Court that the managing director’s evidence was in effect treated as part of the case against Mr Coyle. The Supreme Court felt that given that the liquidator himself did not believe that Mr Coyle should be restricted, that it was somewhat unsatisfactory that the evidence against Mr Coyle was that of a person resisting his own restriction i.e. defending his own conduct of affairs as a director by trying in so far as he could to shift the blame on to Mr Coyle. The Court felt that this state of affairs “existed due to the Delphic posture adopted by the Director of Corporate Enforcement”. The Court said that it may not be proper to consider what other directors said in their own defence as a part of the case against Mr Coyle, on the basis that such an approach deprived Mr Coyle of part at least of the benefit of the fact that the liquidator had concluded he had acted honestly and responsibly.
Ramifications of Case
At a subsequent Supreme Court Hearing dealing with the legal costs arising, ODCE notified the Court that in future they will provide written reasons for their decision if they do not grant relief to a Liquidator who seeks it. In advance of the hearing on costs it is understood that ODCE had agreed to make a contribution towards Mr Coyle’s legal costs, and thus no Supreme Court decision was made on the costs issue.
Mark Woodcock of O’Donnell Sweeney Eversheds Solicitors says that the practice of ODCE effectively forcing a Liquidator to bring proceedings to restrict a director in circumstances where the Liquidator believes the director had in fact acted honestly and responsibly an area which requires reform and was properly alluded to by the Supreme Court.
Mr Woodcock believes that some of the Supreme Court’s criticism of the High Court’s decision is unjustified. He believes that because of her background and expertise in this area, the High Court Judge was well placed to “amplify” some of the provisions of the landmark Judgement made by Mr. Justice Shanley in the La Moselle Clothing Ltd case where the facts permitted.
Declan Black of Mason Hayes & Curran Solicitors suggests that the amplifications of the La Moselle principles to include the adherence to common law duties was endorsed by the Supreme Court, but only for future cases.
What Barry O’Neill of Eugene F. Collins Solicitors found interesting about the case is the fact that the law relating to the restriction of directors is still evolving nearly twenty years after its introduction. Mr O’Neill suggests that it will change dramatically again when the proposed Companies Bill becomes law - the Bill envisages that directors will consent to restriction in certain circumstances. If they consent, the High Court will not be involved.
Mr O’Neill also suggests that the Company Law Review Group are likely to consider the current law again: can they stand idly by when a unanimous decision of the Supreme Court describes a current law as "unique", "draconian", "largely symbolic", "of little practical effect", "but gravely damaging to the reputation of the person afflicted" ? Hardly.
[This article was originally published in the April 2008 edition of Accountancy Ireland]
For further information please contact Jim Stafford or Tom Murray on 01 661 40066 or by email: stafford@liquidation.ie and murray@liquidation.ie