Cahill v O'Brien

• Jurisdiction: Ireland
• Judge: Ms. Justice Murphy
• Judgment Date: 17 December 2015
• Neutral Citation: [2015] IEHC 817
• Docket Number: [2014 No. 252 COS]
• Court: High Court
• Date: 17 December 2015

[2015] IEHC 817

THE HIGH COURT

Murphy Deirdre J.

[2014 No. 252 COS]

IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001 AND ARCHITECTURAL & INDUSTRIAL COATINGS LIMITED (IN LIQUIDATION)

EDMOND P. CAHILL

Applicant

AND

JOHN O'BRIEN AND RAY COSGROVE

Respondents

Company – S. 150 of the Companies Act 1990 – The Company Law Enforcement Act 2001 – S. 819 of the Companies Act 2014 – Liquidation – Liability of a director v non-executive director

Facts: The applicant sought a declaration that the first named respondent, being the director, along with the second named respondent, being the non executive director of the company in liquidation, should be restricted from taking the directorship of any company under s. 150 of the Companies Act 1990. Both respondents alleged that they conducted the affairs of company in an honest manner.

Ms. Justice Murphy granted the declaration of restriction under s. 150 (3) of the Companies Act 1990 in relation to the first named respondent. The Court granted an order that the second named respondent would give an undertaking in writing in compliance with s. 150 (3) and thus, there would be no such declaration in relation to him. The Court observed that s. 150 imposed a burden on the directors to establish that the insolvency of the company did not occur due to their dishonesty or irresponsibility but rather due to factors outside of their control. The Court held that the position of a nominee or non-executive director differed in relation to the conduct of the affairs of the company. The Court held that in order to ascertain whether a director had acted responsibly, the Court should take into account the extent to which the director had complied or not complied with the legal obligation imposed upon him and his conduct leading to the insolvency of the company, such as lack of commercial probity or want of proper standards. The Court found that the conduct of the first named respondent for letting the company to be struck off and still continuing to trade was an irresponsible conduct. The Court found that the second named respondent being the nominee director and having no role in managing the affairs of the company had also acted irresponsibly as he had failed to act when there was a duty upon him to act.

Judgment of Ms. Justice Murphy delivered the 17th day of December, 2015

1 This is an application for a declaration that the first and second named respondents, being persons to whom Chapter 1 of Part VII of the Companies Act 1990 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 that company meets the requirements set out in section 150(3) of the Companies Act, 1990 (as amended). The applicant also seeks an order, pursuant to section 56(2) of the Company Law Enforcement Act 2001 extending the time for the making of the application along with any further order the Court may think just.

2 The applicant in these proceedings, Mr. Edmond Cahill, is the liquidator of Architectural and Industrial Coatings Limited (In Liquidation) (‘the Company’). The first named respondent, Mr. John O'Brien, was a director of that company within twelve months prior to the date of Mr. Cahill's appointment as liquidator, as was the second named respondent, Mr. Ray Cosgrave. Both Mr. Cosgrave and Mr. O'Brien were registered as directors between 1995 and 2006. Mr. Cosgrave was the non-executive nominee of Lafor Establishment, a Liechtenstein entity controlled by a Liechtenstein trust of which a Mr. Lesley Auchincloss is a potential beneficiary. Lafor Establishment was a 36% shareholder in the Company. Mr. Cosgrave is a teacher by profession. He avers that it was clearly understood that he would not be involved in the day-to-day running of the Company and would carry out his duties as non-executive nominee director by attending board meetings to exercise his vote as required. Mr. John O'Brien is a chartered accountant and 27% shareholder of the Company. He acted as Company Secretary and appears to have originally acted as a non-executive director of the Company but assumed the role of General Manager in 2004. Mr. Cahill was appointed as liquidator by a resolution of shareholders dated 20th April, 2010, in the circumstances outlined below. His appointment was confirmed by the creditors of the Company on the same date.

Background

3 The Company was incorporated on 6th July, 1994 and was engaged in the contract painting of aluminium. It also provided a metal treatment service for customers. The Company commenced trading on 1st February, 1996. It traded successfully until 28th May, 2002 when it came to the Board's attention that one of the Company's largest customers was installing its own paint line. The Company incurred a loss in 2002 and attempted to diversify into other areas to compensate for the loss of business. It was unsuccessful in this regard. A number of changes were made to the Board. Mr. Paddy Barry was replaced as Managing Director by Mr. Dermot Monaghan in March 2002. Mr. Barry however continued to be involved in the Company in the position of Sales Director. In addition, reports were commissioned about the future viability of the Company.

4 In and around February 2004 it appears that Mr. Dermot Monaghan, who had been Managing Director since 2002, left the Company. Mr. Paddy Barry, who had been Managing Director of the Company from 1996 to 2002, and thereafter had been Sales Director, resigned as a director on 27th February, 2004 and thereafter stayed on for a short while as General Manager. Thus by early 2004 the Company had lost two directors who, according to Mr. Cosgrave, the second respondent, were technically experienced and qualified persons who had managed the daily operations and manufacturing processes of the Company, leaving the two respondents as the sole directors. On 28th April, 2004 Mr. Barry, then General Manager, wrote to Mr. O'Brien and Mr. Cosgrave. In that correspondence, entitled ‘Crisis Update – March 2004 – Management Accounts’, Mr. Barry noted as follows:

‘During the month of March we have implemented controls and outlined the development necessary for return to profit. All reports over the past weeks have highlighted the seriousness of the situation and the urgent need for injection of working capital in order for the company to go forward.

There will not be funds to pay next week's wages and employees need to be advised rather than bring them in for work that we at present do not have funds to pay wages for.

A decision must be made immediately and I do not have the authority to make this decision.’

In or around 4th May, 2004, Mr. Barry absented himself from the position as General Manager due to ill health. It would appear that the first respondent, Mr. O'Brien, took over that role.

5 At this stage Mr. O'Brien and Mr. Cosgrave were the sole remaining directors and were aware that the Company was unable to pay its debts. On 29th April, 2004, according to the affidavit of Mr. Cosgrave, he and Mr. O'Brien met with Ulster Bank to agree terms on which further funding would be provided to the Company. According to the investigation of the liquidator, Mr. Cahill, on 5th May, 2004, Mr. O'Brien, having discussed the matter with Les Auchincloss, sought the appointment of a receiver by Ulster Bank, with whom the Company had an Invoice Discounting Agreement. Both Mr. O'Brien and Mr. Cosgrave aver that Ulster Bank refused their request in this regard and instead requested that the Company continue to trade and seek investment. In his report as liquidator dated 21st November, 2011, Mr. Cahill recorded that it appeared the Bank were unwilling to appoint a receiver on the grounds that they would find it very difficult to recover their money if the Company ceased to trade.

6 At this time, Mr. O'Brien contacted the Company's main suppliers, including a firm called Carbon Chemicals. He explained that as the Company was now losing money it had no option but to cease trading. Preliminary contacts were made with potential investors and purchasers who had been introduced to the Company by Ulster Bank and Carbon Chemicals. Five potential investors were identified in mid-2004. Mr. O'Brien states in his affidavit that he received advice from the Company's solicitor at this point to the effect that the Company was legally entitled to trade as long as there was a reasonable prospect of obtaining investment or of selling the business in a way that would discharge all creditors. He stated that the directors therefore made a decision to continue to trade while looking for an investor or purchaser for the Company. He further states at paragraph 11:

‘This was in the best interests of the Company's creditors and employees. At this stage my plan was that the business of the Company would be sold and that all creditors of the Company would be paid in full from the purchase monies. In addition, I hoped that all the Company's employees would be able to retain their employment with the purchaser’.

However none of the potential investors ultimately invested. Mr. Cosgrave avers that he suggested, in early 2004, that consideration be given to placing the Company in liquidation ‘but the prevailing view was that efforts should be made to secure investment finance and implement measures to have the Company trade out of its difficulties’.

7 On 16th August, 2004, Mr. O'Brien and Mr. Cosgrave received a letter from Mr. Frank O'Sullivan, the Company's Management Accountant and Financial Controller. Mr. O'Sullivan indicated that he no longer felt he could offer his services to the Company ‘as my position has become impossible over the last number of months’. He continued:

‘As you are aware,...