O'Callaghan Trade Frames Ltd [in Official Liquidation] v Companies Act 2014

• Jurisdiction: Ireland
• Judge: Mr. Justice Quinn
• Judgment Date: 20 October 2022
• Neutral Citation: [2022] IEHC 590
• Court: High Court
• Docket Number: [2019 No. 351 COS]

In the Matter of O'Callaghan Trade Frames Limited (In Official Liquidation)

and

In the Matter of the Companies Act 2014

and

In the Matter of an Application by Aidan Garcia Diaz Under Section 842 of the Companies Act 2014

Between

Aidan Garcia Diaz (As Liquidator of O'Callaghan Trade Frames Limited, In Official Liquidation)

Applicant

and

Peter O'Callaghan and Kieran Hynes

Respondents

[2022] IEHC 590

[2019 No. 351 COS]

THE HIGH COURT

Disqualification – Restriction – Companies Act 2014 s. 842 – Applicant seeking a disqualification order against the respondents – Whether the respondents had discharged their burden of proving that they acted responsibly in relation to the affairs of the company

Facts: The applicant, Mr Diaz, was appointed liquidator of O’Callaghan Trade Frames Ltd (the Company) by order of the High Court (Laffoy J) made on 14 February 2011. He applied to the court seeking a disqualification order against the respondents, Mr O’Callaghan and Mr Hynes, who were directors of the Company, pursuant to s. 842 of the Companies Act 2014. At the hearing of the application counsel for the applicant stated that he was invoking s. 842(d). In para. 3 of his grounding affidavit the liquidator stated as follows: “I say that during the course of my investigation it has become apparent to me that the directors have not discharged their duties in a manner which is either honest or responsible and as such these proceedings have become necessary”. This paragraph revealed that the applicant approached the matter from the perspective of the test contained not in s. 842 for a disqualification order, but the test contained in s. 819 of the Act for the lesser sanction of a restriction order.

Held by Quinn J that the liquidator had failed to discharge the burden of proving that the respondents’ conduct warranted disqualification. Quinn J held that the applicant approached the matter from the perspective that he was required only to outline “matters of concern”, such as an applicant for a restriction declaration would do. Quinn J found that the applicant’s evidence was replete with hearsay, selective correspondence and reliance on random documents which were not properly explained by him, let alone proved. Quinn J identified the following matters which he concluded on the evidence demonstrated a want of responsibility on the part of the respondents: (a) the balance of monies owed to the Company by the first respondent, a balance which the first respondent sought to reverse or conceal by crediting to his director’s loan account the payment by insurance of money owed to the Company; (b) the misleading treatment in the financial statements filed at the Companies Registration Office of the investment bond through Irish Life; (c) the wholesale issuance of credit notes which remained unexplained; (d) the overstatement of the debtors’ ledger and attempts to conceal the recoverability of debts by alleging negligence on the part of the applicant; and (e) the failure to keep proper books of account and records of corporate governance, notably the absence of any evidence of directors’ meetings or of due consideration by the directors of the decline in the financial status of the Company.

Quinn J held that the respondents had not discharged their burden of proving that they acted responsibly in relation to the affairs of the Company. Quinn J made a declaration in the terms provided for in s. 819, namely, that each of the respondents shall not, for a period of five years, be appointed or act in any way, directly or indirectly as a director or secretary of a company or be concerned in the formation or promotion of a company, unless such company meets the requirements set out in subsection (3) of the section.

Restriction order granted. Disqualification order rejected.

Judgment of Mr. Justice Quinn delivered on the 20th day of October, 2022

1 . The applicant was appointed liquidator of O'Callaghan Trade Frames Limited (“the Company”) by order of the court (Laffoy J.) made on 14 February 2011. He seeks a disqualification order against the respondents, who are directors of the Company, pursuant to s. 842 of the Companies Act 2014. That is an order disqualifying the respondents “ from being appointed to act as a director or other officer, statutory auditor, receiver, liquidator or examiner or being in any way, whether directly or indirectly, concerned or taking part in the promotion, formation or management of” any company or friendly society or society registered under the Industrial and Providence Societies Act 1893 – 2014 for such period as the court deems appropriate.

2 . Section 842 identifies in subs. (a) to (j) ten grounds on which a disqualification order may be made. The applicant did not in his Notice of Motion or in his grounding affidavit identify which subsection was invoked by him.

3 . At the hearing of this application counsel for the applicant stated that he was invoking s. 842 (d) which provides as follows:-

“(d) that the conduct of the person as promoter, officer, statutory auditor, receiver, liquidator or examiner of a company makes him or her unfit to be concerned in the management of a company”.

4 . The grounding affidavit of the applicant sworn on 5 September 2019 describes the issues which are of concern to the applicant. I shall examine each of these in more detail later, but they may be summarised by reference to headings in the grounding affidavit as follows:-

(1) Difficulties progressing the liquidation by reason of conduct on the part of the respondents which the applicant describes as unhelpful, obstructive and “less than honest”.

(2) Dissipation of the company's asset base in favour of a connected entity, and the operation and existence of a “phoenix” company.

(3) Monies owed to the company by its director.

(4) Misleading treatment in the company's financial statements of an investment bond.

(5) The issuance of credit notes and apparent diversion of company turnover.

(6) The position of the Revenue Commissioners.

(7) The company's overstated debtors' ledger.

(8) Increasing costs in the liquidation by reason of what the applicant describes as “entirely unnecessary remedial work”.

(9) Failure to keep proper books of account.

5 . Each of the respondents swore a replying affidavit on 10 January 2020 and the applicant swore a supplemental affidavit on 20 February 2020.

6 . Nowhere in the applicant's grounding affidavit does he identify which of the subsections of s. 842 is invoked, and at the opening of the hearing counsel for the applicant stated that he was relying only on s. 842(d).

7 . In para. 3 of his grounding affidavit the liquidator states as follows:-

“I say that during the course of my investigation it has become apparent to me that the directors have not discharged their duties in a manner which is either honest or responsible and as such these proceedings have become necessary”. (emphasis added)

8 . This paragraph is remarkable in that it reveals that the applicant approached this matter from the perspective of the test contained not in s. 842 for a disqualification order, but the test contained in s. 819 of the Act for the lesser sanction of a restriction order. Section 819 provides that a director of an insolvent company shall be subject to a restriction order unless he has satisfied the court of three matters:

(a) That he has acted honestly and responsibly in relation to the conduct of the affairs of the company in question, whether before or after it became an insolvent company,

(b) he or she has, when requested to do so by the liquidator of the insolvent company, cooperated as far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company, and

(c) there is no other reason why it would be just and equitable that he or she should be subject to the restrictions imposed by an order under the section.

9 . The use of the phrase “ as such these proceedings have become necessary” clearly indicates that the applicant considered these proceedings necessary in the absence of being satisfied that the respondents had acted honestly and responsibly, being the test applicable to s. 819. Disqualification proceedings do not “become necessary” by reason of the applicant concluding that the respondents did not act honestly and responsibly. They are warranted in a case where the applicant intends to go further than demonstrating an absence of honesty and responsibility on the part of the relevant respondents and prove one or more of the grounds identified in s. 842. Those grounds include such matters as respondents being guilty of fraud (subs. (a)), breach of duty (subs. (b)), the making of a declaration under s. 610 (personal liability for debts of the company (subs. (c))) or, the ground now invoked by the liquidator, namely “conduct which makes the respondent unfit to be concerned in the management of a company” (subsection (d)). Other grounds include certain findings of inspectors appointed pursuant to part 13 of the Act, repeated default in relation to statutory requirements, and repeated commission of offences. It is therefore incorrect for the applicant to state that these proceedings became necessary by reason of his view that the respondents had acted in a manner which was neither honest or responsible, which is not the test for s. 842.

10 . This flawed approach on the part of the applicant permeates his affidavits when he makes repeated references to issues being a “source of concern”, a phrase commonly used by liquidator applicants in restriction applications where the burden rests on the directors responding.

11 . The submission of the applicant at the hearing was that the combined effect of the events described in the applicant's affidavits is that the court should declare the respondents to be persons unfit to be concerned in the management of a company and make the order...