Director of Corporate Enforcement v Patrick McGowan and Patricia McGowan

• Jurisdiction: Ireland
• Judge: Mr. Justice Fennelly
• Judgment Date: 06 May 2008
• Neutral Citation: [2008] IESC 28
• Court: Supreme Court
• Docket Number: [S.C. No. 118 of 2005],No 118/2005
• Date: 06 May 2008

IN THE MATTER OF WOOD PRODUCTS (LONGFORD) LIMITED AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 160 OF THE COMPANIES ACT, 1990, AS AMENDED AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 160(6A) OF THE COMPANIES ACT 1990, AS AMENDED

BETWEEN

THE DIRECTOR OF CORPORATE ENFORCEMENT

APPLICANT/APPELLANT

-AND

PATRICK McGOWAN AND PATRICIA McGOWAN

RESPONDENTS

No 118/2005

THE SUPREME COURT

Abstract:

Company Law - Directors - Disqualification - Conduct of directors - Failure to make annual returns over lengthy period - Whether directors persistently in default of statutory obligations - Whether directors should be disqualified - Exercise of discretion to make disqualification order - Companies Act 1963 (No 33), s 125 - Companies Act 1990 (No 33), s 160(2)(f).

Facts: Section 160(2) of the Companies Act 1990 provides, inter alia, that "where the court is satisfied...that (d) the conduct of any person as...officer...of a company, makes him unfit to be concerned in the management of a company; or...(f) a person has been persistently in default in relation to the relevant requirements [under the Companies Acts, including the duty to file annual returns]...the court may...make a disqualification order...". Section 160(3) provides, inter alia, that "for the purposes of subsection (2) (f) the fact that a person has been persistenly in default in relation to the relevant requirements may...be conclusively proved by showing that in the five years ending with the date of the application he has been adjudged guilty...of three or more defaults in relation to those requirements." The respondents, who were the sole directors of a company struck off the register of companies due to failure to file annual returns, had failed to make annual returns to the Companies Office for thirteen years and subsequently breached the terms of a High Court order directing them to remedy their defaults. The applicant applied to the High Court for an order, pursuant to s 160 of the Companies Act 1990, inter alia, disqualifying the respondents from being appointed or acting as a director or other officer or be in any way concerned or take part in the management of any company on the basis that their defaults amounted to conduct which made them unfit to be concerned in the management of the company or amounted to conduct which showed them to have been persistently in default of provisions of the Companies Acts requiring returns, accounts or other documents to be filed or given to the Registrar of Companies.

The High Court (Laffoy J) dismissed the application as it found, inter alia, that the respondents had not been persistently in default in relation to their obligations under the Companies Act 1963 to make annual returns in the sense in which that expression was used in s 160(2)(f) of the Act of 1990. It interpreted s 160(2)(f) by reference to subs 3 thereof and held that persistent default was not merely default which had continued over a long period of time but was default which had continued in the teeth of intervention on the part of the courts more than once. The applicant appealed against that finding to the Supreme Court.

Held by the Supreme Court (Fennelly J: Denham and Geoghegan JJ concurring) in dismissing the appeal:

I. That the High Court, by importing into s 160(2)(f) of the Act of 1990 the "three strikes" philosophy which underlined sub-s (3) of that section, had erred in its interpretation of that provision and transformed a faculty to rely on a deeming provision into a requirement;

II. That the purpose of exercise of the power of disqualification pursuant to s 160 of the Act of 1990 was not punitive but protective. However, there should be an element of deterrence in the exercise of that discretion;

III. That, in exercising that discretion, regard could be had to the interests of the employees of the company and third parties and whether the making of a disqualification order would likely disrupt the ongoing business of the company and its ability to trade out of difficulties.

Reporter: P.C.

1 JUDGMENT of Mr. Justice Fennelly delivered the 6th day of May 2008

2 1. Where the directors of a company have failed over a period of thirteen consecutive years to make any of the annual returns prescribed by law to the Companies Registration Office, have they been "persistently in default in relation to the relevant requirements"? Laffoy J held that the respondents had not been in persistent default, since they had not been adjudged guilty of any default by a court. That is the key legal issue on this appeal. Depending on how it is answered, the Court may have to consider whether to exercise its discretion to make an order disqualifying the directors. The principal concern of the Director of Corporate Enforcement is to correct what he perceives to be an erroneous interpretation of the relevant legislation.

3 Statutory provisions regarding disqualification of directors

4 2. The Companies Act 1990 ("the Act of 1990") provides for a wide range of circumstances in which the High Court may on its own motion or pursuant to an application disqualify persons from acting, inter alia, as directors for such period as the Court thinks fit.

5 3. Section 160(2) of the Act of 1990, as amended by the Company Law Enforcement Act, 2001, so far as is relevant to the particular provisions invoked by the Director, provides:

6 (2) Where the court is satisfied in any proceedings or as a result of an application under this section that—

• (d) the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company; or

• (f) a person has been persistently in default in relation to the relevant

  requirements...

  the court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.

7 Section 159 defines a "disqualification order"as:

8 "( a ) an order under this Part that the person against whom the order is made shall not be appointed or act as an auditor, director or other officer, receiver, liquidator or examiner or be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company, or any society registered under the Industrial and Provident Societies Acts, 1893 to 1978, or

9 ( b ) an order under section 184 of the Principal Act..."

10 4. By virtue of Section 159 of the Act of 1990, "officer" in relation to any company, includes any director, shadow director or secretary of the company..."That section also defines the expression, "relevant requirements," as meaning:

11 "...any provision of the Companies Acts (including a provision repealed by this Act) which requires or required any return, account or other document to be filed with, delivered or sent to, or notice of any matter to be given to, the registrar of companies."

12 5. The " relevant requirements" in relation to which the Director claims that the respondents were in persistent default relates to the filing with the Companies Registration Office of annual returns in accordance with sections 125 and/or 126 of the Companies Act 1963, as amended. Section 125 of the Companies Act, 1963, as substituted by 159 of the Act of 2001 provides:

13 "125.—(1) Every company shall, once at least in every year, subject to section 127, make a return to the registrar of companies, being its annual

14 return, in the prescribed form.

• (2) If a company fails to comply with this section, the company and—

  • (a) every officer of the company who is in default, and

  • (b) any person in accordance with whose directions or instructions the directors of the company are accustomed to act and to whose directions or omissions the default is attributable,

    shall be guilty of an offence.

• (3) Proceedings in relation to an offence under this section may be brought and prosecuted by the registrar of companies."

15 6. Since the definition of " relevant requirements" includes requirement under repealed provisions, it is of no consequence that part of the period of default by the respondents in making returns occurred before section 125 was amended in 2001.

16 7. Laffoy J interpreted section 160(2(f) by reference to subsection 3 of the section, which provides:

17 (3) (a) For the purposes of subsection (2) (f) the fact that a person has been persistently in default in relation to the relevant requirements may (without prejudice to its proof in any other manner) be conclusively proved by showing that in the five years ending with the date of the application he has been adjudged guilty (whether or not on the same occasion) of three or more defaults in relation to those requirements.

• (b) A person shall be treated as being adjudged guilty of a default in relation to a relevant requirement for the purposes of this subsection if he is convicted of any offence consisting of a contravention of a relevant requirement or a default order is made against him.

18 8. The Act of 2001 provided the High Court with an alternative to the power of disqualification set out in section

19 160(2). Section 160(9A), as inserted by section 46(e) of that Act provides:

20 "In considering the penalty to be imposed under this section, the court may as an alternative, where it adjudges that disqualification is not justified, make a declaration under section 150."

21 9. Section 150 confers a power to declare that a person to whom Chapter I of Part VII of the Act applies (in effect a person who was a director of an insolvent company) shall not,[subject to certain exceptions] 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...