Director of Corporate Enforcement v Michael Slattery and Another

• Jurisdiction: Ireland
• Judge: Mr. Justice Barrett
• Judgment Date: 23 July 2014
• Neutral Citation: [2014] IEHC 363
• Court: High Court
• Date: 23 July 2014

[2014] IEHC 363

THE HIGH COURT

[NO. 92 COS/2014]

Director of Corporate Enforcement v Slattery

IN THE MATTER OF CHERCREST LIMITED

AND

IN THE MATTER OF RIVERSTOWN INDUSTRIAL ESTATE MANAGEMENT COMPANY LIMITED

AND

IN THE MATTER OF SECTION 160 OF THE COMPANIES ACT 1990

BETWEEN

THE DIRECTOR OF CORPORATE ENFORCEMENT

APPLICANT

AND

MICHAEL SLATTERY AND VAL SLATTERY

RESPONDENTS

COMPANIES ACT 1990 S160(2)(H)

COMPANIES (AMDT) ACT 1982 S12

CLAWHAMMER LTD, IN RE; DIRECTOR OF CORPORATE ENFORCEMENT v MCDONNELL & ENDICOTT 2005 1 IR 503 2005/16/3304 2005 IEHC 85

COMPANIES (AMDT) ACT 1982 S12(3)

COMPANIES ACT 1990 S160

COMPANIES ACT 1990 S160(2)

BUSINESS COMMUNICATIONS LTD v BAXTER & PARSONS UNREP MURPHY 21.7.1995 1995/6/1869

NEWCASTLE TIMBER LTD & ABWOOD LTD (IN LIQUIDATION), IN RE; MALONEY v SMULLEN 2001 4 IR 586 2001/17/4693

CB READYMIX LTD (IN LIQUIDATION), IN RE; CAHILL v GRIMES 2002 1 IR 372 2002/5/1025

KENTFORD SECURITIES LTD (UNDER INVESTIGATION), IN RE; DIRECTOR OF CORPORATE ENFORCEMENT v MCCANN 2011 1 IR 585 2010/12/2830 2010 IESC 59

DOHERTY v DONOHOE UNREP BARRETT 1.4.2014 2014 IEHC 187

COMPANIES ACT 1990 S150

COMPANIES ACT 1990 S160(9A)

COMPANIES ACT 1990 S150(2)

SQUASH (IRL) LTD, IN RE 2001 3 IR 35 2001/23/6280

HUNTING LODGES LTD (IN LIQUIDATION), IN RE 1985 ILRM 75 1984/7/2295

Company Law – s. 105 and. 160 of the Companies Act 1990 – s. 12 of the Companies (Amendment) Act 1982 – Directors – Disqualification – Declaration Of Restriction

Facts: In this case the Director Of Corporate Enforcement sought a disqualification order pursuant to s. 160(2)(h) of the Companies Act 1990 in respect of the respondents who were directors of Chercrest Limited. An application for a disqualification order was also made in respect of the first named respondent as a director of Riverstown Industrial Estate Management Company Limited. Chercrest Limited became insolvent and instead of going through a formal liquidation process, it was struck off the register of companies for failing to file tax returns. The strike off process is available to the registrar of companies under s. 12 of the Companies (Amendment) Act 1982. This process specifically impacts the creditors of an insolvent company. It can also act as a basis for a disqualification order to be made. As Chercrest Limited had been struck off as opposed to liquidated, the court had to decide whether a disqualification order should follow and, if so, for how long. In reaching its decision the court applied the two-stage structure outlined in s. 160(2). First, the court looked at whether the respondent”s conduct fell within the sub-categories of s. 160(2) as a matter of fact. Second, if it did, the court had to decide whether or not to exercise its discretion to make a disqualification order. The court was entitled by virtue of s. 160 to make a restriction declaration under s.150 of the 1990 Act. The court must grant a restriction unless the respondents can exhibit evidence to demonstrate that they acted honestly and responsibly in conducting the affairs of the company. There must also be no just and equitable reason to make the respondents the subject of a declaration.

Held by Barrett J: The court found that as a matter of fact s. 160(2)(h) arose in respect of each of the respondents. It then looked at the scale of the enterprise. The court gave consideration to the fact that Chercrest Limited was a family company and the respondents had not placed the company in liquidation on foot of professional advice. In addition, apart from failing to submit annual returns, the respondents were not guilty of any other misbehaviour. The court did not make a disqualification order against the respondent directors for these reasons. In relation to the restriction declaration, the court found that the respondent”s reliance on professional advice and their general good behaviour meant they had not acted less than responsibly. The failure to make returns and their complacency in the strike-off process was reproachable but not irresponsible. The court decided that the respondents were not liable in respect of s.160 and s. 150 of the 1990 Act. With regard to Riverstown Industrial Estate Management Company Limited the court acknowledged that the company had never traded and decided that no order or declaration should be made under s.160 and s. 150 of the 1990 Act.

1 JUDGMENT of Mr. Justice Barrett delivered on the 23rd day of July, 2014.

2 1. In this case the Director of Corporate Enforcement is seeking, pursuant to s.l60(2)(h) of the Companies Act 1990, as amended, a disqualification order in respect of each of the respondents. A disqualification order is a severe measure that prevents an affected person from having any involvement whatsoever in the promotion, formation or management of any company for the duration of the disqualification period. The court considers first the application made in respect of the respondents as directors of Chercrest Limited, and then the application made in respect of the first-named respondent as a director of Riverstown Industrial Estate Management Company Limited.

Chercrest Limited

3 2. Both of the respondents were directors of Chercrest Limited, a company that got into financial difficulty ultimately, Mr. Slattery claims, because of alleged impropriety by a former director. Despite the injection of significant additional capital into the company by Mr. Slattery from personal borrowings, Chercrest's financial position ultimately worsened to the point that it became insolvent. The Director of Corporate Enforcement's complaint is that, notwithstanding Chercrest's insolvent status, the respondents allowed it to be struck off the register of companies for failure to file annual returns instead of putting it through a formal liquidation process. It emerged in the course of the hearings before the court that during the period in which Chercrest was in clear financial difficulty an accountant was brought into the company with a view to identifying the best way forward for the company as regards confronting the financial difficulties with which it was then faced. The professional advice received from this accountant was not that the company be placed in liquidation but that an investor should be sought who would inject fresh capital into Chercrest. The directors of Chercrest acted on this professional advice, a point that will be returned to hereafter. The court turns first, however, to consider the legal basis on which a 'strike-off' of the type at issue in these proceedings is effected.

4 3. Such a 'strike off' process is available to the registrar of companies under s.12 of the Companies (Amendment) Act 1982, as amended, which provides:

5 2 "(1) Without prejudice to the generality of section 311 of the Principal Act, where a company does not, for one or more years, make an annual return required by section 125 or 126 of the Principal Act, the registrar of companies may send to the company by post a registered letter stating that, unless all annual returns which are outstanding are delivered to him within 1 month of the date of the letter, a notice will be published in the Companies Registration Office Gazette with a view to striking the name of the company off the register.

6 (2) If the registrar of companies either receives an answer to the effect that the company is not carrying on a business, or does not within 1 month after sending the letter receive all annual returns which are outstanding, he may publish in the Companies Registration Office Gazette a notice stating that, at the expiration of 1 month from the date of that notice, the name of the company mentioned therein will, unless all outstanding returns are delivered to the registrar, be struck off the register, and the company will be dissolved.

7 (3) Subject to subsections (1) and (2) of section 12B of this Act, at the expiration of the time mentioned in the notice, the registrar of companies may, unless cause to the contrary is previously shown by the company, strike its name off the register, and shall publish notice thereof in the Companies Registration Office Gazetteand on the publication in the Companies Registration Office Gazette of this notice, the company shall be dissolved."

8 4. In essence, s. 12 establishes a process whereby the registrar may strike off a company that is in breach of its annual return requirements. This may seem a venial transgression, certainly by reference to some of the abuses that one sees reported in the company law arena. However, strike-off has a particular significance for the creditors of an insolvent company, as was noted by Finlay Geoghegan J. in ReClawhammer Limited; Director of Corporate Enforcement v. McDonnell and Another [2005] 1 I.R. 503 at p.510, when she stated that:

"There is potential prejudice to creditors of an insolvent company if the directors, by default, permit it to be struck off the register rather than taking steps to wind it up. In such circumstances such assets of the company as remain are not applied, as a matter of course, in the discharge of creditors according to statutory priorities. Even directors who seek to discharge liabilities of the company may do so in accordance with their own preferences and possible perceived future commercial needs or future commercial intentions or to escape liabilities under guarantees. It also may be of benefit to the directors in the sense of escaping the scrutiny of their conduct of the company's affairs which might follow an investigation by a liquidator including the possibility of being fixed with personal liability for liabilities of the company in circumstances where same is mandated by the Companies Acts. Accordingly, I accept the submission made on behalf of the Director that the Oireachtas regards the fact that directors may...