Kavanagh v Kelly

• Jurisdiction: Ireland
• Judge: Mr. Justice MacMenamin
• Judgment Date: 28 July 2005
• Neutral Citation: [2005] IEHC 421
• Court: High Court
• Date: 28 July 2005

[2005] IEHC 421

THE HIGH COURT

[No. 74 COS/2004]

KAVANAGH v KELLY & ORS

IN THE MATTER OF KELLY TECHNICAL SERVICES (IRELAND) LIMITED (IN

VOLUNTARY LIQUIDATION) AND

IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT, 1990

AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT, 2001.

BETWEEN/

TOM KAVANAGH

APPLICANT

AND

RAYMOND KELLY, DECLAN KELLY, TIM KELLY, BRIAN HARNETT, AND PATRICK O'FLAHERTY

RESPONDENTS

COMPANY LAW ENFORCEMENT ACT 2001 S56

COMPANIES ACT 1990 CHAPTER I PART 7

COMPANIES ACT 1990 S150(3)

COMPANIES ACT 1990

COMPANIES ACT 1963 S2

COMPANIES ACT 1963 S4

COMPUTER LEARNING CENTRE (IRELAND) LTD (IN VOLUNTARY LIQUIDATION), RE DIGITAL CHANNEL PARTNERS LTD, RE 2004 2 ILRM 35

SQUASH (IRELAND) LTD, RE 2001 3 IR 35LO-LINE MOTORS LTD, RE 1988 BCLC 698

COMPANIES ACT 1990 S150(2)(a)

LA MOSELLE CLOTHING LTD v SOUALHI 1998 2 ILRM 345

COLM O'NEILL ENGINEERING SERVICES LTD, RE UNREP HIGH COURT FINLAY GEOGHEGAN 13.2.2004 2004/8/1824

KAVANAGH v DELANEY & ORS (TRALEE BEEF & LAMB LTD, IN RE) 2005 1 ILRM 34

COSTELLO DOORS UNREP HIGH COURT MURPHY J 21.7.1995 1995/6/1958

BUSINESS COMMUNICATIONS LTD v BAXTER UNREP HIGH COURT MURPHY J 21.7.1995 1995/6/1869

CEM CONNECTIONS LTD, RE BCC 917

LYNROWAN ENTERPRISES LTD, RE UNREP HIGH COURT O'NEILL 31.7.2002 2002/15/3709

COMPANY LAW

Directors

Restriction - Whether directors acted honestly and responsibly - Whether creditors misled re company's financial status - Whether mere commercial errors - Connected companies - Shadow director - Failure to cross-examine directors - Whether informed consent given to act as director - Re Ro-Line Motors Ltd [1988] BCLC 698; La Moselle Clothing Ltd v Soualhi [1998] 2 ILRM 345; Re Squash Ireland Ltd [2001] 3 IR 35; Lynrowan Enterprises (Unrep, O'Neill J, 31/7/2002); Kavanagh v Delaney [2004] IEHC 139 (Unrep, Finlay Geoghegan J, 20/7/2004); Re Digital Channel Partners Ltd [2004] 2 ILRM 35 and Re The Computer Learning Centre (Irl) (Unrep, Finlay Geoghegan J, 7/2/2005) considered - Companies Act 1963 (No 33) ss 2 and 4 - Companies Act 1990 (No 33), ss 27 and 150 - Application to restrict three directors granted; application in respect of two further directors refused (2004/74COS - MacMenamin J - 28/7/2005) [2005] IEHC 421Re Kelly Technical Services (Ireland) Ltd;

Kavanagh v Kelly

the applicant applied for orders restricting the five respondents from acting as company directors pursuant to section 150 of the Companies Act 1990. The first, second and fourth respondents were directors of the company at the time of its winding up. The third respondent was a director during a period within twelve months of the liquidation date. The fifth respondent was not formally appointed a director of the company but the applicant contended that he was a de facto director pursuant to section 27 of the Companies Act 1990.

Held by MacMenamin J in granting the relief in respect of the first, second and fourth respondents and refusing the relief sought in respect of the third and fifth respondents that the burden of establishing that a person was somebody to whom section 150 applied lay with the liquidator, a burden which he had not discharged in respect of the third and fifth respondents. In respect of the other respondents, the applicant had proved that, having regard to the extent to which a director has complied with the obligations imposed by the Companies Acts and common law; the extent to which the director’s conduct could be regarded as so incompetent as to amount to irresponsibility; the extent of the director’s responsibility for the insolvency of the company; the extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter; and the extent to which the director displayed a lack of commercial probity or want of proper standards, they should be restricted.

Reporter: P.C.

1 Judgment of Mr. Justice MacMenamin dated the 28th day of July, 2005 .

2 In these proceedings the applicant seeks a declaration that the respondents being persons to whom Chapter I, Part 7 of the Companies Act, 1990applies, 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

3 subs. 3 of s. 150 of the Companies Act, 1990(as amended). The applicant is the liquidator of the above entitled company, having been so appointed on 24 ^th July, 2000. On the same day a resolution to wind up the company was passed while administrative receivers were appointed to the U.K. company on 12 ^th July, 2000.

4 The first, second and fourth named respondents were directors of the company at the time of the commencement of the winding up of the company. The third named respondent, Tim Kelly, was a director for the period from October 1998 to 13 ^th June, 2000, a period within twelve months of the liquidation date.

5 The fifth named respondent, Patrick Flaherty was not formally appointed a director of the company. However for reasons set out hereinafter in this judgment the applicant makes the case that he was a de facto director pursuant to s. 27 of the Companies Act, 1990.

6 At the date of commencement of the winding up the company was unable to pay its debts within the meaning of ss. 2 and 4 of the Companies Act, 1963. The company was incorporated on 12 ^th October, 1998, had an authorised share capital of 12,697,738 shares, of which four were issued and the company had its registered office at Lyndican, Claregalway, County Galway.

Background

7 The company was involved in the supply of contract labour in relation to cabling and laying of telecommunication services. The company had a common shareholding with Kelly Technical Services Limited ("the U.K. company") in that each of the first, second and third named respondents were common, equal shareholders in each entity. Both businesses were engaged in the same business. It is contended from affidavits filed on behalf of the respondents that the U.K. company was funding the company in suit. By way of further background, the company appears to have been formed in order to transact installation work with Eircom.

8 This was the company's principal contract. The purpose of the contract was to provide specialist copper jointing services in the cable laying industry and this was awarded to the company in or about April, 1999.

9 The company was established in or about October, 1998, with the same shareholding as Kelly Technical Services Limited ("KTS U.K."), a company which was established in February, 1993, in which Raymond Kelly, Declan Kelly and Tim Kelly were each 33% shareholders. Both companies were involved in the same line of business and both collapsed in or about the same time.

10 Following the commencement of work on the contract with Eircom in May, 1999 it became apparent to the directors that there was a local shortage of appropriately qualified staff. As a result, apparently on the suggestion of Eircom the company began to recruit employees in South Africa in 1999 specifically to recruit engineers skilled in copper jointing. On 27 ^th September, 1999, the company entered into employment contracts with approximately 80 engineers at a basic wage of IR£700 per week. The company arranged transport and work permits, paid accommodation and purchased tools and transport necessary for the workers to carry out their work in accordance with the standard set by Eircom.

11 Work continued on the Eircom contract until approximately 21 ^st December, 1999. On that date Eircom informed the company by telephone that it was experiencing budgetary problems and that it would be "suspending" the contract until further notice. On 7 ^th January, 2000, written confirmation was received that the contract had been "suspended/postponed". This action along with the company's consequential legal difficulties with its South African employees were both factors which led to the collapse of the company.

12 On 5 ^th January, 2000, the company made its South African workers redundant. These workers commenced legal proceedings for breach of contract against the company, KTS U.K., and Raymond Kelly and Declan Kelly personally. KTS U.K. was joined in the action on the basis that the two companies allegedly operated as one and hence were jointly and severally liable. An interim order was obtained which required the company to re-employ the workers and to supply them with vehicles and accommodation.

13 Subsequent to a hearing in the High Court this court found in favour of the workers in respect of liability. Prior to the issue of quantum being considered by the court, on 31 ^st May, 2000, the company and KTS U.K. reached what was stated to be an out of court settlement with the South African workers whereby, inter alia, the company agreed to reinstate the workers, pay them general damages which totalled IR£480,000 plus costs estimated at IR£ 250,000. It was also agreed that the workers” wages would be increased to IR£800 per week for those working in the United Kingdom.

14 The respondents” case is that following the entry into this settlement, which also bound KTS U.K., a firm called Griffin Factors, which was providing factoring facilities to KTS U.K. became nervous as to KTS U.K.'s financial position. On 20 ^th June, 2000, KTS U.K.'s directors which included Raymond Kelly appointed advisers to consider its financial position. On 7 ^th July, 2000, the directors were advised to appoint an administrative receiver to KTS U.K., which receiver was then appointed on 12 ^th July, 2000. Simultaneously, steps were taken to wind up the company in suit which led to the liquidator's appointment on 24 ^th July, 2000.

15 It is contended...