Martin Kelly v Jason P. Monson and Another

JurisdictionIreland
JudgeMr. Justice Max Barrett
Judgment Date09 December 2014
Neutral Citation[2014] IEHC 573
CourtHigh Court
Date09 December 2014

[2014] IEHC 573

THE HIGH COURT

No: 149 COS/2013
Kelly v Monson
IN THE MATTER OF JPM CAD DESIGN LIMITED (IN LIQUIDATION)

AND

IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990

AND

SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001

Between

MARTIN KELLY
Applicant

AND

JASON P. MONSON AND TRACEY A. MONSON
Respondents

COMPANIES ACT 1990 S150

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

DIRECTOR OF CORPORATE ENFORCEMENT v WALSH UNREP BARRETT 23.7.2014 2014 IEHC 365

DIRECTOR OF CORPORATE ENFORCEMENT v SLATTERY UNREP BARRETT 23.7.2014 2014 IEHC 363

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

Company – Directorship - Director remuneration - Whether excessive - Economic downturn - Decline in financial performance - Yet increases made to director salary - Declaration of restriction - s.150 Companies Act 1990 - Ties of affection - Whether spouse should be subject of declaration of restriction even though she had little to do with the running of the company

Facts This case concerned excessive director remuneration at a time of overall decline in the company"s financial performance. The Court had to decide whether a declaration of restriction should be issued against either or both Mr Jason Monson and Ms Tracey Monson pursuant to s.150 Companies Act 1990. JPM CAD Design Ltd was incorporated on 20 th December 2006. It ceased trading on 31 st March 2013. Mr Monson was prime operator of the company. His wife Tracey did not play a significant part in the running of the company nor was she remunerated as a director. The company was tax compliant up until 2010; thereafter it was not. The company was insolvent and should have been wound up. The liquidator said in his affidavit evidence that the difficulties encountered derived significantly from decisions taken by the company"s directors in regard director remuneration. The liquidator was critical of the director remuneration arrangements. Under s.150 Companies Act 1990 the Court is required to declare that a former director of an insolvent company be restricted from acting as a director or secretary of a company or otherwise being involved in the formation of a company if director misbehaviour has been identified.

Held The Court concluded the amount of director remuneration paid as a percentage of the turnover, notwithstanding the increases carried out during a period of overall decline in its financial performance, were excessive. The court found that Ms Monson's behaviour was not wanting in honesty or responsibility. The Court could not find a reason as to why it would be just and equitable for Ms Monson to be the subject of a declaration of restriction under s.150 of the 1990 Act. She agreed to be the required second director in what was, in effect, her husband's company; thereafter, the division of labours between the couple was such that Mr. Monson ran the company and Ms Monson derived an indirect benefit from the company's operations but played little or no active part in its operation. The court found that Mr. Monson, as MD of JPM CAD Design Limited, demonstrated a lack of commercial probity and/or a want of proper standards in allowing director remuneration to increase as it did, and for those increased amounts to be paid as they were, during a period of overall decline in the financial performance of JPM CAD from 2009 through to 2012. The Court did not think it just to issue any declaration in respect of Ms. Monson pursuant to s.150.

1

Judgment of Mr. Justice Max Barrett delivered on 9th December, 2014.

2

1. The key issue in this case is whether the payment of excessive director remuneration at a time of overall decline in a particular company's financial performance has the present effect that a declaration of restriction must now issue against either or both of Mr. Jason P. Monson and Ms Tracey A. Monson pursuant to s. 150 of the Companies Act, 1990, as amended.

Background facts.
3

2. JPM CAD Design Limited was incorporated on 20 th December, 2006, and ceased trading in or around 31 st March, 2013. The objects for which the company was established were to carry on the business of architectural and engineering activities and related technical consultancy work, and any pursuit incidental thereto. Although both respondents were directors of the company, Mr. Jason Monson was its prime operator. His wife, Ms Tracey Monson, does not appear from the evidence before the court to have played any significant part in the running of the company's business, nor was she remunerated as a director. The company was tax compliant up to about the second half of 2010; thereafter it was not. From about the end of 2010, the liquidator contends that the company was insolvent and should have been wound up. The liquidator avers in his affidavit evidence that "the difficulties encountered by the Company derived significantly, if not entirely from the decisions taken by the company's directors in regard to director remuneration", albeit that the general economic downturn in the national economy also played a part. The director remuneration paid by the company makes for startling reading. It is outlined in Table 1 overleaf.

Year End

Turnover

Director remuneration

Percentage increase in director remuneration

Director remuneration as percentage of Turnover

2009

€59,546

€37,366

n/a

63%

2010

€66,022

€51,146

13.7%

77%

2011

€39,841

€53,548

4.7%

134%

2012

€48,936

€85,870

60.4%

175%

Table 1.
4

3. As the company was trading at a slight loss in 2009 and a more significant loss in 2011 and 2012 (the company appears from the liquidator's averments to have turned a small profit in 2010), it seems that throughout a period of general decline in the company's financial performance, and a shorter period of non-compliance with the tax code, director remuneration was increasing significantly. This is in contrast to the position that one sometimes sees in companies in decline where the first persons to 'take a hit' remuneration-wise are board members. The liquidator is critical of the director remuneration arrangements that pertained within JPM CAD, observing that "Notwithstanding...poor trading performance, when it might be expected that there would be at least a commensurate reduction in Directors Remuneration, the directors remuneration actually increased year on year by significant amounts." The court cannot but conclude, having regard to Table 1, that the amount of director remuneration paid as a percentage of turnover, and the percentage increases in director remuneration effected, by JPM CAD during a period of overall decline in its financial performance, were excessive.

Legal background.
5

4. It is an unpleasant truth that companies often become insolvent. Sometimes as they go through the liquidation process, director misbehaviour is identified. Directors guilty of such misbehaviour can be prevented at law from acting in the future as directors or otherwise in relation to a company. One of the means by which this is achieved is through s.150 of the Companies Act, 1990, as amended. In a nutshell, s.150 requires the court to declare that a former director of an insolvent company be restricted from acting as a director or secretary of a company or otherwise being involved in the formation of a company, save in certain instances. Such an order need not be made if, for example, the court is satisfied that the former director acted honestly and responsibly in relation to the affairs of the relevant insolvent company and there is no other reason why it would be just and equitable for him or her to be restricted as proposed. There is more to the provision than that. However, the foregoing captures its essence, at least insofar as the present proceedings are concerned. The logic of the provision is simple: people who misbehave as directors of one company ought not lightly to be entrusted with stewardship of another. But a page of history is worth a volume of logic, and history suggests that s.150, though possibly unassailable in theory, suffers from some weaknesses that arise in practice. Some of these are considered hereafter.

Some weaknesses in the operation of s.150.
6

5. Parity of sanction. Section 150 applies the same sanction to any former director of an insolvent company who is found guilty of a want of honesty or responsibility or whom justice and equity suggest to be worthy of restriction from acting as a director. Anyone who falls foul of its provisions is subject to the same five-year restriction. Logic may suggest such equality of treatment to be fair; the experience of this Court is that it is not, certainly not always. It is this Court's repeated experience that it is presented with individuals who fall foul of s.150, yet whose behaviour does not appear to the court to merit the parity of sanction which that provision imposes. It is, of course, the right of the Oireachtas to determine when enacting legislation that parity of sanction is merited. However, it is the respectful duty of the court to sound a cautionary note when it finds that it is encountering circumstances in practice where the application of this parity of sanction is yielding results that seem to it to be unfair. In the present case this is an issue which would have affected Ms Monson in particular, had the court not concluded below that it is not in any event required to issue a s.150 declaration against her.

7

6. Non-contested applications. It is the experience of the court that many affected directors choose not to contest s.150 applications. It is clear to the court from some of the submissions that have been made to it in this regard that this is not always, if ever, because directors are satisfied that...

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