Re First Class Toy Traders Ltd Declan Gray v John McLoughlin

• Jurisdiction: Ireland
• Judge: MS. JUSTICE FINLAYGEOGHEGAN
• Judgment Date: 09 July 2004
• Neutral Citation: [2004] IEHC 289
• Date: 09 July 2004
• Docket Number: 2002/354 Cos
• Court: High Court

[2004] IEHC 289

THE HIGH COURT

2002/354 Cos

GRAY (LIQUIDATOR) v. MCLOUGHLIN & TUOHY

DUBLIN

IN THE MATTER OF FIRST CLASS TOY TRADERS LIMITED (IN LIQUIDATION) AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACTS1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT2001

BETWEEN:

DECLAN GRAY AS LIQUIDATOR OF THE COMPANY IN THE WITHIN PROCEEDINGS

Applicant

-and-

JOHN McLOUGHLIN, MICHAEL McLOUGHLIN AND THOMAS TUOHY

Respondents

Citations:

COMPANIES ACT 1990 S150

COMPANIES ACT 1990 S1(3)

COMPANIES ACT 1963 S2(1)

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

RICHBOROUGH FURNITURE LTD 1996 1 BCLC 507

SECRETARY FOR STATE & INDUSTRY V TJOLLE & ORS 1998 BCC 282

KAYTECH INTL PLC, RE POTIER V SECRETARY FOR STATE FOR INDUSTRY 1999 BCC 390

BARINGS PLC (NO 6), IN RE; SECRETARY OF STATE FOR TRADE & INDUSTRY V BAKER (NO 6) 1999 1 BCLC 433

COMPANIES ACT 1990 S149

SQUASH (IRL) LTD, RE 2001 3 IR 35

LA MOSELLE CLOTHING LTD V SOUALHI 1998 2 ILRM 345

Abstract:

Company law - Liquidation - Restriction of directors - De facto company director - Whether respondent de facto director of company within prior 12 months - Whether respondents acted honestly and responsibly in relation to affairs of company - Whether respondents should be restricted from acting as company directors - Companies Act 1963, sections 1 and 2 - Companies Act 1990, section 150.

Facts: section 2(1) of the Companies Act 1963 provides that a director includes any person occupying the position of director by whatever name called. The applicant liquidator of the company applied for an order restricting all three respondents from being company directors pursuant to section 150 of the Companies Act 1990. The applicant submitted that the third respondent was a de facto director of the company within the meaning of section 2(1) of the Act of 1963 despite not appearing as a de jure director of the company.

Held by Finlay Geoghegan J in holding that the third respondent was a de facto director of the company and dismissing the application against all three respondents, that a person who had assumed the status and functions of a company director, bearing in mind the duties of a director, so as to make himself amenable to section 150 of the Act of 1990 was a de facto company director. All three respondents had satisfied the court on the balance of probabilities that they had acted honestly and responsibly in relation to the affairs of the company.

Quaere: whether for directors to commence trading with an under capitalised company and incur significant debts amounts to lack of commercial probity or want of proper standards.

Reporter: P.C.

EXTEMPORE JUDGMENT DELIVERED BY

MS. JUSTICE FINLAY GEOGHEGAN

1 This is an application by the official liquidator under section 150 of the companies Act1990for declarations of restrictions in respect of the three respondents.

2 In respect of the first two respondents it is accepted that they were persons who were appointed and acted as directors of this company up until the date of commencement of the winding up.

3 In respect of the third named respondent, Mr. Tuohy, a preliminary issue arises as he was not formally appointed a director of the company, nor is he registered in the company's office as a director of the company, but the official liquidator submits that he was a person who was a de facto director of this company within the 12 months prior to the commencement of winding up.

4 It is clear from section 1(3) of the 1990 Act that it must be construed as one with the company's Acts1963to 1990inclusive. Section 2(1) of the Act of 1963 provides that a director includes any person occupying the position of director by whatever name called. It is also clear, and was undisputed, that within that definition is included both persons who are de jure directors, that is to say that they have been formerly appointed, and de facto directors as that term has been construed and explained by the courts. Essentially a de facto director is a person who assumes to occupy the position of a director or assumes to act as a director of the company.

5 It is accepted by or on behalf of the official liquidator that the onus is on him to establish that Mr. Tuohy was a de facto director. It is also common case that the court must decide that issue on the balance of possibilities.

6 counsel for all parties referred me to the relevant authorities both in this jurisdiction and in England and wales in relation to the issue.

7 O'Neill J in the matter ofLynrowan Enterprises,(unreported The High court of 31st July 2002), considered this issue. He determined and I agree with his view, that a person who is a de facto director, and therefore a director within the meaning of Section 2(1) of the 1963 Act is amenable potentially to restriction under section 150 of the 1990 Act. There is no and was no dispute at the hearing before me on that issue.

8 The real question and the more difficult question is: what should be the appropriate approach of the court to determining the issue as to whether or not a person is or is not a de facto director.

9 InLynrowan Enterprises, O'Neill J followed the approach of Timothy Lloyd QC sitting as a deputy High Court judge in Re:Richborough Furniture Ltd, (1996) 1 BCLC, 507. In doing so O'Neill J identified three circumstances in which a person may be considered to be a de facto director. These were:

10 (1) Where there is clear evidence that the person has been either the sole person directing the affairs of the company, or

11 (2) Is directing the affairs of the company with others equally lacking in valid appointment, or

12 (3) Where there were other validly appointed directors that he was acting on an equal or more influential footing with the true directors in directing the affairs of the company.

13 O'Neill J also followed Timothy Lloyd QC in putting the following limitation on those three circumstances by stating:

"That in the absence of clear evidence of the foregoing and when there is evidence that the role of the person in question is explicable by the exercise of a role other than director, the person in question should not be made amenable to the section 150 restriction".

14 The above test as formulated by Timothy Lloyd QC has been subsequently the subject matter of some consideration and, I think it is fair to say, some criticism in subsequent decisions of the English courts.

15 I find more helpful the approach of Jacob J in theSecretary for State and Industry v Tjolle and others [1998] BCC, 282, and in particular the further explanation of his approach by Robert walker LJ in Re Kaytech International plc, Potier v Secretary For State for Industry, (1999) BCC, 390. In Tjolle, Jacob J stated at page 290:

"For myself I think it maybe difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title whether the individual had proper information (e.g. management accounts) on which to base decisions and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks “was this individual part of the corporate governing structure?”, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quote from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification...