Stafford v Fleming and Fleming

• Jurisdiction: Ireland
• Judge: Mr. Justice Hanna
• Judgment Date: 07 March 2007
• Neutral Citation: [2007] IEHC 55
• Court: High Court
• Docket Number: [No. 306 COS/2005]
• Date: 07 March 2007

[2007] IEHC 55

The high court

[No. 306 COS/2005]

Re Pineroad Distribution Ltd: Stafford v Fleming

in the matter of Pineroad Distribution 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/

James Stafford

Applicant

and

John Joseph Fleming and Maria Fleming

Respondents

COMPANIES ACT 1990 S150

COMPANIES LAW ENFORCEMENT ACT 2001 S56

COMPANIES ACT 1963 S214

SQUASH (IRELAND) LTD, IN RE 2001 3 IR 35

LO-LINE ELECTRIC MOTORS LTD & ORS, IN RE 1988 CH 477

LA MOSELLE CLOTHING LTD (IN LIQUIDATION) & ROSEGEM LTD (IN LIQUIDATION) v SOULHI 1998 2 ILRM 345

KAVANAGH v DELANEY (SWANPOOL LTD, IN RE) UNREP CLARKE 4.11.2005 2005 IEHC 341

KAVANAGH v CUMMIN & ORS (DIGITAL CHANNEL PARTNERS LTD, IN RE ) 2004 2 ILRM 35

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

O'FERRALL v GILL (THE COMPUTER LEARNING CENTRE LTD, IN RE) UNREP FINLAY GEOGHEGAN 7.2.1995 (EX TEMPORE)

USIT WORLD PLC, IN RE UNREP PEART 10.8.2005 2005/57/11922

AVELING BARFORD LTD v PERION LTD & ORS 1989 BCLC 626

DUIGNAN v CARWAY (VERIT HOTEL & LEISURE (IRELAND) LTD, IN RE) (NO2) 1993 3 IR 191

COMPANIES (AMDT) ACT 1990 S33

COMPANY LAW

Directors

Restriction - Company law - Restriction of directors - Re Squash Ireland Ltd [2001] 3 IR 35 followed - Re Tralee Beef and Lamb [2004] IEHC 139, [2005] 1 ILRM 34 considered - Onus on directors to establish that they should not be restricted - Culpable ignorance - Recklessness - Tax problems ought to have been clear to directors - Irresponsibility of directors - Directors not consciously dishonest but grossly irresponsible - Directors restricted for five years (2005/306COS - Hanna J - 7/3/2007) [2007] IEHC 55Re Pineroad Distribution Ltd: Stafford v Fleming

The applicant liquidator applied for declarations of restriction with respect to John and Maria Fleming, who were, respectively, executive and non-executive directors of the company.

Held by Hanna J. in making the declarations of restriction that although the respondents did not act in a consciously dishonest way nevertheless they acted in a grossly irresponsible way in shutting their eyes to an increasing debt and in continuing to trade for a period far beyond what could reasonably be excused having regard to the enormous scope of their tax problems.

Reporter: R.W.

Mr. Justice Hanna

1 In these proceedings, the applicant is the liquidator of Pineroad Distribution Limited ("the Company") appointed as such on 10th June, 2004. The respondents, John Joseph Fleming and Maria Fleming, were, respectively, an executive director and a non executive director and company secretary of the said company. It is accepted by all parties that the company is insolvent within the meaning of s. 214 of the Companies Act,1963. The applicant brings this application pursuant to s. 150 of the Companies Act, 1990, as amended, seeking an order of this court restricting the respondents from acting as company director or secretary for a period of five years.

2 The company was involved in the haulage industry. The first respondent had operated a number of companies under the business name "Fleming Transport" since 1975. The company was incorporated in 1986 and the business of Fleming Transport was channelled through this company from October, 1988. The company appears to have traded quite successfully over the years with shareholders funds amounting to €1,023,446 according to the audited accounts for the year ending 30th September, 2001. By that time the company had approximately fifty five staff as well as a large fleet of in the order of seventy lorries and trucks, all of these under lease. There were approximately six leasing companies involved in the leasing arrangements.

3 A central figure in the day to day operation of the business was one Mr. Patrick Farrell, the company's operation manager. According to the first respondent, Mr. Farrell was an essential figure in the operation of the company, both in terms of the day to day running and contact with the company's customers. Mr. Fleming, therefore, was somewhat taken aback when, in the summer of 2001, Mr. Farrell tendered his resignation. Mr. Fleming says that apart altogether from the significant blow of losing such a central senior employee, there was a risk that Mr. Farrell would set up on his own and would entice customers to him, given the fact that he had such close and regular personal contact with them. The applicant does contest whether the potential to poach company customers was realistically there, but Mr. Fleming maintains that it was and in a somewhat terse supporting affidavit, Mr. Farrell agreed with him. How then to retain Mr. Farrell's services?

4 The respondents say that protracted negotiations followed in which it was determined,inter alia, that Mr. Farrell would be given a 10% stake in a new company ("Euroute"). Put simply, Euroute would be given the use of the company's employees, vehicles and other equipment in return for which it was intended that Euroute would pay the company's costs. The arrangement commenced in or around the month of October, 2001. It should be observed that no provision was made in the agreement between the respondent and Mr. Farrell for payment for the goodwill of the company and this is one of the features which causes concern to the applicant and causes him to apprehend that the deal between Mr. Fleming and Mr. Farrell was improvident as far as the shareholders' and creditors' interests were concerned. On the other hand, Mr. Fleming, asserts that the goodwill was not a matter of great import to him and that as of the time of entering into the arrangement with Mr. Farrell failure to provide for payment for the goodwill was a justifiable "call" in the circumstances which then obtained.

5 The statement of affairs prepared by the respondents shows a deficit of €1.424million. Of this, the Revenue Commissioners are preferential creditors in the amount of €380,704, such debts arising in the year previous to the commencement of the winding up. Further, in addition, the Revenue Commissioners account for the overwhelming preponderance of unsecured/non-preferential creditors. Out of the estimated liabilities of €592,967, the Collector General is owed sums of €513,526 in respect of VAT and €69,352 in respect of PAYE/PRSI, in total €582,878. Thus, the total revenue debt amounts to something in the order of 98% of the unsecured creditors. No money is owed to either of the respondents. Euroute is said to be owed €25 and a company called J.J. Fleming & Co. is said to be owed €403.

6 Counsel for both the applicant and the respondents had no difficulty in agreeing the relevant principles of law. The leading case on s. 150 of the Companies Act,1990 is Re Squash Ireland Limited [2001] 3 I.R. 35. At pp. 39 to 40, McGuinness J. says in reference to directors:-

"The question before the court is whether they acted responsibly and this, as was correctly stated by counsel on behalf of the respondent, must be judged by an objective standard. In the case of all companies which have become insolvent it is likely that some criticisms of the directors may be made. Commercial errors may have occurred; misjudgments may well have been made; but to categorise conduct as irresponsible I feel that one must go further than this."

7 Quoting a passage from the judgment of Browne-Wilkinson V.C. inRe Lo-Line Motors Limited [1988] Ch. 477 at p. 485 - 486 McGuinness J. adopted the following:-

"What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is probably the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to creditors and others… Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate."

8 McGuinness J. then went on to adopt the test set out by Shanley J. inLa Moselle Clothing Limited v. Soualhi [1998] 2 I.L.R.M. 345 which sets out five criteria to which the court should have regard. They are as follows:-

9 1. The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts,1963 to 1990.

10 2. The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.

11 3. The extent of the directorate responsibility for the insolvency of the company,

12 4. The extent of the directorate responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.

13 5. The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.

14 McGuinness J. goes on to state that the entirety of the tenure of the director should be considered and not just the few months in the run up to the liquidation.

15 Since the decision inSquash Ireland [2001] 3 I.R. 35 there have been a number of important decisions of the High Court which greatly assist the consideration of s. 150 cases. In Re. Tralee Beef and Lamb (Unreported, High Court, 20th July, 2004) Finlay Geoghegan J. says:-

"In re Vehicle Imports Limited (in liquidation) (Unreported, High Court, Murphy J., 23rd November, 2000) Murphy J. cited with approval the relatively recent formulation of those duties by Jonathan Parker J. In re Barings plc. and Ors. (No....