Tom Kavanagh v John Delaney

• Jurisdiction: Ireland
• Judge: Mr. Justice Hardiman
• Judgment Date: 01 February 2008
• Neutral Citation: [2008] IESC 1
• Court: Supreme Court
• Docket Number: 382/2004,[S.C. No. 382 of 2004]
• Date: 01 February 2008

THE SUPREME COURT

Hardiman J.

Macken J.

Finnegan J.

382/2004

IN THE MATTER OF TRALEE BEEF & LAMB 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:

TOM KAVANAGH

Applicant/Respondent

and

JOHN DELANEY, PATRICIA DELANEY, TERRY DUNNE and SIMON COYLE

Respondents

Abstract:

Company law - Restriction of directors - Consequences of restriction - Criteria for restriction order - Amplification of criteria - Executive and non-executive directors - Conflicts with fellow directors - Companies Act 1990, s. 150 - Company Law Enforcement Act 2001, s. 41

The fourth named respondent was a chartered accountant and partner in a well known firm. He appealed against the High Court restriction order imposed on him. He was appointed as a non-executive director of the company and did not play any active part in the management of the company. The liquidator and the High Court found that he had satisfied them that he acted honestly and no breach of any obligation imposed by the Companies Act was identified. However, the High Court made the restriction order for breach of the common law duties of a director.

Held by the Supreme Court (Hardiman, Macken and Finnegan JJ) in allowing the appeal and setting aside the order of the High Court that the Court was gravely concerned about the justice of the procedures leading to the decision to restrict the fourth named respondent. Where reputation and professional standing were intimately involved, it was not right to alter or amplify the criteria for imposing a restriction order. The importation of the other director's evidence into the case against the fourth named respondent was not consistent with the principles of adversarial litigation.

Reporter: R.W.

1 JUDGMENT of Mr. Justice Hardiman delivered the 1st day of February, 2008.

2 This is the appeal of the fourth-named respondent ("Mr. Coyle") against the judgment and order of the High Court (Finlay-Geoghegan J.) which judgment was delivered on the 20th July, 2004. By an order perfected on the 27th July, 2004 the High Court directed that the respondents and each of them:

3 "Shall not for a period of five years from the date hereof 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 it meets the requirements set out in subsection (3) of the said Section."

4 This order is of the sort commonly referred to as a "restriction order". Its statutory origins will be discussed below.

5 Factual background.

6 Mr. Tom Kavanagh, the plaintiff and the applicant in these proceedings is a chartered accountant who, by order of the High Court of the 28th January, 2002, was appointed liquidator of Tralee Beef and Lamb Limited ("the Company"). The respondents, including Mr. Coyle who is the sole appellant, were each directors of the Company at the date of the commencement of its winding up: this is established by the search in the Companies Registration Office referred to in the affidavit of Mr. Kavanagh. The first and second-named respondents are husband and wife.

7 It is undisputed that the Company was at the time of the commencement of the winding up unable to pay its debts, within the meaning of s.214 of the Companies Act, 1963. The official liquidator's Certificate to that effect is exhibited in his affidavit.

8 The official liquidator goes on to give details of the Company's difficulties. None of this has been disputed. He says that the first-named respondent, Mr. John Delaney, was the Managing Director of the Company and appears to have been the sole executive director. According to the records produced by the directors of the Company, a very large deficiency in its assets occurred during the last six months of trading for which, in the view of the liquidator, no reasonable explanation has been given. According to its draft accounts for the year ended 31st March, 2001, the net assets of the Company were EUR975,077.00. But according to the statement of affairs prepared by Mr. and Mrs. Delaney as of the 10th

9 October, 2001, the excess of liabilities over assets then amounted to EUR5,325,662.00. The liquidator believes that these are attributable to heavy trading losses over the last six months of trading. This increase in the Company's liabilities is described by the official liquidator as "scarcely credible". He says that the level of losses calls into question the accuracy of the management accounts for the year ended 31st March, 2001 and indeed of the audited accounts to 31st March, 2000. It will be seen that the figures indicate a drop in value in a short period of time of over EUR6.3 million euro.

10 There is, in the papers before the Court, a distinct lack of information that might allow the Court to form any view as to the reason for the insolvency. The Company was in the business of slaughtering cattle and lambs, mostly the former, which it boned and sold in Ireland and the U.K. or sent to other de-boning halls which sold the de-boned beef to companies outside the European Union. To a company engaged in that sort of business, quite clearly the BSE outbreaks and associated developments in and after the year 2000 were a major adverse development.

11 The appellant here, the fourth-named respondent Mr. Coyle, is a chartered accountant and a partner in the well known firm of Chapman, Flood, Mazars. He was nominated to join the Board of Directors of the Company by C.F. Investment Managers Ltd. ("CFIM") which is a company that manages seven distinct funds invested in Business Expansion Schemes in accordance with Part 16 of the Taxes Consolidation Act, 1997. These seven funds have over 1,000 investors. The Trusts establishing the various funds provided that the investors be represented on the board of a company in which the funds are invested in order to facilitate the monitoring of company progress and the periodic reporting to investors and to the Central Bank. Mr. Coyle says in his affidavit in the present proceedings that the terms of his appointment as a non-executive director were that he should receive and review financial information from the executives of the Company and attend certain directors' meetings as a non-executive director. He was not however to play any active part in the management of the Company.

12 In view of the issues arising it is well to set out precisely Mr. Coyle's factual contention in his own words: He saysatparagraph4:

13 ... It was at all times made clear to Mr. Delaney that my appointment was purely in connection with and as a consequence of the aforesaid BES investments in the Company. I say that the Trust Deed establishing the fund from which the investment in the Company was made (having been approved by the Department of Enterprise and Employment and notified to the Revenue Commissioners), requires that someone take a position as non-executive director of investor companies so as to represent the interests of the two investment funds. It was at all times made clear to Mr. Delaney that my appointment as a non-executive director of the company was only made in that context."

14 It may be significant that Mr. Coyle's affidavit is sworn to reply, not to the affidavit of the official liquidator but to the affidavit of Mr. John Delaney against whom, by reason of the statutory provisions discussed below, the liquidator had also brought restriction proceedings.

15 It is clear from the liquidator's affidavit that he formed the view that Mr. Coyle had acted honestly and responsibly in relation to the affairs of the Company of which he was a non-executive director. He petitioned the Director of Corporate Enforcement to be relieved from the statutory obligation (set out below) to bring restriction proceedings in relation to Mr.

16 Coyle but the Director of Corporate Enforcement declined to relieve him. The Director gave no reasons for this and did not attend or seek to be heard either before the High Court or before this Court on the hearing of this appeal. In view of the significance of the legal submissions and the legal issues raised, the absence of the Director of Corporate Enforcement is most unfortunate.

17 The learned trial judge was prepared to infer, from the fact that the Director of Corporate Enforcement refused the official liquidator's request to be dispensed from bringing a restriction application in respect of Mr. Coyle, that the Director did not agree with the official liquidator's conclusion that Mr. Coyle had acted honestly and responsibly in relation to the Company. I would not be prepared to draw such an inference. The fact is that the Director has given no reasons whatever for his attitude either to the official liquidator or to the Courts. One explanation for it would be that he disagrees with Mr. Kavanagh's assessment. However, since he has not had the opportunity that gentleman has had to discuss the affairs of the Company with, and question, the Directors, it is not clear to me on what basis he could disagree with the official liquidator's professional judgment. His silence, and refusal to grant the official liquidator's request, seems to me just as consistent with a rigid policy decision that he will take no position in a case like the present and unload the entire responsibility on to the Courts with (as the learned High Court judge pointed out) no legitimus contradictorof what Mr. Coyle says. More neutrally put, he will maintain, for unspecified reasons, a distance between himself and the restriction proceedings.

18 Statutory background.

19 Section 150 of the Companies Act 1990 (as amended by Company Law Enforcement Act s.41 2001) relates to persons who are directors of a company which is found on winding up to be insolvent, or had been such directors in the year prior to the commencement of the winding up. Such a person...