On 20th January 2016, the Irish Court of Appeal (the "Court") handed down an important decision in the case of Director of Corporate Enforcement v Walsh & ors  IECA 2 in relation to the law on the disqualification of directors. This judgment provides useful clarity on the law in this area.
This case concerned an appeal by the Director of Corporate Enforcement (the "DCE") against a decision of Barrett J in which the judge declined to make a disqualification or restriction order against three company directors. The main complaint against the directors was that they had failed to file annual returns for two companies, namely Walfab Engineering Limited ("Walfab") and RPB Products Limited ("RPB"), which led to these companies being struck off the Register of Companies (the "Register"). An application was brought by the DCE under Section 160(2)(h) of the Companies Act 1990 (the "Act") which is applicable to company directors who, through culpable inaction, have permitted an insolvent company to be struck off the Register when they should have proceeded to wind up the relevant company.
Defence of the directors
The directors of Walfab and RPB blamed the downturn in the economy for the decline of the financial affairs of the companies and did not dispute their failure to file annual returns. They claimed that they had at all times acted honestly and responsibly in relation to the companies and that when the companies became insolvent, resources were not available to allow them to liquidate the companies.
One of the directors argued that it was never her intention to be actively involved in Walfab and she took no active role in its management. She also highlighted that she never received any director's remuneration, wages, salary or otherwise and never took any drawings from Walfab.
Decision of the Court
Kelly J, giving judgment for the Court, relied heavily on the judgment of Finlay-Geoghegan J in Re Clawhammer where she stated:
"There is potential prejudice to creditors of an insolvent company if the directors, by default, permit it to be struck off the register rather than taking steps to wind it up. In such circumstances such assets of the company as remain are not applied, as a matter of course, in the discharge of creditors according to statutory priorities... Accordingly, I accept the submission made on behalf of the Director that the Oireachtas regards the fact that directors may have permitted a company to be struck off the register as a result of their failing to make annual returns as more than a technical breach of their obligations under the Companies Acts."
Kelly J noted that the approach set out by Finlay-Geoghegan J was one which had been endorsed and followed in subsequent applications under Section 160(2)(h) and said that he could see no reason why the trial judge had departed from this approach in the instant case. He rejected the contention that financial difficulty or difficult trading conditions changed the purpose of Section 160; the aim of which is to promote proper corporate governance. In addition, he refused to accept that difficult financial circumstances alter the obligations placed upon directors where companies under those directors' control become insolvent. In such cases, they should take the necessary steps to bring about the orderly winding up of the relevant company.
Kelly J also disagreed with the weight Barrett J attached to what he described as the "scale of enterprise and qualification of directors" and the "context in which director transgression" occurred. Kelly J did not accept that these factors could be regarded as relevant to the exercise of the Court's discretion under Section 160. He concluded that neither the qualifications of the directors nor the economic challenges that a company may be confronted with affect the obligations on directors to act responsibly in respect of an insolvent company.
Past behaviour of directors
In rejecting the reasoning of Barrett J, Kelly J took the view that Section 160(2)(h) does not impose any burden on the DCE to establish any instances of past bad behaviour in order to justify the making of a disqualification order. He noted that the intent of the legislature would be frustrated if an obligation was placed upon the DCE to put before the court evidence of the historical behaviour of directors. Indeed, in many cases where annual returns have not been filed by the company and no Section 56 report (a liquidator's report in respect of an insolvent company) is available from a liquidator as the company has not been placed into liquidation, the DCE would not be in a position to form any view as to how directors have carried out their obligations in the past.
Kelly J then moved on to consider the issue of passive directorships. He noted that it would be contrary to the entire notion of proper corporate regulation if passive directors (i.e. those directors who do not take an active role in the management and day-to-day operation of a company) could be exonerated from liability or relieved from disqualification or restriction on the basis of the passive nature of their role. He stated that all directors are required to undertake all reasonable steps to file annual returns and that there was no reason to limit the disqualification or restriction of passive directors to cases where there is "real moral blame" on their part.
Court's discretion under section 160(9A)
Kelly J then considered the Court's discretion pursuant to Section 160(9A) of the Act to make a declaration of restriction under Section 150 of the Act as an alternative to a declaration of disqualification. He rejected the contention of Barrett J in the High Court that Section 160(9A) allows the court to make a Section 150 declaration only where such could be made on foot of a Section 150 application. He was satisfied that Section 160(9A) vests the Court with the discretion to impose the lesser sanction of a Section 150 declaration on a Section 160 application, provided that it is appropriate to do so. On a consideration of the evidence, Kelly J concluded that this was a case where the Court ought to exercise its discretion in favour of making a restriction order rather than a disqualification order and accordingly, he imposed a restriction of five years against each director.
Implications of the Court's Decision
This decision clearly reinforces and re-establishes the case law regarding the disqualification of directors. In contrast to recent decisions of the High Court, the Court's judgment strongly suggests that it will be less tolerant towards directors who have breached the Act (and, one assumes, the Companies Act 2014, which updates but largely re-enacts what was the legislative position covering this area). In particular, it highlights that passive directors will not be afforded any differential treatment when an examination of their duties as directors is being undertaken by the court and that financial and trading conditions will not be afforded any significant weight in determining whether a disqualification or restriction order should be made where there is a clear breach of a director's obligations under Irish company law.
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