THE HIDING by the former chairman of Anglo Irish Bank Seán FitzPatrick of his borrowings from the bank over a period of eight years may have been in breach of company law in relation to producing true and fair books of account and disclosing information to auditors.
The issues involved could affect not just Mr FitzPatrick but also the former chief executive of the bank, David Drumm, and the former chief financial officer, Willie McAteer, depending on their state of knowledge concerning the loans.
The controversy could also have implications for all directors of the bank over the period the loans were not disclosed.
Mr FitzPatrick has described his actions as “inappropriate” but not illegal and the financial regulator’s office has said it took advice last year and was informed Mr FitzPatrick’s actions were not illegal.
The Office of the Director of Corporate Enforcement (ODCE), Paul Appleby, is currently investigating the loans but would not comment when asked what aspects of company law it is considering in relation to the matter.
The Minister for Finance, Brian Lenihan, has said disclosure of Mr FitzPatrick’s activities has caused huge reputational damage to Anglo Irish Bank and was material to it having to be nationalised.
Companies are obliged under law to produce books of account that give a true and fair view of their business. When doing so, they must have regard to International Financial Reporting Standards (IAS).
Over the period he was hiding his loans from Anglo Irish Bank, Mr FitzPatrick was chief executive and, subsequently, chairman of the bank. He was what is called a “related party” to the company and, as such, the company had obligations under IAS rule number 24 to disclose its dealings with him.
According to the IAS website: “If there have been transactions between related parties, an entity shall disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements.
“At a minimum, disclosures shall include: (a) the amount of the transactions; (b) the amount of outstanding balances and: (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and (ii) details of any guarantees given or received”.
In 2007, Mr FitzPatrick disclosed loans of €7 million at year end having transferred loans more than 10 times that amount temporarily off the books so as to miss the year end. It was a practice that had been going on for eight years.
Given the figures and the €7 million disclosure, it seems unlikley it could be argued that the amounts were not material.
Under company law, a company and its directors who fail to take reasonable steps to comply with their obligations to produce the accounts required under law, are guilty of an offence that can, upon conviction, result in a fine or a term of imprisonment.
Persons who make false statements in relation to the production of accounts may also, upon indictment, be fined or jailed.
Ernst Young, auditors to Anglo Irish Bank, has said it was not aware until recently of Mr FitzPatrick’s activities in relation to his loans. Section 197 of the Companies Act 1990 states it is an offence if an officer of an company “knowingly or recklessly makes a statement to that is misleading, false or deceptive in a material particular”.
There is also a common law fiduciary duty on directors. This means directors have a duty to the company that is superior to their duty to themselves. These obligations have been long recognised by the courts.
It could be that directors of the company who were aware of Mr FitzPatrick’s activities when he was moving substantial loans to Irish Nationwide so as to miss his bank’s financial year end and then returning the loans to his bank after the financial year end, were in breach of their duty to the bank by not have the matter noted in the company’s accounts, or stopped.
