SUPREME COURT Director of Corporate Enforcement -v- McGowan & AnorJudgment was given on May 6th, 2008, by Mr Justice Nial Fennelly, Mrs Justice Susan Denham and Mr Justice Hugh Geoghegan concurring.
JUDGMENT
An appeal from the Director of Corporate Enforcement against a High Court ruling that the respondent should not be disqualified as a director under the Companies Act 1990, as amended, failed, and the respondent was permitted to remain as director of the company.
However, the Supreme Court found that Ms Justice Mary Laffoy had erred in her interpretation of section 160 (2) (f) of the Companies Act 1990.
BACKGROUND
The Companies Act 1990, as amended by the Company Enforcement Act 2001, provides for circumstances where the High Court may disqualify people from acting as directors for such period as the court sees fit.
This can be because the person's conduct "makes him unfit to be concerned in the management of a company" (S. 160 (2) (d)) or "if a person has been persistently in default in relation to the relevant requirements" (S. 160 (2) (f)).
Subsection 3 (a) of the section specified that "persistently in default" is "conclusively proved by showing that in the five years ending with the date of the application he has been adjudged guilty . . . of three or more defaults in relation to those requirements".
The Act also gives the High Court discretion to make a disqualification order.
The facts, which were not disputed, were that Wood Products (Longford) Ltd, had failed for 13 consecutive years to make any annual returns to the Companies Registration Office, as prescribed by law. The respondents, Patrick McGowan and his wife Patricia McGowan, were company directors.
The company also failed to make tax returns for corporation tax, PAYE and PRSI. In May 2002 and June 2003, the collector-general secured a judgment totalling €279,813.04 plus costs against the company. Neither judgment had been satisfied at the time the director made his application to the High Court, although it appeared they were subsequently.
The respondents admitted all these facts and apologised to the court. Mrs McGowan resigned as director and her place was taken by an accountant. The company was, at the time of the trial, trading profitably.
The issue in the case was whether the behaviour of the respondents was such as to meet the requirements of the legislation to merit disqualification.
Referring to "persistent default", Ms Justice Laffoy said in the High Court judgment: "Persistent default is not merely default which has continued over a long period of time but is default which has continued in the teeth of intervention of the court more than once."
She said that while their conduct was to be deprecated, she was not satisfied that it met the criteria laid down in the legislation, that is, three court findings of default over a five-year period.
Therefore the director had not established the facts necessary for disqualification and she did not have jurisdiction to make such an order.
Ms Justice Laffoy then examined the authorities concerning the finding of unfitness necessary to justify an order based on paragraph (d) of the subsection.
Here, she said, the most reprehensible conduct was the failure to discharge their obligations to the Revenue Commissioners.
However, she concluded, "the question which arises is whether they have displayed a lack of commercial probity or, as it is sometimes put, whether they have fallen below the standards of commercial morality.
"In my view, the conduct of the respondents has come very close to that threshold, but has not quite reached it."
Therefore, on the two questions, of whether they had been in such "persistent default" as to merit disqualification and whether they were "unfit" to be directors, Ms Justice Laffoy found that they escaped such sanction, although only barely in relation to unfitness.
She then went on to consider whether she could exercise her discretion to make a disqualification order, which she declined to do.
Here she appeared to be influenced by the fact that the company was now trading profitably and that it was in the interests of its employees and of third parties that its premises not be subject of a forced sale.
The Director of Corporate Enforcement appealed against the High Court's decision, claiming that the court had misinterpreted paragraph (f) and that the respondents had been in "persistent default", also claiming that the judge should have exercised her discretion to make disqualification orders.
There was no appeal of her failure to make a finding of unfitness.
DECISION
The Supreme Court commended: "In the absence of a finding of unfitness, the learned judge had not established her jurisdiction to make a disqualification order. It was not logical for her to proceed to consider the exercise of her discretion" under this section.
It accepted that the issues raised were matters of great importance for the Director of Corporate Enforcement, relating as they did to the proper management of limited companies. It pointed out that the conduct of the respondents had been harshly criticised by the High Court judge.
"However," Mr Justice Fennelly said, "the High Court failed to make the essential finding of unfitness. Nonetheless, I do not think it would be fair or just to embark on a review of the exercise of the judge's discretion, where the director has not appealed against the failure of the High Court to make an essential finding of fact."
He continued, however, to find that the High Court had erred in the interpretation of paragraph (f). "She imported into paragraph (f) what she described as the 'three strikes' philosophy which underlies sub-section (3) . . . There is no warrant for this approach . . . What the learned judge has done is effectively to transform a faculty to rely on a deeming provision into a requirement."
Mr Justice Fennelly found that there had been "persistent default" on the part of the respondents.
"They repeatedly committed criminal offences. That amply meets the requirement of persistent failure . . . The failure to file annual returns for so many years continuously demonstrates a quite extraordinary disregard for the statutory obligations of directors."
This would ordinarily warrant the making of a disqualification order, he said, and the court had discretion to do so.
However, after considering authorities, he continued: "The principal purpose of disqualification is . . . not to punish, but to protect the public", though he added he agreed with the director that there should be an element of deterrence in the exercise of discretion.
Citing Ms Justice Laffoy's reasons for not exercising her discretion to disqualify, he said: "Laffoy J was rightly concerned with the interests of the employees of the company and of third parties . . . Taking all of these circumstances into account, I do not think a disqualification order is warranted.
"It would not, at this stage, serve a useful purpose and would probably disrupt the ongoing business of the company."
For the same reason, he declined to make a declaration under section 150 of the 1990 Act, as it would not be possible to do so and allow the respondent continue as a director of the company.
He said the matter might be different if the Supreme Court had been asked to consider the matter under the heading of unfitness, but this decision of the High Court had not been challenged.
He found that the second-named respondent, Mrs McGowan, was no longer involved in the management of the company and it would be harsh to make a declaration against her.
He dismissed the director's appeal.
The full text of this judgment is available on www.courts.ie
Michael Cush SC and Gráinne Clohessy SC, instructed by Anne Keatinge, solicitor, for the Director of Corporate Enforcement; Pat Purcell BL, instructed by Regan, McEntee and Partners, Trim, for the respondents