Declan Gray (liquidator) v John McLoughlin, Michael McLoughlin and Thomas Tuohy
Company law - Application by liquidator for declaration - Whether de facto director - Onus of proof - Criteria to be applied by court when considering whether de facto director - Whether respondents acted honestly and responsibly in relation to the conduct of the affairs of the company - Companies Act 1990, section 150 - Company Law Enforcement, Act 2001 section 56
The High Court (before Mrs. Justice Finlay Geoghegan); extempore judgment delivered July 9th, 2004.
To bring a successful application for the restriction of a director under section 150 of the Companies Act 1990, the official liquidator must first establish, on the balance of probabilities, that the respondents in question are persons to whom the section applies. The section applies not only to persons who were formally appointed as directors, but also to persons who were de facto directors of the company within the 12 months prior to the commencement of winding up. If the applicability of the section has been established the court will go on to consider whether the respondents have satisfied the court, on the balance of probabilities, that they acted honestly and responsibly in relation to the conduct of the affairs of the company.
The High Court (Mrs Justice Finlay Geoghegan) so held in dismissing the liquidator's application under section 150 of the Companies Act 1990 against all three respondents.
Gary McCarthy BL for the official liquidator; John O'Donnell SC and Frank Beatty BL for the first respondent; Mark Sanfey SC and Cian Ferriter BL for the second respondent; John Hennessy BL for the third respondent.
Mrs Justice Finlay Geoghegan commenced her judgment by outlining that this application was brought before the court by the official liquidator of the company under section 150 of the Companies Act 1990 for declarations of restriction in respect of the three respondents. Such declarations of restriction have the effect of preventing that person from being appointed or from acting in any way, whether directly or indirectly, as a director or secretary of any company or from taking part in the promotion or formation of any company, unless that company meets certain requirements, for a period of five years.
Mrs Justice Finlay Geoghegan pointed out that as regards the first two respondents, it was accepted that they were persons who were appointed as, and acted as, directors of the company until the date of the winding up. In respect of the third respondent, Mr Tuohy, a preliminary issue arose as he was not formally appointed as a director of the company, nor was he registered in the company's office as a director of the company. The official liquidator submitted that Mr Tuohy was a de facto director of the company within the 12 months prior to the commencement of winding up.
Mrs Justice Finlay Geoghegan noted that section 2(1) of the Companies Act 1990 provides that a director includes any person occupying the position of director by whatever name called. It was also clear, and was undisputed, that within that definition is included both persons who are (i) de jure directors, i.e. formally appointed, and (ii) de facto directors, i.e. persons who assume to occupy the position of a director or assume to act as a director of the company although not formally appointed as such. Mrs Justice Finlay Geoghegan further stated that, as had been accepted by the official liquidator, the onus was on him to establish that Mr Tuohy was a de facto director and that the court must decide this issue on the balance of probabilities.
Having set out that a person who is a de facto director is potentially amenable to restriction under section 150 of the 1990 Act, Mrs Justice Finlay Geoghegan went on to consider the more difficult question of how the court should determine the issue as to whether or not a person is a de facto director. In addressing this question, Mrs Justice Finlay Geoghegan noted the approach in Re Richborough Furniture Ltd (1996) 1 BCLC 507 which was followed by O'Neill J in Lynrowan Enterprises (unreported, High Court, July 31st, 2002) where he identified three circumstances in which a person may be considered to be a de facto director namely (1) where there is clear evidence that the person has been either the sole person directing the affairs of the company, or (2) is directing the affairs of the company with others equally lacking valid appointment, or (3) where there were other validly appointed directors that he was acting on an equal or more influential footing with the true directors in directing the affairs of the company. O'Neill J also followed Timothy Lloyd QC in putting limitation on those three circumstances by stating that in the absence of clear evidence of the foregoing and when there is evidence that the role of the person in question is explicable by the exercise of a role other than director, the person in question should not be made amenable to the section 150 restriction.
Noting that the above test as formulated by Timothy Lloyd QC has been subsequently the subject matter of some consideration and some criticism in the English courts, Mrs Justice Finlay Geoghegan stated that she found the decision of Jacob J in Secretary of State for Trade and Industry v Tjolle BCC 282 to be more helpful.
In this case Jacob J stated that he thought that it may be difficult to postulate any one decisive test and believed that what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (e.g. management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Jacob J. said that taking all these factors into account there would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law"
This was cited with approval in Re Kaytech International plc (1999) BCC 390 where Robert Walker LJ, stated that he did not understand Jacob J, in the first part of that passage, to be enumerating tests which must all be satisfied if de facto directorship is to be established - he was simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director. Mrs Justice Finlay Geoghegan stated that the task the court must perform is to determine what is described above as the crucial issue, namely, whether the individual in question has assumed the status and functions of a company director so as to make himself amenable to section 150 of the Act of 1990. It further appeared to Mrs Justice Finlay Geoghegan that if a person is considered to be a de facto director then he is a director within the meaning of section 2(1) of the Act of 1963 and, therefore, has inter alia the common law duties and powers of a director.
In considering whether a person has assumed the functions of a director, Mrs Justice Finlay Geoghegan stated that it was helpful to recall what the essential duties of a director at common law were, and agreed with the formulation by Jonathon Parker J in Re Barings plc and others (No. 5) Secretary of State for Trade and Industry v Baker and others BCLC 433 that "ach individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them." Therefore, Mrs Justice Finlay Geoghegan had to decide whether the liquidator had established, on the balance of probabilities, that on the facts of this case Mr Tuohy assumed the status and function of a director bearing in mind the above formulation of the duties or function of a director.
Mrs. Justice Finlay Geoghegan stated that having considered the evidence in light of the submissions made by counsel and the law to which she had referred above, she had concluded that as a matter of probability that Mr Tuohy was a de facto director of the company in the 12-month period prior to the commencement of the winding up. Mrs Justice Finlay Geoghegan then set out the reasons for reaching such a conclusion namely;
(1) both the first and second named respondents who are the two de jure directors of the company considered Mr Tuohy to have acted as a director of the company. They went further and considered that he was appointed a director of the company; (2) that Mr Tuohy accepted in his affidavit that he agreed to the description of finance director for his position; (3) the evidence was that Mr Tuohy met regularly at what might have been characterised as board meetings, though Mr Tuohy sought to characterise them as management meetings; (4) Mr Tuohy was a cheque signatory whilst not being an employee of the company (5) Mr Tuohy appeared to have had full information about the affairs of the company and in particular he himself controlled the availability of the financial information in the company; (6) it appeared from Mr Tuohy's affidavit that he accepted that he had responsibility for the financial function within the company. It was common case that he was not an employee of the company; (7) Mr Tuohy's involvement in the control and supervision of the affairs of the company went beyond the pure financial function. He appeared to have had a role in the negotiation of property matters and guaranteed the lease to the landlord. Crucially at a difficult time for the company in the summer of 2002, he attended meetings with the principal supplier and the landlord along with the second named respondent and appeared to have signed a letter to the principal supplier.
So for all those reasons Mrs Justice Finlay Geoghegan concluded that Mr Tuohy, on the facts of the case, did assume the status and function of a director and therefore was a director within the meaning of section 2(1) of the Act of 1963. Once this conclusion was reached, Mrs Justice Finlay Geoghegan had to then consider under section 150 whether or not the three respondents have satisfied the court that they acted honestly and responsibly in relation to the conduct of the affairs of the company.
Mrs Justice Finlay Geoghegan pointed out that there was no issue on the facts in relation to the honesty of the three respondents, and she was quite satisfied that they acted honestly in relation to the conduct of the affairs of the company. On the facts raised by the official liquidator there was, in relation to all three respondents, one generalised issue raised which went to the question of whether they could satisfy the court that they acted responsibly. It was asserted, and Mrs Justice Finlay Geoghegan thought it was fair to say that it was not disputed, that the company was under capitalised and traded at a loss from start to finish. The issue, according to Mrs Justice Finlay Geoghegan, was whether or not that of itself indicated that the court should find that the directors had not satisfied the court that they have acted responsibly. The question before the court as to directors' responsibility must be judged by an objective standard. Mrs Justice Finlay Geoghegan said that the commencing of a business, as was done in this instance, with a company that was undercapitalised raised an issue namely; the extent to which the director, in the conduct of the company, has displayed a lack of commercial probity or want of proper standards. It was envisageable, according to Mrs Justice Finlay Geoghegan, that for directors to set out with an under-capitalised company and to commence trading with limited liability and incur significant debts might raise questions about a lack of commercial probity or want of proper standards.
Mrs Justice Finlay Geoghegan was satisfied, however, on the facts of this case that there was no such lack of commercial probity or want of proper standards. Mrs Justice Finlay Geoghegan was also satisfied that the first two respondents were experienced businessmen and the third respondent had significant experience of financial and accounting matters. Whilst they did start trading through an under-capitalised company there was no suggestion that they were improperly attempting to avail of limited liability. Rather they appeared to have organized the financing for the company in a way in which the first two respondents using their existing business profile would be able to obtain loan finance for the company which they then personally guaranteed. Mrs Justice Finlay Geoghegan was satisfied that they genuinely anticipated and believed that whilst this would be a loss making company in its initial stages that it had the potentiality to be a successful venture. Unfortunately the illness of the first named respondent and the personal difficulties between the respondents at a critical time in the company seemed to have constituted a significant impediment to that ultimately being achieved.
Mrs Justice Finlay Geoghegan stated that it formed no part of the function of the court to decide whether or not independently of those factors, the company could have succeeded. On these conclusions, Mrs Justice Finlay Geoghegan was satisfied on the major issue raised in relation to the responsibility that the directors have satisfied the court that they had acted responsibly.
Accordingly Mrs Justice Finlay Geoghegan dismissed the liquidator's application under section 150 against all three respondents.
Solicitors: Eugene F. Collins for the Applicant; Vincent & Beatty for the first respondent; Kennedy Fitzgerald (Galway) for the second respondent; Ivor Fitzpatrick & Co. for the third respondent.
Peter Shanley, barrister