In the matter of Xnet Information Systems Ltd (Involuntary Liquidation) and in the matter of section 152 of the Companies Act 1990 between Aidan Higgins (applicant) v James Stafford (respondent) and The Director of Corporate Enforcement (notice party)
Company Law - Application for relief from restriction on directors of insolvent companies - Whether applicant entitled to relief - Matters to be considered by the court - Companies Act 1990 (No. 33 of 1990) ss.150, 150(1), 150(3), 152.
The High Court (Mr Justice O'Neill); judgment delivered on October 10th, 2006.
A declaration of restriction can only have one legitimate purpose and that is to protect the public from the dishonesty and/or the responsibility of persons who in the discharge of their duties as directors of companies have acted dishonestly or irresponsibly. In considering an application to lift the restriction, the court must have regard to the reasons which led to the restriction in the first place. A court asked to lift the restriction either wholly or partially must be satisfied that the risk to third parties, be they creditors, other directors or shareholders of another company, being damaged, by either the dishonesty or irresponsibility of the applicant in the future is of such a low order as to leave the court satisfied that the restriction can be, safely, either, wholly or partially lifted. The court should also have regard to the "need" or "interest" that an applicant has for having the restriction removed.
The High Court so held in granting relief and imposing conditions.
Jim O'Callaghan, BL, for the applicant; Oisín Quinn, BL, for the respondent; Declan Murphy, BL, for the notice party.
Mr Justice O'Neill commenced his judgment by outlining the relief sought by the applicant namely: an order pursuant to s.152 of the 1990 Act, granting the applicant relief from the declaration of restriction pursuant to s.150 of the 1990 Act, made by Mrs. Justice Finlay Geoghegan on May 24th, 2004.
Mr Justice O'Neill detailed the background to the case. The company was incorporated in 1995, its two shareholders being the applicant and one Kevin Moore. Until 2000 they were also its directors. The company engaged in the business of computer data storage and carried on this business out of a Victorian house at Haigh Terrace in Dún Laoghaire. The business of the company thrived and had won awards for its achievements. Apart from the foregoing, it had at that time cash reserves in excess of €600,000, enough to cover three months operating costs. The company had one very pressing difficulty and that was that its premises were inadequate to accommodate the business. To remedy this problem, a decision was taken to move to more suitable premises in Co Wicklow and there was consensus amongst the directors, who at that stage had grown to four, that the premises would be bought by the applicant and Mr Moore who would then lease the premises to the company at an appropriate rent. That methodology was perceived as the way to get the company into the new premises, but with the minimum disbursement of cash so as not to interfere with its cash flow situation.
Mr Justice O'Neill stated that this might have been the way matters would have unfolded were it not for the events that led to the resolution to wind up the company on July 19th, 2002, and, in particular, the events that persuaded the court (Finlay Geoghegan J.) to declare, pursuant to s. 150(1) of the 1990 Act, that the applicant be not, for a period of five years from the date of the order, 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 met the requirements set out in s. 150(3) of the Act.
Mr Justice O'Neill referred to the judgment of Finlay Geoghegan J. delivered on May 6th, 2004. Mrs Justice Finlay Geoghegan found that "A lease was entered into with the company, which did not appear to have been approved by the board of directors though the third and fourth named respondents were aware of the proposed initial rent."
Furthermore, Mrs Justice Finlay Geoghegan found that "the third and fourth named respondents did not become aware of the financing arrangements for the purchase of the premises and for the fit-out of the premises until a board meeting of July 18th, 2001. In particular, they were not aware of any loan obtained by the company in connection with the purchase nor any loan made by the company to the first and second named respondents." Mrs Justice Finlay Geoghegan stated that "in August, 2001, when the company was in very difficult financial circumstances, it appeared that the first and second named respondents, without seeking the approval of the board of directors of the company, procured the increase of the rent payable to them by the company. That did not appear to have been approved by the board of directors or to have been brought prior to its execution to the attention of the third and fourth named respondents." Mrs Justice Finlay Geoghegan noted that "the first and second named respondents were unable to repay the loans to the company. Cost-cutting exercises took place in the autumn of 2001. In January, 2002, definitive advice was received that the loans made to the first and second named respondents were illegal. It was resolved that the company be wound up on July 19th, 2002." Mrs Justice Finlay Geoghegan concluded that she "cannot be satisfied that they have at all times acted responsibly in relation to the conduct of the affairs of this company. Accordingly, under the terms of s.150 of the Act of 1990 I am bound to make the Declaration of Restriction in respect of each of the first and second named respondents."
Mr Justice O'Neill having noted the findings set out above then turned to the submissions of each of the parties. The applicant (who was the first named applicant in the earlier proceedings) now sought relief from the restriction pursuant to s.152 of the 1990 Act. Counsel for the applicant submitted that the factors which the court should have regard to in assessing whether there were just and equitable grounds for relief were: the importance of the applicant's constitutional right to earn a livelihood; the absence of any finding of dishonesty regarding the applicant's conduct as a director; the applicant's conduct since the commencement of the winding up; hardship; s.150's role in protecting the public and investors; and the effect, if any, on the deterrent value of the s. 150 restriction.
In regard to the applicant's constitutional right to earn his livelihood it was submitted that the courts must vindicate that right and whilst it is not an absolute right any statutory provision which curtailed the right should be closely examined by the courts to ensure that the restriction or curtailment was not, having regard to the legitimate objective of the statutory restriction, either arbitrary or excessive. It was submitted that the applicant's conduct since the winding up, in that notwithstanding his own impecuniosity, he entered into an agreement with the liquidator to repay certain sums and that the discharge by the applicant of these sums should be a weighty factor in persuading the court to lift the restriction. In this regard attention was drawn to the fact that because of these payments the liquidator, ie the respondent, was not opposing the relief sought on this application. In regard to the deterrent value of the s.150 restriction, it was submitted that where there was no dishonesty or bad motive found, that the element of deterrence involved in these restrictions in order to protect the public, ie the creditors and others who would have dealings with the director in question, is much less engaged.
Mr Justice O'Neill stated that in essence the applicant's case for relief was that he was an entrepreneur with an expertise in the computer industry; that he had developed ideas which have commercial potential but that he could not exploit these without forming and being a director of a company. Furthermore that the raising of the €63,000 in order to gain the benefit of the exemption from restriction under s. 150(3) was beyond his capacity to raise money having regard to his circumstances, and that in exploiting the commercial benefit of his ideas if he continued under restriction he would be placed at a gross disadvantage vis-à-vis investors who may be interested in joining him in a commercial enterprise. Mr Justice O'Neill noted that the respondent did not oppose the application.
Mr Justice O'Neill stated the notice party submitted that any court dealing with an application for relief from restriction must be satisfied firstly that the public is adequately protected in respect of the concerns giving rise to the original disqualification or restriction, and secondly that the deterrent value of restriction in general is not thereby undermined. As the Oireachtas had stipulated a mandatory restriction of five years for the purpose of protecting the public it was submitted the court should be slow to grant relief unless the interest of justice so requires and the purposes of s.150 as to the protection of the public and the general deterrence with encouragement for appropriate standards would not thereby be undermined. It was further submitted that the court should have regard to the need of the applicant for the relief or his interest in gaining such relief, but greater weight should be attached to third party interests. The capitalisation requirement stipulated in s.150(3), ie €63,000, was in the vast majority of cases less than the amount of working capital required to start up a company and the capitalisation requirement of s.150(3) requiring as it did an "equity cushion" was a valuable protection of creditors. The court should very carefully evaluate and be very satisfied as to the reasons put forward by an applicant as to why the requirement to put up this capital is unduly onerous for him. As s.152(1) authorises the court, if granting relief from restriction, to do so "on whatever terms and conditions it sees fit", the notice party detailed specific conditions to the court which it deemed necessary.
Mr Justice O'Neill stated that one must have regard firstly to what is the fundamental purpose of the restriction declaration provided for in s.150. It can only have one legitimate purpose and that is to protect the public from the dishonesty and/or the responsibility of persons who in the discharge of their duties as directors of companies have acted dishonestly or irresponsibly. Mr Justice O'Neill stated that in his view when one takes into account the relatively low capitalisation threshold provided for in s.150(3) and the above mentioned time provision, it would seem that it was intended that the Oireachtas was intent on the relatively speedy rehabilitation of directors in respect of whom declarations of restriction were made. Mr Justice O'Neill said that the low capitalisation threshold in s.150(3) cannot be applied in such a way as to work an invidious discrimination against impecunious persons.
In applying these provisions so as to ensure the protection of the public, Mr Justice O'Neill stated that the first matter in his view which the court must have regard to are the reasons which led to the restriction in the first place. A court asked to lift the restriction either wholly or partially under s.152 must be satisfied that the risk to third parties, be they creditors, other directors or shareholders of another company, being damaged, by either the dishonesty or irresponsibility of the applicant in the future is of such a low order as to leave the court satisfied that the restriction can be, safely, either, wholly or partially lifted. Next, the court should have regard to the "need" or "interest" that an applicant has for having the restriction removed. Mr Justice O'Neill was of the view that in this regard there could not be any particular prescriptive test. That is for two reasons. Firstly, there is the very broad discretion given in s.152(1) which ought not to be cut down by judicial interpretation. Secondly, one has to have regard to the fact that a restricted director with ample funds is not in any way subject to any such requirement, to demonstrate a need for or interest in the removal of the restriction. An applicant must demonstrate some "need" or "interest" which requires the removal of the restriction in whole or in part.
It was clear that an applicant must satisfy the court that the capitalisation threshold in s.150(3) is having regard to his impecuniosity an insurmountable obstacle to him. Where a court is satisfied, having considered the reasons for the restriction, that the risk to the public is still there, but is low or with conditions would be low, in Mr Justice O'Neill's view the appropriate course to follow was to reduce the capitalisation threshold to a level which is attainable to the applicant in question. Mr Justice O'Neill said that the court must also have regard to a number of other factors. These are the deterrent effect of the restriction. The courts must also have regard to the conduct of the applicant since the winding up. The court should also have regard to the hardship suffered by an applicant.
In the light of the above Mr Justice O'Neill then considered of the facts as revealed in the evidence in the case. The factors laid out in the judgment of Finlay Geoghegan J. which led to the Declaration of Restriction were serious matters. They were clearly not at the worst end of the scale of turpitude, but also, they were not at the other end either. The applicant's conduct since winding up showed that he had entered into an agreement with the respondent to repay monies due by him to the company and he had honoured that agreement in spite of his very straightened financial circumstances. Mr Justice O'Neill stated that in light of the foregoing in his opinion the risk to the public of a repeat of irresponsible behaviour by the applicant in the discharge of his duties as a director of a company was very low. Mr Justice O'Neill considered that the deterrent effect of a s.150 restriction in general would be not be undermined by the removal in whole or in part of the restriction on the applicant. Mr Justice O'Neill reduced the capitalisation threshold to €7,500 so that in that way the applicant would be enabled to engage in trade in the computer sector as he planned to do, whilst at the same time all other aspects of the declaration of restriction will remain in place until their statutory expiration. In addition, Mr Justice O'Neill imposed the conditions that the applicant notify the notice party of the name of any company of which he becomes a director or secretary or in which he takes up any position which is the subject matter of the declaration of restriction.
Finally, Mr Justice O'Neill directed that particulars of the relief granted, be furnished to the Registrar and entered by him on the register pursuant to s.153(2).
Solicitors: Connor Cahill, Sheehan & Co (Dublin) (for the applicant); WhitneyMoore (Dublin) (for the respondent); Principal solicitor for the Office of the Director of Corporate Enforcement (for the notice party)
Kieran O'Callaghan, barrister