A recent Supreme Court decision reviewed the law on directors' duties.(1) The case concerned restriction orders against directors of an insolvent company in liquidation, which apply unless it is shown that the person acted honestly and responsibly in relation to the conduct of the company's affairs and that there is no other reason why it would be just and equitable that he or she be restricted.
The main restriction is that the person does not, for a period of five years, act as a director of a company unless it has a minimum paid-up capital of at least €317,432.52 in the case of a public limited company and €63,486.90 in the case of any other type of company.
However, as Mr Justice Murphy has commented: "It would seem that the more serious penalty which the restraining order imposes is the stigma which attaches as a result of the making of the order and its filing in the Companies Office."(2)
The decision reviewed the authorities and made interesting comments concerning directors of Irish subsidiary companies.
As Ms Justice Finlay Geoghegan commented:
"The fact that the company is a wholly owned subsidiary within a worldwide group does not appear to alter the legal principles applicable to the duties of directors, but rather to create a particular factual scenario which must be taken into account when considering the discharge of those duties… It would appear totally permissible and indeed a proper exercise of the duties of directors in the interests of the [Irish] company for the directors to fully take into account and indeed even to follow the policies adopted for the entire group when managing the business of the Irish company… Whether a director of the wholly owned Irish subsidiary company acted responsibly in the sense of discharging the minimum common law duties, he must be able to establish at a minimum that he did inform himself about the affairs of the Irish subsidiary company, as distinct from any other company within the group, and together with his fellow directors that he did take real steps to consider and take decisions upon at least significant transactions to be entered into or projects undertaken by the Irish subsidiary company. There must be evidence of a real consideration by the directors of whether significant transactions or operations to be undertaken were desirable in the interest of the Irish subsidiary company or could be said to be for the benefit of the Irish subsidiary company."(3)
The court quoted from the decision of the English Judge Romer:
"In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that the distribution is a reasonable one in the circumstances."(4)
The court emphasised the need to have regard to the general words of the statute.(5) Mr Justice Fennelly stated:
"There will usually be a real difference between the duties of executive and non-executive directors. The latter will usually be dependent on the former for information about the affairs [of and] the finances of the company, a fact which will impose correspondingly larger duties on the former. Tralee Beef and Lamb(6) was a notable example of a non-executive director with little role or influence in the company. As, in the present case, the inter-relationships of companies in a group may affect the extent of a director's responsibilities… In order to discharge his duties, he must, in the first instance, inform himself about the business and affairs of the company and about his own duties as a director. Circumstances will inform the nature and extent of these duties. Even non-executive directors of companies must be increasingly conscious in the times we live in that they cannot be mere ciphers or purveyors of votes at the whim of management."
For further information on this topic please contact Frank O'Reilly at WhitneyMoore by telephone (+353 1 611 0000), fax (+353 1 611 0090) or email ([email protected]).
Endnotes
(1) Mitek Holdings Ltd & The Companies Acts, Mr Justice Fennelly, 2010 IESC 31.
(2) Business Comminications Limited v Baxter and Parsons IEHC July 21 1995.
(3) 360 Atlantic (Ireland) Limited (In Receivership and Liquidation), 2004 IEHC 410.
(4) City Equitable Fire Insurance Ltd, 1925 CH 407.
(5) Section 150 of the Companies Act 1990, and see Section 56 of the Company Law Enforcement Act 2001 which requires a liquidator to apply to court for a restriction order unless the Director of Corporate Enforcement has relieved him of such obligation in a particular case. See also Section 160 of the Companies Act 1990 which deals with disqualification of directors commonly in cases of fraud and Section 297A of the Companies Act 1963 which deals with civil liability for fraudulent or reckless trading.
(6) Tralee Beef and Lamb Limited (In Liquidation) 2008 3 IR 347.
