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Tralee Beef and Lamb Limited (In Liquidation) On the 1st of February 2008 Mr. Justice Hardiman delivered the long awaited Judgment of the Supreme Court in the Appeal brought by Mr. Simon Coyle – a former Director of Tralee Beef & Lamb Limited (in liquidation) – against the Order and Judgment of Ms. Justice Finlay Geoghegan of the High Court dated the 27th of July 2004. In a written Judgment which ran to some seventeen pages, the Supreme Court allowed Mr. Coyle’s Appeal and set aside the Order of the High Court. Background to the Appeal The Liquidator’s Application pursuant to Section 150 of the Companies Act, 1990 was heard before Ms. Justice Finlay Geoghegan of the High Court on the 11th day of December, 2004. Ms. Justice Finlay Geoghegan delivered her Judgment on the 20th of July 2004 and, by Order perfected on the 27th of July, 2004, the learned Trial Judge directed that Mr. Simon Coyle – along with his co-Directors – should not for a period of five years, be 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 that Company met the requirements as set out in Section 150(3) of the Companies Act, 1990. Mr. Simon Coyle appealed the Judgment and Order of the High Court and the Supreme Court Application was heard before Mr. Justice Hardiman, Ms. Justice Macken and Mr. Justice Finnegan on the 14th of November 2007.
Mr. Simon Coyle appealed the Judgment and Order of the High Court Trial Judge on the following eight grounds:- 1. That the High Court Judge erred in law in applying a standard of supervision to Mr. Coyle which did not represent the law in this jurisdiction. 2. That the High Court, when determining whether Mr. Coyle had acted honestly and responsibly in relation to the affairs of the Company, did not give any, or any adequate weight to the following: • That Mr. Coyle was a non-executive Director 3. That the Trial Judge erred in law in holding that she did not have to resolve disputed facts as between Mr. Coyle and Mr. Delaney. 4. That the Trial Judge erred in law in finding that Mr. Coyle had not acted responsibly when she purported to resolve conflicts of fact arising on Affidavits. 5. That Mr. Coyle was deprived of a fair trial in that the Judgment of the High Court proceeded upon a basis which was never put to Mr. Coyle and which was not contended for by any of the Respondents to the Application. 6. That the High Court Judge erred in law and fact in making findings of fact which were unsupported by evidence or which were contrary to the evidence. 7. That the High Court Judge erred in law and fact in failing to have regard to the fact that Mr. Coyle had complied with all of the obligations imposed upon him by the Companies Acts 1963 to 1990. 8. That the Trial Judge erred in law in applying common law duties owed by a Director to the Company when assessing the standards imposed upon a Director in the context of a Section 150 Application.
The Official Liquidator appointed to Tralee Beef & Lamb Limited (in liquidation) – Mr. Tom Kavanagh – initially applied to the Office of the Director of Corporate Enforcement (ODCE) to be relieved of the obligation imposed upon him by statute to bring an Application pursuant to Section 150 of the Companies Act 1990 against Mr. Coyle. Mr. Kavanagh stated in his Section 56 Report that he had formed the view that Mr. Coyle had acted honestly and responsibly in relation to the affairs of the Company and the basis for this view was set out in detail. Notwithstanding the Official Liquidator’s Application for relief, the ODCE directed that Mr. Kavanagh bring the Section 150 Application as against all of the Directors of the Company – including Mr. Coyle. In his Affidavit grounding the Section 150 Application, the Official Liquidator stated as follows: “As regards Mr. Coyle, I say that I expressed the opinion in the Section 56 Report to the Director of Corporate Enforcement that Mr. Coyle had demonstrated to me that he had acted honestly and responsibly in relation to the affairs of the Company and I requested the Director to relieve me from the requirement to apply for a Restriction Order in respect of Mr. Coyle…..The Director did not exceed to this request.” The Official Liquidator maintained his position throughout the course of the High Court Application and, in Submissions filed on behalf of the Official Liquidator in the Supreme Court Appeal, it was noted that; “…having taken advice, the Liquidator is of the view that he should not contest the substantive issue in the Appeal but will instruct Counsel to attend and assist the Court in any way possible. It is submitted that firstly, having already expressed the view to the ODCE that the Appellant acted honestly and responsibly, it would not have been appropriate to argue from a different perspective, either to the Trial Judge or to this Honourable Court. Secondly, it is submitted that in any Application pursuant to Section 150 of the Act, the role of the Liquidator is to put the relevant factual matters before the Court. The Liquidator duly discharged his obligation in this regard. It is for the Court to decide therefore if the Directors have discharged the onus of proof under the Section and to make determinations in relation to the effect of Affidavit evidence. It is further submitted that it is appropriate for the Liquidator to consider the potential cost to the Company of fully contesting an Appeal….. these costs if awarded would fall to be paid in priority to other creditors of the Company”.
• The Role of the Office of the Director of Corporate Enforcement Before it addressed the grounds of Appeal proffered by Mr. Coyle, the Supreme Court focussed on the role of the Director of Corporate Enforcement in Section 150 Applications. Pursuant to Section 56 of the Company Law Enforcement, 2001, a Liquidator must report to the ODCE within six months of the date of his appointment. In his Section 56 Report a Liquidator is obliged to detail whether, in his view, a Director has acted honestly and responsibly in relation to the affairs of the Company. The Liquidator is also obliged to confirm whether he is seeking relief from the ODCE of the obligation imposed upon him by the Companies Acts to bring a Restriction Application against the Directors of the Company. Section 56(2) of the Company Law Enforcement Act, 2001 states that a Liquidator of an insolvent Company shall, not earlier than three months nor later than five months after the date on which he or she has provided to the Director a Report under subsection (1), apply to the Court for the restriction under Section 150 of the Act of 1990 of each of the Directors of the Company, unless the Director has relieved the Liquidator of the obligation to make such an Application. Section 56(3) states that a Liquidator who fails to comply with subsection (1) or (2) is guilty of an offence. In the present case, the Official Liquidator sought to be relieved of his obligation to bring a Section 150 Application as against Mr. Coyle. This request for relief was declined and, as has become common practice, no reasons were given by the ODCE for its decision in this matter. Despite having formed the view that Mr. Coyle had acted honestly and responsibly in relation to the affairs of the Company, the Official Liquidator was nonetheless forced to bring an Application pursuant to Section 150 as against Mr. Coyle. In the Supreme Court Judgment, Mr. Justice Hardiman commented as follows: “It is not clear to me on what basis he (the Director of Corporate Enforcement) could disagree with the Official Liquidator’s professional judgment. His silence, and refusal to grant the Official Liquidator’s request, seems to me just as consistent with a rigid policy decision that he will take no position in a case like the present and unload the entire responsibility onto the Courts with… no legitimus contradictor of what Mr. Coyle says.” Mr. Justice Hardiman went on to describe the current statutory regime relating to the restriction of Directors as being “draconian” and questioned whether same was consistent with “fundamental fairness and constitutional justice”. Mr. Justice Hardiman noted that the statutory provisions as contained in Section 56 of the Company Law Enforcement Act, 2001 make it mandatory for a Liquidator to bring an Application pursuant to Section 150 and further noted that failure to do so would result in the Liquidator facing criminal sanction. In this regard Mr. Justice Hardiman noted “…the Liquidator of an insolvent Company has been compelled to expend the Company’s money, which might otherwise go towards the creditors, in bringing an Application in which he himself has no belief; and the factual basis for which does not in his view exist.” Mr. Justice Hardiman also noted that by reason of the provisions contained in Section 150(2) (a) of the 1990 Act, the Court must make a Restriction Order against a Director unless the Court is satisfied that the Director has acted honestly and responsibly in relation to the affairs of the Company and also that it is satisfied that “there is no other reason why it would be just and equitable” to make the Restriction Order. Mr. Justice Hardiman focussed on this last element and noted that a Respondent must not only prove that he has acted honestly and responsibly but he must also prove the negative position i.e. that there is no other reason why it would be just and equitable for him to face a Restriction Order. Mr. Justice Hardiman expressed concern at what he described as a “blanket reversal of the onus of proof” and noted that the law in this jurisdiction is in stark contrast to the procedure adopted in the UK for the disqualification of Directors. In the United Kingdom, the State is obliged to set out in full detail the reasons why a Director ought to be subject to a disqualification / restriction order and thereafter the onus is upon the Director to defend his position within the clearly defined boundaries of the case put forward by the State. In this jurisdiction it is not for the Liquidator to prove that the circumstances warrant a Section 150 restriction but rather it is for the Directors to prove that they should not be so restricted and this they must do effectively in the dark. • The Appropriate Test to be Applied In deciding the question as to whether a Director has acted honestly and responsibly in relation to the conduct of the affairs of the Company, the Courts have historically looked to the Judgment of Shanley J. in La Mosselle Clothing – which was subsequently approved by McGuiness J. in the Supreme Court decision of in re: Squash (Ireland) Limited. The criteria laid down by Shanley J. became the established standard of proof in all Section 150 Applications. Notwithstanding the established principles however the learned Trial Judge decided that the criteria as laid down by Shanley J. in La Mosselle Clothing required “amplification” and in her High Court “I would respectfully suggest that the above matters need the following amplification when being considered in relation to the Respondents herein. Shanley J. at paragraph (a) refers only to the obligations imposed on a Director by the Companies Acts. At common law, directors owe duties to the Company which are normally divided into duties of loyalty based on fiduciary principles, developed initially by the Courts of Equity, and duties of skill and care developed initially by the Common Law Courts from the principles in the law of negligence. There is no suggestion in the above decision that the Courts should ignore those duties. Accordingly, it appears to me that when considering the matters referred to by Shanley J. in La Mosselle Clothing Limited, under paragraph (a) a Court should have regard not only to the extent to which a Director has or has not complied with any obligation imposed on him / her by the Companies Acts but also with duties imposed by common law.” In the Supreme Court, Counsel for Mr Coyle argued that the Trial Judge had proceeded upon a basis which was never contended for by Mr. Coyle, nor any of the other Respondents to the Application and that this had deprived Mr. Coyle of the opportunity to comment upon and to adduce evidence to satisfy the amplified criteria. In the Supreme Court Judgment, Mr Justice Hardiman - whilst noting that he was in agreement with the proposition of law enunciated by the Trial Judge – held that Mr. Coyle had legitimate grounds of complaint as the proposed amplification of the La Mosselle test was not discussed nor debated at the High Court hearing. Mr. Justice Hardiman went on to state that “having regard to the need to respect Mr. Coyle’s constitutional rights, not only to fair procedures but also to his good name and the associated right to earn a living by the practice of his profession, I do not consider that it was appropriate to “amplify” the criteria for restricting a director after the hearing”. Mr. Justice Hardiman further noted that “…as I have said, I do not disagree with the content of the learned Trial Judge’s “amplification”. But in a hearing of great importance to the appellant, where his reputation and his professional standing are intimately involved, I do not think it right to alter amplification or otherwise the criteria for imposing on him what I am satisfied is a very significant stigma. This point weighs with me all the more strongly because the appellant has been expressly found to have been honest in his dealings, and I have no doubt that he was. I do not think that any amplification of the law, however desirable on general or policy grounds, should take place in the context of inflicting a grave stigma on such a person, or without detailed argument as to the content and wording of the amplification”. It is important to note that Mr. Justice Hardiman did not seek to overturn the proposed amplification of the La Mosselle test but rather held that the test should not have been amplified by the Trial Judge post hearing and without detailed argument as to the content and wording of the amplification. The question remains therefore as to whether Directors facing restriction Applications in the future will need to defend the action based not only upon the La Mosselle criteria but also upon the amplified test as proposed by Ms. Justice Finlay Geoghegan. It would appear from the Supreme Court Judgment that Mr. Justice Hardiman is also suggesting that there be an open debate as to the extent of such amplification prior to its imposition upon Respondent Directors of insolvent companies. • Executive –v- Non-Executive Directors For the last number of years, the High Court Judgment in this matter has been relied upon by both practitioners and the Courts as an authority as to the responsibilities of Non-Executive Directors. Mr. Justice Hardiman in his Supreme Court Judgment noted however that the debate as to the respective duties of Executive and Non-Executive Directors remain ongoing and that no “authoritative findings” have been made on the subject to date. Mr. Justice Hardiman noted that he would welcome such a debate and noted that same should focus, in particular, upon the obligations and responsibilities of Directors who are appointed to Company Boards for specific and defined purposes. Mr. Justice Shanley noted that without such argument or debate, he would not be prepared to accept that the same standard of common law duty should apply to each class of Director. In this regard Mr. Justice Hardiman stated that he did not “consider that this case or that of Vehicle Imports mandates the assimilation of the position of a non-executive director to that of an executive in terms of common law duties”. • Factual Disputes on Affidavit The Application brought by the Liquidator in the High Court was based entirely upon Affidavit evidence and there was no cross-examination of any of the Respondent Directors. There was however considerable conflict on Affidavit as between the Respondent Directors. Mr. Justice Hardiman noted, with concern, that “Mr. Delaney’s evidence was in effect treated as part of the case against Mr. Coyle, and possibly vice versa”. Mr. Justice Hardiman held that it was not appropriate for the Court to consider what a particular Respondent to a Liquidator’s Motion had said in his own defence as part of the case against another Director. Mr. Justice Hardiman expressed concern that the Trial Judge “may have had regard to Mr. Delaney’s Affidavit even where it was unsupported by the Liquidator, to that extent putting Mr. Delaney into the Liquidator’s position and treating him as the legitimus contradictor of Mr. Coyle”. Mr. Justice Hardiman noted that he was disturbed by the possibility of the Court relying upon evidence proffered by a Respondent – who was effectively defending his own position – and in using this as evidence against a Co-Respondent. This raises issues as to how Section 150 Applications ought to be determined in the future where there are multiple Respondents who have not adopted a common position – should there be separate hearings or must an application be made to the trial judge to determine the relevant and appropriate evidence?
The Judgment of the Supreme Court raises a number of issues in the context of future Section 150 Applications: 1. In circumstances where a Liquidator, in his Section 56 Report, requests to be relieved by the Director of Corporate Enforcement from the obligation to bring a Section 150 Application as against a Respondent Director, the Supreme Court would appear to be urging the ODCE – if it is to refuse to accede to the Liquidator’s request – to provide reasons for his decision. 2. The Supreme Court Judgment also appears to be inviting a constitutional challenge to the provisions of Section 150 of the Companies Act, 1990 and to Section 56 of the Company Law Enforcement Act, 2001. 3. With regard to the Trial Judge’s amplification of the criteria set forth in La Mosselle and Squash Ireland, while the Supreme Court upheld Mr Coyle’s complaint, it did so not on the basis that it disagreed with Ms. Justice Finlay Geoghegan but rather on the basis that the criteria were amplified by the Trial Judge post hearing and Mr. Coyle had not been given an opportunity during the course of the High Court hearing to be heard in relation to same. The Supreme Court has welcomed an open debate on the proposed wording of any such amplification and it remains to be seen therefore whether the proposed amplification of the La Mosselle / Squash Ireland criteria will be incorporated into the jurisprudence in this area. 4. The respective obligations and responsibilities to be imposed upon Non-Executive and Executive Directors remain unresolved. In its Judgment, the Supreme Court appears to reject the proposition that the same standard should be applied to Executive and Non-Executive Directors and has further suggested that an individual appointed to a Company Board for a specific and defined purpose should not be subject to the same criteria and obligations as an Executive board member who is responsible for the day-to-day running of the Company. 5. The Supreme Court has also suggested that Courts, when deciding whether or not a particular Director should be the subject of a Section 150 Restriction, should steer clear from relying upon evidence contained in the Affidavits of Co-Directors.
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