Matthew Austin: ‘Passive directors’ will not escape restriction
Matthew Austin, partner at Hayes solicitors, examines a court ruling clarifying directors’ duties under the law.
In the recent case of Fennell v Appelbe, both the High Court and the Court of Appeal confirmed the restriction of a director of an insolvent company for a period of five years. The courts found that he had failed to demonstrate that he had acted honestly and responsibly throughout his time as director.
Section 819 of the Companies Act 2014 provides that, on the application of a liquidator, the court shall order that a person, who was a director of an insolvent company, be restricted for a period of five years. The extent of the restriction means they cannot be appointed or act in any way, directly or indirectly, as a director or secretary of a company, or be concerned in the formation or promotion of a company.
Under section 819(2), the court must make a restriction order unless it is satisfied of the following:
- the director has acted honestly and responsibly in relation to the conduct of the affairs of the company in question, whether before or after it became an insolvent company;
- the director has, when requested to do so by the liquidator of the insolvent company, cooperated as far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company; and
- there is no other reason why it would be just and equitable that the director should be restricted.
Facts of the case
This case concerned Alvonway Investments Limited, which was in liquidation. In 2011, NAMA acquired a number of loan facilities. NAMA proceeded to issue letters of demand for payment of nearly €420,000,000, and a statutory receiver was appointed in 2013. In 2014, NAMA presented a petition to wind up the company and Mr Fennell was appointed by the High Court as liquidator.
The company had three directors at the time, namely Mr O’Donovan, Mr O’Brien and Mr Appelbe. The Office of the Director of Corporate Enforcement informed the liquidator that he had not been relieved of his duty to make a restriction application in respect of the three directors for their alleged failings with regards to the company.
The principal ground for the application was the making of two payments by the company the day before NAMA appointed a statutory receiver, which amounted to an unfair preference under section 604 of the Companies Act 2014. One of these payments was made to Mr O’Donovan, against whom the liquidator sought a disqualification order.
The liquidator acknowledged that Mr Appelbe was not aware of, nor had he benefited from, the payment, but sought to restrict him as the payments had been made while the company was “grossly insolvent”. The liquidator argued that this was not consistent with the honest and responsible behaviour expected of a director.
High Court proceedings
The heart of Mr Appelbe’s argument in the High Court was that he had “little knowledge” of the company’s management prior to the appointment of the statutory receiver. Mr Appelbe also argued that NAMA deprived him of information on the company’s affairs. The High Court rejected this.
According to the High Court, Mr Appelbe’s contention that he had little knowledge of the company’s affairs revealed his fundamental misunderstanding of the serious nature of the duties of directors. The onus on directors under section 819 is to provide evidence of acting responsibly and is not an onus to demonstrate that he was unaware of the offending transactions.
The High Court restricted Mr Appelbe for a period of five years.
Court of Appeal proceedings
In his appeal, Mr Appelbe stated that the High Court erred in making the order against him because the liquidator failed to put forward a case for him to answer. The Court of Appeal dismissed this and said Mr Appelbe misunderstood section 819. It is not a question of whether the liquidator made out a case for Mr Appelbe to answer; rather once a restriction application is made in the context of insolvency, the burden shifts to the director to adduce evidence of his or her honesty and responsibility.
In addition, Mr Appelbe contended that he could not be considered to have been irresponsible because he had never been “called upon” to engage in the affairs of the company. Essentially, Mr Appelbe attempted to equate his status as a passive director to a defence to a restriction application. The Court of Appeal disagreed and found that this could not absolve him of his duties as a director.
The court expressed disbelief that Mr Appelbe had “little knowledge” of the company’s affairs given the extent of the deficit. In fact, the court found that Mr Appelbe’s claim that he had “no worthwhile information in relation to the affairs of the company”, coupled with the fact that he had been a director of the company since its inception in 2005, demonstrated a degree of irresponsibility that served to “copper fasten” the High Court order of restriction.
Mr Appelbe’s directorship of 11 other companies and his professional qualification as a solicitor served only to cause the court to remain steadfast in its decision to restrict him.
The court found that Mr Appelbe failed to provide any evidence that would rebut the statutory presumption in favour of restricting a director of an insolvent company under section 819, and accordingly, could not find in his favour.
It is noteworthy that the court refused to restrict Mr Appelbe’s co-respondent in the High Court, Mr O’Brien, who provided “extensive affidavit evidence” demonstrating his knowledge and engagement with company affairs. This contrast highlights the core of section 819: there is a heavy onus on a director to provide evidence to demonstrate their honesty and responsibility if they are to avoid restriction.
Not only does this case reinforce the true meaning of section 819, it also serves as a reminder of the active, ongoing nature of directors’ duties.