Court orders director subject to activity restrictions under Companies Act 1990 s.150 for failing to wind up insolvent company.

Neutral Citation No. [2005] IEHC 62

THE HIGH COURT

[2000 No. 109 COS]

IN THE MATTER OF CARECA INVESTMENTS LIMITED (IN LIQUIDATION)

AND IN THE MATTER OF THE COMPANIES ACTS 1963 TO 2001

AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990

BETWEEN

MARTIN V. FERRIS (OFFICIAL LIQUIDATOR OF CARECA INVESTMENTS LIMITED)

APPLICANT

AND

PETER FARRELL AND LEO COADY

RESPONDENTS

Judgment of Mr. Justice Clarke delivered 4th March, 2005.

1. In these proceedings the applicant as liquidator of Careca Investments Limited seeks a declaration that both respondents should be

subjected to the orders specified in s. 150 of the Companies Act 1990 (as amended) restricting their activities in relation to

companies for a period of 5 years. The first named respondent has not contested the application. In his case the only matter

outstanding is the question of costs which has been left over to the conclusion of the issues as against the second named

respondent (“Mr. Coady”). This judgment, therefore, relates solely to the case as against Mr. Coady.

2. It is not in dispute that the company the subject matter of these proceedings (Careca Investments Limited “Careca”) was in

substance a single purpose company. The company purchased land in Donabate in or around May 1992. It was sold in June 1995 at

what, on any view, was a substantial profit. This was the only significant transaction of the company while it traded. The petition to

wind up the company was presented by the Collector General on foot of a capital gains tax liability which, when interest was included,

amounted to IR£277,681.25. The company had not traded for approximately four years prior to the date of liquidation.

3. It is not contested but that Mr. Coady was a director up to and including the date of liquidation or that the company is unable pay

its debts. In those circumstances s. 150 prima facie applies. The only issue which I have to consider is as to whether, in Mr. Coady’s

case, he is entitled to rely on s. 150(2) by establishing that he has acted honestly and responsibly in relation to the conduct of the

affairs of the company.

4. For reasons which will become apparent in the course of this judgment there can be little doubt but that the affairs of the

company were not conducted in a responsible manner. However the real issue between the parties is as to Mr. Coady’s responsibility

for such a state of affairs.

The running of the company

5. On the basis of the evidence put forward on behalf of the liquidator it seems clear that there were, to all intents and purposes,

little or no books or records kept by the company so as to comply with its obligations under the Companies Acts. In the course of the

liquidation a number of persons, including, Mr. Coady, Mr. Farrell, and the company’s solicitor Mr. O’Sullivan, were examined under s.

245 of the Companies Act 1963. The transcripts of the evidence as so given were before me on this application. In respect of the

complete lack of records of the company the explanation given by Mr. Coady at that time was that by virtue of the fact that the

company was a single purpose company no records were necessary. In the course of affidavits filed by him during this application he

suggested that he had no real responsibility for the lack of records because, by virtue of what he described as his exclusion from the

affairs of the company, he had no ability to ensure that proper records were kept. Indeed this latter point characterises the

substance of Mr. Coady’s defence to these proceedings.

6. He does not dispute, therefore, the following matters:-

(a) the company had wholly inadequate books and records;

(b) there is no adequate information available to establish that the proceeds of sale of the property by the company were

dispersed in a proper fashion.

7. In relation to the latter matter it should be noted that there remains considerable confusion as to the precise manner in which the

company dealt with its financial affairs. It would appear that upon purchasing the property for a sum of IR£170,000, a sum of

IR£277,000 was borrowed from the First National Building Society (“FNBS”) secured against the lands. Mr. Coady’s explanation is that

the additional funding was required to put in place sufficient funds to progress the potential development of the lands in question. He

does accept, however, that it would appear that the relevant staff members of the building society concerned were led to believe

that the borrowings were entirely in respect of the consideration moneys. He also suggested that the surplus was used although not

by him, in an improper manner. Precisely because there are wholly inadequate books and records of the company it is very difficult for

the liquidator to ascertain with any precision what happened the additional moneys above and beyond those required to complete the

purchase and, of equal if not greater relevance, the purpose for which such moneys were transferred in the way in which they were.

8. It should, therefore, be noted that this confusion would not be there if the company had prepared even tentative accounts during

the period between 1992 and 1995 while it held the lands. Such accounts would have disclosed the purchase price of the lands, the

basis for any disbursements out of the additional borrowing and would have enabled any person looking at those accounts to know

the financial position of the company when it came to sell the property and thus to predict with some considerable degree of

accuracy the amount of net funds which would be left over after the sale. Such accounts would also have disclosed the extent to

which the company had incurred any additional liabilities in the intervening period whether by virtue of loans from directors or

undischarged liabilities to creditors. No such accounts were prepared.

9. It would appear that the borrowings from the FNBS were not serviced so that as of the time of the sale of the property a sum of

IR£401,518.43 was required to be discharged to clear that debt. Together with other minor adjustments the balance of the funds

which were received on behalf of the company by its solicitors appears to have been just in excess of IR£335,000. The disbursement

of those funds has also been a matter of some considerable controversy. It is common case that Mr. Coady received two payments

totalling IR£67,118.25. As the liquidator deposes at paragraph 9 of his affidavit of 8th September, 2004 “due to the complete lack of

books and records it is impossible to ascertain whether any payments were due to the directors, or whether there were distributable

reserves from which a distribution could validly be made. He also notes that the payments which were made to Mr. Coady, and indeed

his fellow director and shareholder Mr. Farrell, were made in circumstances where they were both aware that a substantial liability due

to the Revenue Commissioners for capital gains tax remained unpaid”.

Mr. Coady’s position

10. In response Mr. Coady accepts, and indeed relies upon, the fact that there may well have been inappropriate payments both out

of the funds initially received by the company on foot of its loan from the INBS and also from net proceeds of sale of the property.

11. However he seeks to make the case that he was, in substance, excluded wrongfully from the affairs of the company from a

relatively early date and was thus not truly responsible for the manner in which the affairs of the company were conducted. He

further draws attention to the fact that the made complaint in respect of the manner in which the company was conducting its affairs

and also sought, ultimately, to bring court proceedings arising out of his complaints. In those circumstances he contends that he

acted responsibly at all times.

The Issues

12. At the hearing the liquidator brought to the attention of the court three specific matters which he suggested indicated a lack of

appropriate responsibility on the part of Mr. Coady. They are as follows:-

1. the principal concern of the liquidator was with the total absence of appropriate books and records

2. he drew to the courts attention his considerable concerns relating to what had happened to the net proceeds of sale

of the Donabate property; and

3. he drew to the courts attention the fact that the company was not wound up for a very significant period indeed after

it had ceased to trade. The property was sold in 1995. The company only went into liquidation on foot of a petition

presented by the Collector General on 6th June, 2000. It is contended on behalf of the liquidator that Mr. Coady acted

irresponsibly in failing, in all the circumstances, to seek to have the company wound up at a much earlier stage.

13. I deal with each of the issues in turn.

1. Books and Records

14. It is not seriously in contention that the company failed to maintain any significant books or records. In respect of this contention

of the liquidator Mr. Coady’s case is that he acted responsibly in that the exclusion from the affairs of the company, which he

contends occurred, in effect precluded him from having any capacity to ensure proper books and records were kept.

15. While Mr. Coady seeks to place his exclusion from the affairs of the company at an earlier stage, the correspondence which he

exhibits concerning his complaints does not really commence until 5th July, 1995 when, in the aftermath of the sale of the property,

he complains in a letter to Mr. Cathal O’Sullivan (of O’Sullivan and Associates, the company solicitors) concerning that firms costs. He

also complains about other items of financial detail. It does not, therefore, seem to me that there is any evidence of Mr. Coady being

engaged in a significant complaint as to his exclusion from the affairs of the company until he became concerned about the manner in

which the net proceeds of sale of the company’s property was being dealt with.

16. Indeed on reading that correspondence it is clear that much of the detail of the disputes which had arisen concerned the

appropriateness or otherwise of the paying of certain sums which were contended to be liabilities of the company. Clearly if the

company had kept proper books and records then it would have been difficult for there to be any significant dispute as to the precise

liabilities which the company would acknowledge itself bound to discharge. At a very minimum any such disputes should have been

relatively minor. It is impossible to avoid the conclusion that the absence of proper books and records was itself a significant

contributory factor to the fact that disputes as to what were the company’s proper obligations could have existed in the aftermath of

the sale of the Donabate property.

17. There is no significant evidence to suggest that, at any time up to and around the period when that property was sold, Mr. Coady

was sufficiently excluded from the conduct of the affairs of the company so as to absolve him from his obligations to ensure that

proper books and records were kept. It should be pointed out that it is not, of course, his obligation to keep those records himself. It

is his obligation as a director to satisfy himself, to a reasonable extent, that they are been kept. I am not satisfied that he took any

reasonable steps to ensure that sufficient books and records were being kept so as be able to identify the financial state of the

company from time to time. The fact that no audited accounts were produced at any stage and the fact that no significant attempt

seems to have been made to produce audited accounts until the early part of 1995 clearly supports the view that none of the

directors took any adequate steps to ensure that proper books and records were kept. In the circumstances I am satisfied that Mr.

Coady acted irresponsibly in failing to ensure that proper books and records of the company were kept at a minimum up to a period in

the middle part of 1995 when disputes between him and the other director and principal of the company Mr. Farrell and the company

solicitor Mr. O’Sullivan became serious.

2. The net proceeds of sale

18. Mr. Coady relies upon the fact that, in his view, the net proceeds of sale were improperly disposed of. In relation to the

contention that moneys were paid out from the company without any regard to the fact that a significant liability would have arisen

to the Collector General for capital gains tax he contends that it was his view that had the payments which he contends were

improperly made not being made, or indeed had the sums so paid been returned to the company there would have been a sufficient

sum to meet the Revenue’s claims.

19. However this does not get away from the fact that he did himself receive a sum in excess of IR£67,000 out of those net

proceeds. That was a significant sum of money which in today’s currency and terms would exceed €100,000. There is no evidence

that Mr. Coady took any steps to satisfy himself as to what was to happen to the net proceeds of sale at a time where he himself

clearly accepted that he was to be a beneficiary of same. He does not suggest that he opposed the sale in anyway and indeed it is

difficult to see effect could have been given to the sale without his agreement having regard to his position of one of only two

directors. There were no, even informal, accounts prepared at the time of the sale to indicate what the net proceeds would be. In

the circumstances it seems to me that Mr. Coady was irresponsible in accepting a payment out of the net proceeds without having

satisfied himself as to the ability of the company to properly make such payments. Furthermore insofar as there was any confusion or

lack of clarity in relation to how the net proceeds were to be dealt with this was undoubtedly contributed to by the failure of the

company up to that date to have any appropriate books and records. Under this heading I must also, therefore, find that Mr. Coady

has failed to discharge the onus upon him in showing that he acted responsibly.

3. The delay in winding-up

20. Under this heading counsel for the liquidator has drawn my attention to the decision of Costello J. (as he then was) in the matter

of Shannonside Holdings (In Liquidation) and In The Matter of the Companies Acts 1963 to 1990 (unreported judgment delivered 20th

May, 1993) where at p. 10 of the judgment the following is stated:-

“Secondly it is not denied that the company was insolvent and unable to pay its debts. The directors had a duty to wind

up the company and the members of the company acceded to the request that a resolution to wind up be passed. Even

though it may be advantageous to directors to pass a winding-up resolution, it seems to me that the resolution to wind

up cannot be challenged on this ground once insolvency has been established and the duty to wind up shown to exist”.

21. While that was a case in which persons were being critical of the directors for instigating a winding-up it nonetheless remains

authority for the proposition that in general terms the directors of an insolvent company are under a duty to seek to have same

wound up. That duty does, of course, depend on all the circumstances of the case and there may well be appropriate instances

where, at least for a period of time, it may be appropriate to postpone winding-up pending attempts to deal with the issues that arise

by virtue of the insolvency.

22. As was pointed out by counsel for the liquidator in the course of the hearing the correspondence detailing the complaints of Mr.

Coady in respect of the conduct of the affairs of the company seem to have rested with his letter of 13th October, 1995 until they

were reactivated by his letter of 23rd September, 1998. As is clear from the terms of that latter letter it itself was triggered by the

receipt of correspondence from the Revenue Commissioners in the proceeding months concerning the potential liabilities of the

company. On that basis it seems that the only inference that can be drawn is that Mr. Coady was, to a very large extent, prepared

to let matters lie until the Revenue Commissioners became active. While he has indicated that he felt at all material times that the

revenue debt could be met if the inappropriate payments made out of the funds of the company were returned he does not, quite

frankly seem to have done very much about it. To this he pleads an absence of funds but no real explanation is given for why he did

not take the advice which he concedes he was given by his solicitor to the effect that he should have sought to have the company

wound up.

23. That the delay is a material matter on the facts of this case is also clear from the fact that the liquidator may now experience

additional difficulties in attempting to recover any sums which may be due to the company because of the passage of time and the

fact that certain claims (such as claims for the return of sums paid on foot of a fraudulent preference) may now be statute barred.

24. In all those circumstances I am also satisfied that Mr. Coady failed to act responsibly by virtue of not taking adequate steps to

ensure the winding-up of the company within a reasonable period of it ceasing to trade and in circumstances where he knew or ought

to have known that it was likely to be insolvent.

Conclusions

25. In all the circumstances it therefore seems to me that I should make the order sought by the liquidator.