Body corporate cannot be shadow director under Companies Act 1990 s.150 due to conflict with s.176 prohibition.

THE SUPREME COURT

Record Number 2005 No. 166

Hardiman J.

Geoghegan J.

Fennelly J.

IN THE MATTER OF:-

WORLDPORT IRELAND LIMITED [IN LIQUIDATION]

AND IN THE MATTER OF:-

THE COMPANIES ACTS 1963 -2001

AND IN THE MATTER OF:-

SECTION 150 OF THE COMPANIES ACT 1990 (AS AMENDED)

JUDGMENT of Mr. Justice Fennelly delivered the 16th day of December, 2008.

1. This is an appeal on two preliminary points of company law. The principal question is whether a body corporate can be a

shadow director for the purposes of an application for a restriction order under section 150 of the Companies Act 1990. The

second preliminary question concerns whether a body corporate, incorporated outside the jurisdiction, can be a shadow

director for the purposes of an application under the section.

2. The applicant is the official liquidator of Worldport Ireland Limited (“the company”), an insolvent company. In that

capacity, he made an application to the High Court for an order, inter alia, declaring that the appellant is a shadow director

of the company and for an order pursuant to section 150 of the Companies Act, 1990 (“the Act of 1990”) that the appellant

be restricted from being appointed or acting in any way, whether directly or indirectly as a director or secretary or being

concerned in the promotion or formation of any company for a period of five years.

3. The appellant is incorporated in the United States of America.

4. The appellant raised a preliminary objection in the High Court that it could not be a shadow director of the company on

the ground that section 176 of the Companies Act 1963 prohibits a body corporate from being a director of any company

incorporated under that Act. It also argued that the section did not apply to a foreign body corporate.

5. The High Court ordered that the following matters be determined as preliminary points of law:

(a) Whether a body corporate can be a shadow director for the purposes of an application for restriction under section

150 of the Companies Act 1990.

(b) Whether a body corporate, incorporated outside the jurisdiction, can be a shadow director for the purposes of an

application for restriction under section 150 of the Companies Act 1990.

6. Three principal sections of the Companies Acts are relevant to the resolution of the first, which is the key issue.

7. Section 176 of the Companies Act 1963 prohibits bodies corporate from being company directors. It provides:-

(1) A company shall not, after the expiration of 3 months from the operative date, have as director of the

company a body corporate.

(2) A body corporate which, on the operative date is a director of a company shall, within a period of 3

months from that date vacate its office as director of the company, and all acts or things purporting to be

made or done after the expiration of that period, by a body corporate as director of any company shall be null

and void.

8. Section 27(1) of the Act of 1990 defines a shadow director as follows:

Subject to subsection (2), a person in accordance with whose directions or instructions the directors of a

company are accustomed to act (in this Act referred to as "a shadow director") shall be treated for the

purposes of this Part as a director of the company unless the directors are accustomed so to act by reason only

that they do so on advice given by him in a professional capacity.

9. Section 150(1) of the Act of 1990 is the provision invoked by the respondent in his capacity of official liquidator. It

provides:

“The court shall, unless it is satisfied as to any of the matters specified in subsection (2), declare that a person

to whom this Chapter applies shall 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 it meets the requirements set out in subsection (3); and, in subsequent provisions of this

Part, the expression "a person to whom section 150 applies" shall be construed as a reference to a person in

respect of whom such a declaration has been made.”

10. Two interpretative provisions are also relevant. Section 11(c) of the Interpretation Act, 1937 extends the meaning of the

word “person,” when used in an act of the Oireachtas to include bodies corporate. Section 149(5) of the Act of 1990

provides that Chapter I of Part VII of the Act, which is headed “Restriction on Directors of Insolvent Companies, and

which includes section 150, “applies to shadow directors as it applies to directors…”

11. Whether the appellant is “a person to whom this Chapter applies,” (section 149(5)) depends, in turn, on whether an

order can be made against a shadow director which is itself a body corporate.

12. O’Leary J delivered the judgment in the High Court. He expressed his principal conclusion in the following terms:

“The only conclusion open to this Court on the nature of the status enjoyed by shadow directors is that they

are a separate entity than directors. The legislation makes the distinction clear. Specifically it appears to the

court that shadow directors are not a subset of the office of directors but entirely separate (though of course

connected).

Prima facie therefore Section 176 (1) Companies Act 1963 which does not mention shadow director has no

application to shadow directors and there is no reason based on this provision why a body corporate cannot

be a shadow director for the purpose of a restriction under Section 150 Companies Act 1990.”

13. The learned judge rejected the appellant’s argument that section 150 was never intended to apply to corporate shadow

directors by reason of the prohibition contained in section 176. He pointed out that the restrictions under the section go far

beyond the mere prohibition on the person acting as a director and the fact that some of the provisions have no effect in an

individual case does not render the section redundant in such cases: the remainder of the restrictions have both a purpose

and an effect.

14. In respect of the second preliminary question, the learned judge held that Section 150 makes no distinction between the

way in which Irish based company promoters and foreign-based ones are dealt with and he saw no reason why the

conclusion on the eligibility of bodies corporate to be shadow directors should not apply equally to Irish and foreign entities.

15. By order dated 16th February 2005, pursuant to the judgment of O’Leary J, the High Court answered each of these

questions in the affirmative.

16. The Court has received written and has heard oral submissions in the course of the appeal against the decision of the

High Court.

17. The appellant says that section 176 of the Act of 1963 prohibits any body corporate, which, on the respondent’s case,

includes the appellant, from being a director of any company. It would be absurd for a court to make an order prohibiting a

body corporate from being a director of a company, since it is impossible legally for it to be a director. Therefore, whether

or not the appellant is a shadow director of the company, the court cannot make an order against it under section 150(1) of

the Act of 1990. The appellant asks rhetorically how the capacity for a body corporate to be a director can be implied “by a

side-wind contained in section 150” in the face of a clear statutory prohibition contained in section 176.

18. The appellant makes a further submission with regard to the inclusion of a body corporate, in particular a body

corporate claimed to be a shadow director, within the scope of section 150. The section applies prima facie to persons and

clearly covers natural persons. Consequently, the respondent must is driven to rely on section 11(c) of the Interpretation

Act, 1937, which lays down general rules applicable to the interpretation of all acts of the Oireachtas. That paragraph reads

as follows:

Person. The word "person" shall, unless the contrary intention appears, be construed as importing a body

corporate (whether a corporation aggregate or a corporation sole) and an unincorporated body of persons as

well as an individual;

19. The appellant submits that the word “person” cannot include a body corporate, again by reason of section 176 of the

Act of 1963. There is a “contrary intention” for the purposes of the Interpretation Act. The court cannot make an order

prohibiting a body corporate from doing something (being a director of a company) which it is, in any event prohibited from

doing.

20. The respondent, on the other hand, submits, citing the judgment of the learned trial judge as well as a further High Court

decision of Laffoy J (referred to below), that the term “shadow director” is not a category of director. He says that there is

very good reason why a person may not be qualified to be a director and yet still fall to be a shadow director. A finding that

a person is a shadow director is a finding of fact about the actions of that person – that he directed the activities of the

formal directors. The respondent cites the example of an undischarged bankrupt (who cannot lawfully be appointed a

director) but who could, nonetheless, direct all the dealings of the formal directors and give all instructions as to how the

company should be run and yet never fear any repercussion if the company became insolvent. Such a person could become

involved in the management of subsequent companies secure in the knowledge that he could not be restricted from being so

involved. That interpretation would not protect the public from harmful behaviour of those controlling companies.

Conclusion

21. I would say immediately that there seems to me to be no merit, independently of the first question in the appeal, with

regard to the second preliminary point of law. O’Leary J was absolutely correct in holding that there is no reason to interpret

the provisions of section 150 as making any distinction between Irish and foreign bodies corporate. No such reason has been

advanced on the appeal. The real issue arises under the first question, namely whether a body corporate can come within

section 150 at all. If an order cannot be made against a corporate shadow director, the second question will not arise.

22. I am also satisfied that the learned judge was correct in his primary conclusion on the interpretation of the relationship

between section 150 of the Act of 1990 and section 176 of the Act of 1963. The appellant’s case is that it follows from the

prohibition of a body corporate from being a director of a company that a body corporate cannot be a shadow director for

the purposes of section 27(1) of the Act.

23. That argument is based on the fallacy that section 27 is concerned with persons who formally hold the position of

director. The learned judge rightly held “that shadow directors are not a subset of the office of directors but entirely

separate…” The section is addressed to persons who, in many if not most cases, will not hold any formal title as director.

The shadow director is a “person in accordance with whose directions or instructions the directors of a company are

accustomed to act…” A finding that a person is a shadow director is a finding about how that person is accustomed to

behave in relation to the company. It is quite unrelated to and distinct from the observance of any formalities concerning

that person’s appointment or election as a director. No such formalities are required. There is nothing inconsistent about

finding a person to be a shadow director for the purposes of section 27 and the fact that the person is legally ineligible to

hold the position of director.

24. The learned judge was quite right to test the proposition by reference to the prohibition in section 183 of the Act of 1963

on an undischarged bankrupt from becoming a director without the leave of the court. In fact, that section makes it an

offence for an undischarged bankrupt to act as a director. So, presumably the election of an undischarged bankrupt may

conceivably be valid, though unlawful. Nonetheless, if the appellant’s submissions were correct, an undischarged bankrupt

would be free to direct all the dealings of the formal directors and give all instructions as to how the company was to be run,

without committing any offence contrary to section 183 and without being treated as a shadow director for the purposes of

section 27 and, hence, liable to the imposition of a restriction pursuant to section 150.

25. Finally, Laffoy J considered whether a body corporate could be a shadow director in her judgment in Fyffes plc v DCC

plc and others [2005] IEHC 477 (Judgment 21st December 2005). In that judgment, the learned judge applied the reasoning

of O’Leary J in his judgment in the present case. Following a detailed analysis of the statutory provisions, she concluded as

follows:

“The word “director” is defined as including a shadow director within the meaning of s. 27. The drafting

technique employed in Part V, in my view, was not intended to, and does not affect the proper interpretation of

s. 27. By virtue of s. 11(c) of the Act of 1937, the word “person” in s. 27 is to be construed as including a

company unless the contrary intention appears. I can discern no contrary intention in Part V of the Act of

1990. Interpreting the word “person” in s. 27 as importing a company is not in any way inconsistent with s.

176 of the Act of 1963. The latter provision precludes a company from having a body corporate as a director;

the former identifies the type of person who, by reference to the manner in which he acts vis-à-vis the

company, is to be treated as a director.”

26. I would respectfully agree with that statement of the law. I should add that her conclusion with regard to the effect of

the Interpretation Act on section 27 does not determine the interpretation of section 150, discussed below.

27. Thus a body corporate may be a shadow director for the purposes of section 27. Next it is necessary to consider

Chapter I of Part VII of the act. Section 149(2) provides:

“This Chapter applies to any person who was a director of a company to which this section applies at the date

of, or within 12 months prior to, the commencement of its winding-up.”

28. The words, “person who was a director,” refer at first sight to the actual de jure holding of that office. However, by

virtue of section 149(5), Chapter I “applies to shadow directors as it applies to directors…” That is enough to bring any

shadow director who is a natural person within the scope of the Chapter and, in particular, of section 150. But does section

150 extend to a shadow director which is a body corporate? Does the court have power to make a restriction order in

respect of such a body? It now becomes necessary to consider section 11(c) of the Interpretation Act, 1937. By reason of

that provision, cited above, the term, person, in an act of the Oireachtas, must be interpreted so as to include a body

corporate “unless the contrary intention appears.” At this point, I would say that it is clear that, if there is no contrary

intention, a corporate shadow director is covered by the section and a restriction order can be made against it.

29. This leads me to consider the order to be made pursuant to section 150. The court is obliged to make the order or

declaration provided by section 150 “unless it is satisfied as to any of the matters specified in subsection (2)…” Most

notably, the court may be satisfied “that the person concerned has acted honestly and responsibly in relation to the

conduct of the affairs of the company.” For present purposes, it must be assumed that the court will not have been satisfied

of any of those matters. In that event, the order must be made in accordance with section 150(1).

30. Following the words of the section, there are two features of the order. Firstly, it will declare that the affected person

“shall 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.” Section 150(1) obliges the court to

make the order. The court “shall” make an order, declaring that the affected person is not to do any of the things listed.

Because the formula is negative, i.e. it prohibits the doing of any of those things, it is not open to the court to prohibit only

some of them. If the law forbids a person from selling eggs or cheese it makes it illegal to sell either eggs or cheese.

31. Secondly, the section contains the qualification or proviso: “unless it [the company] meets the requirements set out in

subsection (3)…” Any declaration made by a court under the section would necessarily have to contain that proviso.

Without it, the declaration would, on its face, purport to prohibit the affected person from doing things which the law

expressly permits. Sub-section 3, as amended by section 41 of the Company Law Enforcement Act, 2001, specifies

minimum share capital (£250,000 in the case of public limited companies; £100,000 in the case of other companies) and

provides that shares must be paid up in cash. (Euro-equivalent figures will now apply). Thus, any restriction under section

150 must be qualified so as to recognise that the affected person is not prevented from being involved as a director or

otherwise in the promotion or formation of a company which meets those requirements.

32. It follows, therefore, that any order made under section 150(1) must prohibit the affected person from being appointed

or acting in any way as a director or secretary or taking part in the promotion or formation of any company. Since a body

corporate is prohibited by section 176 of the Act of 1963 from being a director of a company at all, it is, to say the least

anomalous, that a court should be obliged to prohibit it from so acting. This may point to a “contrary intention” for the

purposes of the Interpretation Act. The section contains no provision enabling the court to sever its order by omitting the

prohibition on acting as a director. It envisages that an order will be made prohibiting all the types of action named in the

sub-section. At the very least, the draftsman does not appear to have addressed the question of whether the word “person”

extends to a body corporate alleged to be a shadow director, even if section 149(5) performs that office in the case of

natural persons who are bodies corporate.

33. There is the further problem of the proviso. The restriction laid down by section 150(1) must be declared to be subject

to the possibility that the affected person may be engaged in the promotion or formation of a company which meets the

capital requirements of section 150(3). Such an order would, on its face, imply that a body corporate, being restricted under

the section, would, nonetheless, be free to become a director of a company which met the capital requirements of sub-

section 3. That would conflict with section 176 of the Act of 1963. Hence the order would be, at least to that extent, be

meaningless and, arguably, absurd.

34. The question is whether these difficulties about the form of order amount to sufficient appearance of “contrary

intention” to displace the statutory rule of interpretation that “person” includes “body corporate.”

35. Counsel for the respondent referred the Court at the hearing of the appeal to a Northern Ireland decision, Briggs v

Gibson’s Bakery Limited [1948] NIR 165. The issue was whether a company could be convicted under road-traffic

legislation of permitting its employee to drive without insurance. The legislation made it unlawful for “any person” to do so.

The penalty was a fine or imprisonment with the addition of disqualification from holding a driving licence. Since a company

could not hold a driving licence, the resident magistrate raised the question on a case stated to the King’s Bench Division

whether the company could be “a person” for the purposes of the legislation. The court looked at a number of cases

concerning “contrary intention.” Andrews L.J., with whom Lowry J agreed, held that the first punishment, a fine, could be

imposed on a company and that the disqualification provision was intended to apply to those who held or were capable of

holding a driver’s licence. There was no sufficient contrary intention. The company was a “person” and could be convicted

of the offence. One of the cases considered by the court (The Law Society v United Service Bureau Ltd. [1934] 1 K.B.

343) concerned a prosecution of a company for practicing as a solicitor without holding a practicing certificate. The relevant

section created the offence as follows: “Any person, not having in force a practising certificate, who wilfully pretends to

be .... qualified or recognised by law as qualified to act as a solicitor,” Avory J considered, at page 349, that the section

“must be held to contemplate a person who can have in force a practising certificate as a solicitor.” He stated at page

350: “It is clear beyond possibility of argument that a corporate body cannot pass the final examination provided for by

the Act and, therefore, cannot apply to be admitted as a solicitor, or be so admitted…” Therefore, the respondent

company could not be brought within the words "any person."

36. In the present case, the key problem is the form of order envisaged by the section. In the Briggs case, the Northern

Ireland court was satisfied that a penalty (a fine) could be imposed on the company, even if other penalties (imprisonment or

disqualification) could not. Some parts of the section could be applied. Others could not. Thus “person” could include the

company. In the case of Law Society v United Service Bureau Ltd., on the other hand, the fact that a company could never

have held a practicing certificate was decisive. I find that decision persuasive in considering the present case.

37. In the present case, the court would, if “person” includes a corporate shadow director, be required to make orders in a

form which would be directly inconsistent with an express statutory provision which prohibits corporate bodies from being

directors. The order would be made in a form which implied that a body corporate could hold the position of director

contrary to section 176. It is not possible to make the section compatible with that legal provision without interpolating

words into section 150(1), enabling the court to make orders in relation to some only of the acts mentioned. In a case such

as the present, acting as a director would have to be excluded from the order. As the section stands, and without appropriate

amendment, it does not accommodate the extension of the meaning of “person” to include a body corporate. The reason is

simple. The draftsman did not advert to the complication. I think the section evinces an intention contrary to the normal rule

including a body corporate within the meaning of person.

38. Therefore, I would allow the appeal so as to substitute a negative answer to the first question of law. Since no body

corporate, foreign or not, can be the subject of an order under the section, the second question does not properly arise. I

would propose that the High Court order answering that question be set aside and the answer be: “Does not arise”