High Court dismisses costs order against director where insolvency restriction declaration failed due to narrow timing of resignation.

Neutral Citation: [2016] IEHC 496

THE HIGH COURT

[2015 No. 98 COS]

IN THE MATTER OF PAURAIC LARKIN AND ASSOCIATES LIMITED

(IN VOLUNTARY LIQUIDATION)

AND IN THE MATTER OF THE COMPANIES ACT 1963 – 2013

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

AND IN THE MATTER OF SECTION 56 OF THE COMPANY LAW ENFORCMENT ACT 2001

BETWEEN

EUGENE McMAHON

APPLICANT

AND

PAURAIC LARKIN AND MARIE GORMAN

RESPONDENTS

RULING of Mr. Justice David Keane delivered on the 11th August 2016

Introduction

1. This ruling concerns the costs of an unsuccessful application for a declaration of restriction under s. 150 of the Companies Act

1990 (“the 1990 Act”) against the second named respondent, Ms Gorman.

Background

2. In a judgment delivered on the 24th June 2016, I declined to make a declaration of restriction against Ms Gorman on the ground

that I could not be satisfied, on the balance of probabilities, that she was a director of Pauraic Larkin and Associates (“the company”)

within 12 months prior to the commencement of its winding up.

3. It was a close run decision. Ms Gorman relied upon a copy of a handwritten letter of resignation, dated the 19th December 2011, in

circumstances where there was some doubt concerning whether the general meeting at which the members of the company resolved

to wind up the company took place on the 18th or the 19th December 2012. Resolving that doubt in favour of Ms Gorman, I

concluded that I could not be satisfied that the resolution had been passed prior to the 19th December 2012 and, in consequence,

that Ms. Gorman’s resignation had not taken effect on the day prior to the first day of the 12 month period prescribed under s. 149 of

the 1990 Act. This meant that, by the narrowest of margins, the liquidator had failed to prove that Ms Gorman was a person to

whom, under the provisions of s. 149 of the 1990 Act, Chapter 1 of Part VII of the 1990 Act (on the restriction of directors of

insolvent companies) applies.

4. I pause here to note that Ms Gorman had not raised the point in the course of the application. The Court addressed it of its own

motion. Ms Gorman had exhibited her letter of resignation in support of the quite different argument that, since she had taken up a

directorship of the company in or about 2007 on the basis of advice that this was solely to enable the company to comply with a legal

requirement that it have two directors; since she had not had any involvement whatsoever in the affairs of the company save to sign

the company’s accounts when requested to do so; and since she had played no part in the day to day running of the company and

had, indeed, resigned in late 2011, she was entitled to rely on the defence under s. 150 (2) of the 1990 Act that she has acted

honestly and responsibly in connection with the conduct of the company’s affairs.

5. In light of my finding already described, it was not necessary to consider that argument. In the recent decision of the Court of

Appeal in Director of Corporate Enforcement v Walsh [2016] IECA 2, which is of course binding upon this Court, the point is forcefully

made that it would be contrary to the whole notion of proper corporate regulation that passive directors would be exonerated from

liability or relieved from restriction on the basis of the passive nature of their role. To that point I would only add that it seems absurd

to imagine, much less accept, that the blunt requirement of s. 174 of the Companies Act 1963 (“the 1963 Act”) that ‘every company

shall have at least two directors’, permits the appointment of a particular species of director who owes no duty or obligation to the

company, its shareholders or creditors beyond that of facilitating or enabling pro forma compliance with the requirements of the

Companies Acts.

6. Ms Gorman now applies for her costs of the unsuccessful application against her, whereas the company liquidator, Mr McMahon,

who brought that application, submits that the Court should make no order for costs.

The law

7. The principles that govern such applications are clearly established.

8. While it would be wrong to say that s. 150 of the 1990 Act, as amended, makes no provision as to costs, it is true to say that s.

150 (4B) directly deals only with the nature and scope of those costs orders that a Court can make against directors in respect of

whom a declaration is granted. In Luby v McMahon (G.M.T. Engineering Services Ltd) [2003] 4 IR 133, Finlay Geoghegan J. held that,

by necessary implication, the effect of that provision is that no order for costs can be made against any respondent in respect of

whom a declaration is not granted.

9. But what of situations like this one, where a respondent in respect of whom a declaration is not granted seeks an order for her

costs against the liquidator who brought the application?

10. In Murphy v Murphy (Visual Impact and Displays Ltd) [2003] 4 IR 451, Finlay Geoghegan J. held that the provisions of O. 99, r. 1

of the Rules of the Superior Courts (“the RSC”) apply to such applications, that is to say, that the costs of the application are in the

discretion of the Court.

11. In McCarthy v Gibbons (Kranks Corner Ltd) [2009] IEHC 423, Finlay Geoghegan J. expanded upon that analysis in concurring with

the view expressed by O’Leary J. in Stafford v Beggs & Ors [2006] IEHC 258 that a restriction declaration application is neither a

‘claim’ nor a ‘counterclaim’ and, thus, does not attract the application of the usual rule under O. 99, r. 1(4) that costs should follow

the event. As O’Leary J. pointed out, ‘[t]he liquidator is merely the presenter of the application not a claimant or party with any

interest in the outcome either for himself or on behalf of the parties.’

12. Having concluded that, in dealing with the costs of an application under s. 150 of the 1990 Act, the Court should not start from

the position that a respondent who makes out a defence under s. 150 (2) is entitled to the costs of the application against him or

her, Finlay Geoghegan J. went on to express disagreement with any suggestion there might be in Stafford that there exists a ‘normal

rule’ to the converse effect i.e. that the court should start from a position that the ‘normal rule’ is that a respondent against whom

such an application fails is not entitled to his or her costs of that application. As Finlay Geoghegan J. went on to note, the true

position is that the Court must exercise its discretion in each case having regard to the relevant facts and the statutory scheme.

The arguments

13. The arguments on the present application were primarily addressed to the issues considered in the following passage at p. 9 of

the judgment of Finlay Geoghegan J. in Kranks Corner Ltd:

“There is a limited subset of applications pursuant to s. 150, where I have, in a number of ex tempore decisions, followed

an approach which would almost amount to the ‘normal rule’ to which O’Leary J. referred. Those were applications where

there was no dispute that s. 150 of the Act of 1990 applied to the company in liquidation, and to the respondents as

directors of the company in liquidation. Further, that the liquidator had put before the Director [of Corporate

Enforcement] all the relevant facts when making his s. 56 report and the respondent directors had been given an

opportunity of either commenting on those facts in advance or furnishing the liquidator with the relevant information in

response to his queries. In such circumstances, a liquidator cannot in any way be considered responsible for the

commencement of the application under s. 150. On the relevant facts, where the Director takes the view that the

liquidator should not be relieved of his obligation to bring the application under s. 150, the liquidator is, as stated by

O’Leary J., obliged, pursuant to s. 56 of the Act of 2001, to bring the application. The statutory scheme in such

circumstances now requires persons who are, or were, within twelve months of the commencement of the winding up,

directors of an insolvent company, to then satisfy the High Court that they acted honestly and responsibly if they are to

avoid a declaration of restriction. If they succeed in so persuading the court, it appears to me that it is an inevitable

consequence of the statutory scheme put in place by the Oireachtas that they may have to bear their own legal costs of

defending the application which the liquidator has been required to bring. There does not, in those circumstances, appear

any justification for making an order for costs against a liquidator which would have to be borne by him, either personally,

or if he was entitled to an indemnity out of the assets of the liquidation (and there were funds in the liqudation),

effectively by the creditors of the insolvent company.

However, the starting point for the above analysis is both that there is no dispute that s. 150 applies to the company in

liquidation and the respondent directors, and that the liquidator has put before the Director, when making the s. 56

report, all the relevant facts, following appropriate enquiries of the respondent directors.”

14. Largely by reference to the preceding principles, Ms Gorman seeks her costs of the unsuccessful application against her in reliance

on three separate points. Each of those points is best understood in the context of the following brief chronology of the relevant

events:

19th December 2011 Date of the handwritten letter of resignation as director of the company signed by Ms Gorman.

13th December 2012 Date upon which the Form B10 recording termination of Ms Gorman’s directorship (stated to take

effect from the 19th December 2011) was lodged in the Companies Registration Office.

18th or 19th December 2012 Date of the members’ resolution at general meeting to wind up the company.

19th December 2012 Date of the creditors’ meeting at which Mr McMahon was appointed liquidator of the company.

18th June 2013 Date of the liquidator’s first s. 56 report to the Director of Corporate Enforcement (not identifying Ms

Gorman as a director of the company).

28th January 2014 Date of the liquidator’s second s. 56 report to the Director of Corporate Enforcement (not identifying

Ms Gorman as a director of the company)

28th March 2014 Date of the liquidator’s third s. 56 report to the Director of Corporate Enforcement (identifying Ms

Gorman as a director of the company and expressing the opinion that she had failed to demonstrate that she had acted

responsibly in connection with the conduct of the company’s affairs).

29th April 2014 Letter from the Director to Mr McMahon, referring to a report received on the 29th January 2014

(evidently, his second report) and informing him that he was not relieved of the obligation to apply for a declaration of

restriction of the directors of the company (with the exception of one other named director, whose letter of consent to

act as such, filed in the CRO, is dated the 1st December 2012)

13th May 2014 Date of a letter from Mr McMahon to the respondent directors informing them of his intention to bring a

restriction declaration application against them.

4th June 2014 Date of a letter from the respondent directors’ solicitors stating, amongst other things, wrongly that Ms

Gorman had not been a director of the company since November 2011.

3rd March 2015 The motion was filed grounding the application for a declaration of restriction against each of the

respondent directors.

5th June 2015 Date upon which Ms Gorman swore an affidavit averring that she had written a letter of resignation as a

director of the company on the 19th December 2011.

20th November 2015 Date upon which Ms Gorman swore an affidavit exhibiting her handwritten letter of resignation as a

director of the company, dated the 19th December 2011 at both its head and foot, and stating in the body of the text

that she wished to resign as such ‘as and of 19/12/11’.

15. Against the background of the events described, the points made on behalf of Ms Gorman are as follows:

(i) That Mr McMahon was in dereliction of his duty as liquidator in bringing an application for a declaration of

restriction against Ms Gorman in reliance upon the Director’s letter of the 29th April 2014 in circumstances where

that letter plainly referred to Mr McMahon’s second report of the 28th January 2014, which had not identified Ms

Gorman as a director of the company at all.

(ii) That Mr McMahon was in dereliction of his duty as liquidator in failing to have any, or any sufficient, regard to

the statement in a letter from Ms Gorman’s solicitors dated the 4th June 2014 that she had not been a director of

the company since November 2011.

(iii) That Mr McMahon as liquidator wrongly made a ‘massive’ and erroneous assumption when stating, in his third

report to the Director, that ‘in the absence of anything to the contrary and in light of the attempt of Ms Gorman to

resign as a director of the company just prior to the company being put into liquidation, Ms Gorman has displayed

the same lack of commercial probity or want of proper standards in the conduct in the affairs of the company as Mr

Larkin did.’

16. Dealing with each of those points in turn, it seems to me necessary to make the following observations. While it is true that the

Director’s letter of the 29th April 2014 appears on its face to have been referring specifically to Mr McMahon’s second s. 56 report, it

is also true that Mr McMahon had submitted a third report dated the 28th March 2014, just over a month prior to the date of that

letter. Moreover, Mr McMahon did not actually issue the relevant motion on foot of which the present restriction declaration

application was brought until the 3rd March 2015, by which time the Director would have been in possession of Mr McMahon’s third

report for almost a year. There is no suggestion that, during the significant intervening period, the Director was in any way prevented

from exercising his power under s. 56 of the Company Law Enforcement Act 2001 (“the 2001 Act”) to relieve Mr McMahon of the

obligation to apply for a declaration of restriction in respect of Ms Gorman had the Director considered it appropriate to do so.

17. In relation to the second point, it must first be noted that the statement in the letter from Ms. Gorman’s solicitors, dated the 4th

June 2014, that she had not been a director of the company since November 2011 was, on any view, an erroneous one. On Ms

Gorman’s own case, she did not resign as a director until the 19th December 2011. Moreover, she does not seem to have clarified the

point until she included an averment to that effect in the affidavit that she swore on the 5th June 2015, some three months after the

present application issued and more than a year after she was informed that it was to be brought. In addition, Ms. Gorman was

unable to provide any evidence in support of that contention until she exhibited to an affidavit that she swore on the 20th November

2015 what she has averred is an authentic copy of her letter of resignation.

18. As regards the third point, the sequence of events that I have just described makes it clear that Mr McMahon had very little hard

evidence or information to go on when he was required to submit his various s. 56 reports to the Director between June 2013 and

March 2014 and I do not find the, no doubt, significant assumptions that he was obliged to make for the purpose of those reports to

have been unwarranted in the circumstances.

19. Accordingly, I find no force in the argument that the liquidator failed to put the relevant facts before the Director or that he failed

to give Ms Gorman an opportunity of either commenting on those facts or providing him with the relevant information in response to

his queries in advance of the application that he was in consequence obliged to bring in March 2015.

20. That does leave over one final argument, namely the extent to which Mr McMahon is to be held personally liable for bringing an

application that the Court had no jurisdiction to consider under s. 149 of the 1990 Act in view of his failure to satisfy the Court that

Ms Gorman was a director of the company within 12 months of its winding up.

21. On behalf of Ms Gorman, Mr Kennedy submits that the decision most closely on point is that of Finlay Geoghegan J. in Visual

Impact and Displays Ltd, as that was also a restriction declaration application in which the Court was not satisfied that the

respondent concerned was a director of the company at any time during the twelve months prior to the commencement of its winding

up. In that case, on the basis of that finding, the Court awarded the costs of the application to the respondent concerned against

the liquidator personally.

22. However, it seems to me that the facts there were significantly different to those of this case. There, the application proceeded

by reference to the entirely unsupported averment of the liquidator that the respondent had ‘apparently’ been appointed a director of

the company, although never recorded as such in any filing with the CRO. That unsupported averment was expressly denied on oath

by the respondent, who averred that he had never become, or acted as, a director of the company.

23. Here, Ms Gorman was, and was recorded by the CRO as being, a director of the company until, on the 13th December 2012, either

five or six days prior to the members’ resolution at a general meeting to wind up the company, a Form B10 was received by the CRO

purporting to record her resignation as a director with effect from a date that, by a remarkable coincidence, was just far enough in

the past to bring her tenure as a director of the company a hair’s breadth outside the period stipulated by s. 149 (2) of the 1990 Act

as triggering the restriction declaration requirement of s. 150 of that Act against her.

24. In my view, the circumstances of the present case are more closely analogous to those considered by Finlay Geoghegan J. in

Kranks Korner Ltd. That was also a case in which one of the jurisdictional requirements for an application under s. 150 of the 1990

Act was discovered to be absent. There, it was the requirement under s. 149 (1) of the 1990 Act that the company must have been

insolvent on or after the date of the commencement of its winding-up. The liquidator had formed the view that the company was

insolvent by reference to the understanding that it had continued in business without insurance for a period during which it was

notified of two personal injuries claims against it. It was later discovered that, in fact, the company’s insurance had been extended to

cover that period, leaving its solvency in no doubt.

25. While Finlay Geoghegan J. found in that case that the liquidator had failed to make appropriate enquiries before deciding to make

the relevant s. 56 report to the Director and had failed to give the respondent directors any opportunity to comment on the

insolvency issue, the Court also found that the respondent directors contributed to the perceived requirement to bring the s. 150

application by failing to bring the relevant matters to the attention of the liquidator either prior to the commencement of the

application or for some time afterwards.

26. In this case, had the remarkable sequence of events that I have already described been properly clarified earlier by Ms Gorman in

the manner that it only ultimately was when she swore an affidavit on the 15th November 2015, exhibiting her letter of resignation of

the 19th December 2011 and averring to its authenticity, then the application against her might well have been resolved more quickly

or, indeed, avoided entirely.

27. I should add that I take the same view of the actions of Mr McMahon in this case as Cregan J. took of the actions of the

liquidator in Coyle v O’Nolan & Ors (Pierse Contracting (No. 2)) [2015] IEHC 113. That is to say, I take the view that the liquidator

brought this application in good faith and on what appeared to be reasonable grounds.

Conclusion

28. In all of the circumstances, I will exercise the jurisdiction conferred on me by O. 99, r. 1 (1) of the RSC to make no order

concerning the costs of this application.