Court of Appeal - Onus on restricted director to adduce evidence to demonstrate that he acted responsibly

Introduction

Section 819 of the Companies Act 2014 operates to restrict directors of insolvent companies from being appointed or acting as a director or secretary of a company and from being concerned in or taking part in the formation or promotion of a company. Any director who falls foul of s.819 is subject to a mandatory period of restriction of 5 years. The primary purpose of s. 819 is to protect the public from persons who, by their conduct, have proven themselves unfit to hold the office and discharge the duties of a director.

The recent Court of Appeal decision of Faherty J in Ken Fennell v. Joseph O’Donovan (otherwise Joe Donovan), Brendan O’Brien and Fergus Appelbe[1], in which RDJ acted, highlights once more how crucial it is for all directors, including non-executive or “passive” directors, to keep abreast of company affairs in order to comply with their obligations under the Companies Act.

Background

The decision concerns an appeal by a solicitor Fergus Appelbe against a decision of the High Court to grant a restriction order against him. Mr Appelbe was a director of Alvonway Investments Limited (the Company) from its incorporation in 2005. There were two other directors of the Company at the time the liquidator was appointed – Joseph O’Donovan and Brendan O’Brien. The Company was one of a number of Companies owned and operated by Joseph O’Donovan and its primary asset was Wilton Shopping Centre, Cork. Loan facilities advanced to Mr O’Donovan were acquired by NAMA in 2011. NAMA appointed a statutory receiver in August 2013. The liquidator was appointed in March 2014. The company was grossly insolvent at the time with a balance sheet deficit of €300 million.

High Court

Submissions

The liquidator sought an order for disqualification against Mr O’Donovan and restriction orders against the Appellant and Mr O’Brien. The impetus for seeking these orders was the making of payments totalling €450,032 from the Company’s current account to Mr O Donovan and a firm of accountants the day prior to NAMA’s appointment of a statutory receiver. The High Court was satisfied that Mr O’Donovan was the sole director responsible for these payments. Mr O’Donovan consented to a restriction order against him in lieu of a disqualification order.

Nonetheless, the liquidator submitted that he did not believe the two remaining directors acted responsibly in their role as directors as they ought to have been aware of the Company’s insolvent position at the time of the payments and ought to have ensured there were sufficient controls in operation to prevent the payments from taking place.

Mr Appelbe submitted that he had very little knowledge of what happened in the Company. He submitted that at the time of the August payments, NAMA were effectively in control of the Company and they dealt exclusively with Mr O’Donovan and had no contact with him, as did the statutory receiver once appointed. As such, he was deprived of knowledge of the affairs of the Company. Further, he argued that he co-operated with the liquidator at all times.

Decision

The High Court referred to the fact that Mr Appelbe was the only director to have served as a director continually from the inception of the Company to the time of its liquidation. It was held that he adduced no evidence as to his contribution to the decisions of the directors at any time in the life of the Company. He did not address the response of the directors to the development of the Company’s deficiency and the transfer of its loans to NAMA. Furthermore, he did not demonstrate any active steps that he took to keep himself informed of the affairs of the Company.

The High Court considered whether the involvement of NAMA in a Company displaces or modifies the duties of directors and held that until a receiver or liquidator is appointed, the directors retain their responsibilities and duties. In fact, the transfer of a Company’s loans to NAMA would heighten the need for directors to make themselves aware of the Company’s status.

The High Court noted that apart from denying knowledge of the insolvency and the August Payments, Mr Appelbe was totally silent on his activities as a director. As such, it was held he had not acted responsibly, and a restriction order was made against him.

Interestingly, the High Court reached a different conclusion in relation to Mr O’Brien. In contrast, Mr O’Brien demonstrated that he acted responsibly as he at least had knowledge of and an understanding of the Company’s business, its strategy, and the constraints under which it operated. He co-operated fully with the liquidator and there was no other just & equitable reason as to why he should be restricted, therefore he was not.

The Appeal

Mr Appelbe (the Appellant) appealed this decision to the Court of Appeal. The Appellant’s overarching argument was that the High Court erred in making the restriction order against him in the absence of any case being made by the liquidator for him to answer. The liquidator submitted that the Appellant’s argument was fundamentally misconceived in that it is not for the liquidator to make a case under s.819, rather the onus is on the director to show he acted honestly and responsibly.

The Court of Appeal held that the Appellant provided no information in relation to the role he played in the Company. He adduced no evidence to demonstrate that he informed himself of the Company’s affairs at any time. There was a total failure by the appellant to provide information from which the High Court judge could derive that the Appellant had fully informed himself in relation to the affairs of the Company consistent with his obligations as a director. Faherty J agreed with the conclusions reached by the High Court judge given the paucity of the Appellant’s evidence. The learned judge noted that in contrast, Mr O’Brien furnished a detailed Affidavit to the High Court outlining his knowledge of the Company and that was the appropriate approach.

Faherty J accepted that the liquidator’s Affidavit could have been more expansive but that any perceived frailties in the liquidator’s Affidavit cannot assist the Appellant. The stark absence of information from the director meant that he did not discharge the onus on him to prove he acted responsibly. The Court of Appeal noted that even if the Appellant had proven he co-operated with the liquidator, he also had to establish that he acted honestly and responsibly and he had not established he acted responsibly. The restriction order was upheld.

Commentary

Overall, this decision was an orthodox application of section 819. It reaffirms the now well-established position that a plea of ignorance in relation to Company affairs will not absolve a non-executive or “passive” director of their responsibilities under the Companies Act. It is imperative that directors, even if not involved in the day-to-day running of the Company, keep abreast of Company affairs. Lack of knowledge of the state and dealings of the Company can lead to a finding of lack of responsibility and a restriction period of 5 years. The decision also confirms that the onus on the director is not simply to respond to what is set out by the liquidator, but rather to set out more broadly the facts that show he/she acted responsibly. The more information that can be provided in relation to a director’s knowledge and involvement in the insolvent Company, the less likely he/she is to be restricted.

[1] Ken Fennell v. Joseph O’Donovan (otherwise Joe Donovan), Brendan O’Brien and Fergus Appelbe, [2022] IECA 160.