High Court makes Irish History: Piercing the Corporate Veil

• Ireland

• Corporate secretarial services

21-12-2022

As a follow on to our series of articles regarding directors’ duties which can be read here, we summarise a recent case before the High Court which may well serve as a watershed moment in Irish company law.

In this case, Powers v Greymountain Management Limited [in Liquidation] & Ors, the High Court held, for the first time that the corporate veil should be pierced in order to hold the directors personally responsible not only for fraudulent acts committed, but omissions which allowed the fraud to continue.

The Facts of the case

The plaintiff in this case had invested monies into Greymountain Management Limited (“Greymountain”) through certain financial instruments but, it transpired that these monies had been misappropriated and never actually invested. Unusually, the Plaintiff did not seek an order against the Company which was insolvent for several years, but instead sought orders for personal liability against the directors of Greymountain.

The fraud was alleged against 2 non-resident individuals acting as shadow directors of Greymountain, both of whom did not attend their own hearing. Aside from the Plaintiff, other investors had been induced into this fraud by being given the impression that Greymountain was subject to Irish and European financial services regulations, which it was not.

The other defendants were the two Irish resident directors, the first of whom was a college student who had become a director of the Company on advice of his mother to help pay his college fees. The second Irish director was a highly experienced director having held over 500 directorships over a 20-year period and was employed as a consultant in the company secretarial department of an accountancy firm where Greymountain’s address was registered. The second director claimed he had no knowledge of the alleged fraud and described his role in Greymountain as more of an administrative role akin to that of a company secretary rather than a director. Both Irish directors claim they were directors by name only and both of these claims were rejected.

Responsibilities of directors

In considering the responsibilities that attach to the role of a director, the Court had regard to the judgement in Fennell v Appleby [2022] which affirmed the judgement in Re. Laragh Civils [2016] that, at a minimum, directors should;

• inform themselves about the nature of their duties as director;

• familiarise themselves with the affairs generally of the company concerned; and

• exercise appropriate oversight at board level in respect of the discharge of whatever tasks or functions that have been delegated to others.

The Long Standing Doctrine of Separate Legal Personality

It is well established in Irish law that a company has separate legal personality to its members and directors. This principle was established in the seminal case of Salomon v. Salomon [1897] and whilst this principle is not an absolute, until recently, no Irish Court had ever held that a company’s corporate veil should be “pierced” or “looked through” in order to establish the personal liability of directors for wrongful acts or omissions.

Notwithstanding that, Twomey J. noted that there are certain circumstances where the piercing of the corporate veil would be appropriate including;

• fraud or misapplication of monies by the directors;

• the syphoning off of large sums of money by the directors such that the company would be unable to fulfil its obligations or pay its creditors; or

• negligence by the directors in the conduct of the affairs of the company.

Liability of the Shadow Directors

On the balance of probabilities, it was held that the shadow directors were the controlling minds behind the fraudulent activity. The Court viewed that there should be no reason to distinguish between shadow directors and directors when applying these principles of the piercing of the corporate veil. They were made personally liable for the full amount of the Plaintiff’s loss.

Liability of the Directors

The Court emphasised the fact that they cannot conclude that the Irish directors had been part of or aware of the fraudulent activity, however, without them being in place as the Irish directors, the fraud would not have taken place or been facilitated. They had fundamentally failed in observing their primary duties as directors and had abrogated the running of the Company to the shadow directors with a total lack of oversight of what the Company was actually doing.

In respect of the first director, the Court looked at the facts of the case and not the effect of the conduct and actions of other directors. The Court held that, as an adult, he must accept responsibility for his own actions and whilst one can sympathise with his plight, particularly the circumstances which led to him being appointed a director, ignorance of the law is not a defence and therefore, justice requires that the veil be lifted to make him personally liable.

The second director, unlike the first had facilitated the fraud according to the Court by co-signing on the company’s bank accounts and audited accounts. This was a crucial element in allowing the fraudulent activity to take place. Given his failure to acquire sufficient knowledge of the affairs of the company, he was found to have been in dereliction of his primary duties in relation to the operations of a company and therefore, this merited the piercing of the corporate in making him personally liable to the Plaintiff.

Reminder for Directors

This case reiterates that all directors have duties which they must observe. The impropriety and dereliction of duties displayed in this case justified the decision to hold the directors personally liable and should act as a reminder to all directors of Irish companies of their statutory obligations attaching to the role. Most importantly, the veil between a company and the individuals behind it is not an absolute in Irish law and should never serve as a sanctuary for those seeking to commit harm against others.

Our Company Secretarial Team at Eversheds Sutherland are highly skilled and experienced, particularly in dealing with the statutory duties and obligations of directors. If you require any assistance in this regard or indeed with any aspect of your company secretarial requirements, please contact a member of the team.

Aoibheann O'Grady, AoibheannOGrady@eversheds-sutherland.ie