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Passivism is not a defence

  • Ireland
  • Corporate secretarial services

19-10-2022

A director is appointed to manage the business of a company on behalf of its shareholders. While an individual acting as a director is not required to hold any formal qualifications, they should be familiar with their legal responsibilities and statutory obligations imposed by the Companies Act 2014 (the “2014 Act”), other statutes and at common law. In addition to this, as fiduciaries, not only are directors responsible for their own actions, but also the actions or inactions of their fellow directors.

It is important to note that the 2014 Act does not differentiate between the various types of director (executive, non-executive, nominee or shadow directors) in the application of directors’ duties.

Quite often, a director is appointed for regulatory reasons, to satisfy residency requirements or even by a particular shareholder to serve their interests. Despite all types of directors being subject to the same statutory obligations under the 2014 Act, there are instances where directors pay little or no attention to the affairs of a company and oftentimes these derogations of duties will come to light if a company becomes insolvent.

Such a situation arose in the recent decision in Fennell v Applebe where a director of an insolvent company appealed the imposition of a restriction order. Initially the High Court had approved the restriction order as the director’s contention that he had little knowledge of the company’s affairs demonstrated a fundamental misunderstanding of the serious nature of directors’ duties.

Having regard to the criteria for a restriction order, the High Court considered Section 819 of the 2014 Act which provides that the Court shall make an order for restriction unless it is satisfied that;

a) the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company in question, whether before or after it became an insolvent company,

b) he or she has, when requested to do so by the liquidator of the insolvent company, cooperated as far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company, and

c) there is no other reason why it would be just and equitable that he or she should be subject to the restrictions imposed by an order under section 819(1).

In addition to the above, when a company is being wound up for reasons of insolvency, a liquidator has an obligation to make an application to the Court to impose a restriction order on the directors of that company, unless excused from doing so by the ODCE (now Corporate Enforcement Authority).

In appealing the restriction order, the director argued that the liquidator failed to bring a case for him to answer and this was rejected as the onus is on a director to prove they acted honestly and responsibly in relation to the company’s affairs, rather than the inverse. In addition, the director asserted that he could not have been considered to have been irresponsible because he had never been called upon to engage in the affairs of the company and his “passive” stance was a defence. This was dismissed by the Court of Appeal and they rejected the appellant’s insistence that he had little knowledge of the affairs of the company given the degree of its insolvency and the length of his tenure. Furthermore, his lack of involvement, which was serving as his defence only served to copper fasten his irresponsibility and the need for the imposition of the restriction order.

Conclusion

This decision reiterates that directors cannot claim ignorance or passiveness as a defence to a restriction application. In order to effectively fulfil the role, active engagement with the company’s business activities is required and at the very least, they should have a basic understanding of the affairs of the company of which they are a director.

Our Company Secretarial Team at Eversheds Sutherland are highly skilled and experienced, particularly in dealing with the statutory 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.

Ciara Wheeler, Assistant Company Secretary - CiaraWheeler@eversheds-sutherland.ie