knowledge 20 September 2022 |

No protection for a “passive” director

In this case,¹ Mr Appelbe (the “appellant”) was one of three directors (Mr O'Donovan, Mr O'Brien and Mr Appelbe) of Alvonway Investments Limited (the “Company”) and had been a director since its incorporation.  As of December 2010, the Company’s liabilities exceeded the value of its assets by approximately €300 million.  In 2011, certain loan facilities made available to the company, were acquired by the National Asset Management Agency (“NAMA”).  In 2013, NAMA issued letters of demand calling for payment and a statutory receiver was appointed.  Mr Fennell (the “Liquidator”) was appointed as the Liquidator in 2014 after NAMA petitioned the High Court to wind up the Company.  The Office of the Director of Corporate Enforcement, as it then was,² informed the Liquidator that he had not been relieved of his duty to make a restriction application in respect of the three directors. 

The principal ground for the application was the making of two payments by the Company the day before NAMA appointed a statutory receiver.  One of these payments was made to Mr O'Donovan, against whom the Liquidator sought a disqualification order.³  The Liquidator accepted that Mr Appelbe was not aware of, nor had he benefited from, the payment, but sought to restrict him as the payments had been made while the Company was “grossly insolvent”.  The Liquidator argued his lack of knowledge constituted “irresponsibility” within the meaning of section 819.

Section 819

Section 819 provides that “the court shall make a declaration” that, for a period of five years, the person subject to the application, “shall not be appointed or act in any way, directly or indirectly, as a director or secretary of a company, or be concerned in or take part in the formation or promotion of a company”.  The court shall make an order unless it is satisfied of all three matters laid out in section 819(2):

1. 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,

2. 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

3. 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)].

The High Court judgment

Mr Appelbe argued that he had “little knowledge” of the Company’s management prior to the appointment of the statutory receiver and after that appointment, NAMA “deprived” him of information regarding the affairs of the Company. 

The High Court rejected this.  Mr Appelbe’s contention that he had “little knowledge” of the Company’s affairs revealed his “fundamental misunderstanding” of the serious nature of the duties of directors.  His “lack of action” could not be used as defence.  The onus on directors under section 819 is to provide evidence of acting responsibly, and is not an onus to demonstrate that he was unaware of the impugned transactions.  The High Court restricted Mr Appelbe for a period of five years.

The Court of Appeal judgment

Mr Appelbe’s first ground of appeal was that the High Court erred in making the order against him because the Liquidator failed to put forward a case for him to answer.  The Court of Appeal dismissed this as a misunderstanding of section 819.  It is not a question of whether the liquidator made out a case for Mr Appelbe to answer, rather once a restriction application is made in the context of insolvency, the onus is on to the director to evidence his or her honesty and responsibility.

Secondly, Mr Appelbe contended that he could not be considered to have been irresponsible because he had never been “called upon” to engage in the affairs of the Company.  Essentially, Mr Appelbe argued that his status as a “passive” director is a defence to a restriction application.  The court disagreed.  This could not absolve him of his duties as a director and the court expressed disbelief that the appellant had “little knowledge” of the Company’s affairs given the extent of the deficit.  Rather than his lack of involvement being a defence, this “copper fastened” his irresponsibility and the need for his restriction.

The High Court found that Mr Appelbe was not responsible for the Company’s insolvency.  On appeal, Mr Appelbe took issue with the fact, despite this finding, he was not totally absolved of responsibility for the Company’s failure.  This was dismissed by the Court of Appeal which noted that there seemed to be some confusion between being the cause of the insolvency and being responsible for the affairs of the Company.

Finally, Mr Appelbe argued that the Liquidator’s failure to respond to his letters should persuade the court to decline to order his restriction. This was dismissed.  This could not have any impact on the responsibility of the director and could not absolve him of his duties under the 2014 Act.

Comment

The judgment of the Court of Appeal emphasises that the role of a director requires active engagement in a Company.  Mr Appelbe’s argument that he was never “called upon” to engage in the affairs of the Company confirmed to the court that restriction was warranted, rather than exculpating him.

Mr Appelbe failed to provide any evidence that would rebut the statutory presumption in favour of restricting a director of an insolvent Company under section 819.  This is to be contrasted with the “extensive evidence” provided to the High Court by Mr O’Brien which led to that court refusing to restrict him.  This contrast highlights the core of section 819: there is a heavy onus on a director to provide evidence to demonstrate their honesty and responsibility (and hence avoid a restriction order).