HC 289/04

THE HIGH COURT
DUBLIN

2002/354 Cos			

IN THE MATTER OF FIRST CLASS TOY TRADERS LIMITED (IN LIQUIDATION AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACTS 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001

BETWEEN:

DECLAN GRAY AS LIQUIDATOR OF THE COMPANY IN THE WITHIN PROCEEDINGS
      Applicant

-and

JOHN McLOUGHLIN, MICHAEL McLOUGHLIN AND THOMAS TUOHY
  Respondents

EXTEMPORE JUDGMENT DELIVERED BY MS. JUSTICE FINLAY GEOGHEGAN ON FRIDAY, 9TH JULY 2004

This is an application by the official liquidator under section 150 of the companies Act 1990 for declarations of restrictions in respect of the three respondents.

In respect of the first two respondents it is accepted that they were persons who were appointed and acted as directors of this company up until the date of commencement of the winding up.

In respect of the third named respondent, Mr. Tuohy, a preliminary issue arises as he was not formally appointed a director of the company, nor is he registered in the company's office as a director of the company, but the official liquidator submits that he was a person who was a de facto director of this company within the 12 months prior to the commencement of winding up.

It is clear from section 1(3) of the 1990 Act that it must be construed as one with the company's Acts 1963 to 1990 inclusive.  Section 2(1) of the Act of 1963 provides that a director includes any person occupying the position of director by whatever name called.  It is also clear, and was undisputed, that within that definition is included both persons who are de jure directors, that is to say that they have been formerly appointed, and de facto directors as that term has been construed and explained by the

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courts.	Essentially a de facto director is a person who assumes to occupy the position of a director or assumes to act as a director of the company.

It is accepted by or on behalf of the official liquidator that the onus is on him to establish that Mr. Tuohy was a de facto director. It is also common case that the court must decide that issue on the balance of possibilities.

Counsel for all parties referred me to the relevant authorities both in this jurisdiction and in England and Wales in relation to the issue.

O'Neill J in the matter of Lynrowan Enterprises, (unreported The High Court of 31st July 2002), considered this issue.  He determined and I agree with his view, that a person who is a de facto director, and therefore a director within the meaning of Section 2(1) of the 1963 Act is amenable potentially to restriction under section 150 of the 1990 Act. There is no and was no dispute at the hearing before me on that issue.

The real question and the more difficult question is: what should be the appropriate approach of the court to determining the issue as to whether or not a person is or is not a de facto director.

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In Lynrowan Enterprises, O'Neill J followed the approach of Timothy Lloyd QC sitting as a deputy High Court judge in Re: Richborough Furniture Ltd, (1996) 
1 BCLC, 507. In doing so O'Neill J identified three circumstances in which a person may be considered to be a de facto director. These were:

1.	Where there is clear evidence that the person has been either the sole person directing the affairs of the company, or

2.	Is directing the affairs of the company with others equally lacking in valid appointment, or

3.	Where there were other validly appointed directors that he was acting on an equal or more influential footing with the true directors in directing the affairs of the company.

O'Neill J also followed Timothy Lloyd QC in putting the following limitation on those three circumstances by stating:
"That in the absence of clear evidence of the foregoing and when there is evidence that the role of the person in question is explicable by the exercise of a role other than director, the person in question should not be made amenable to the Section 150 restriction".

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The above test as formulated by Timothy Lloyd QC has been subsequently the subject matter of some consideration and, I think it is fair to say, some criticism in subsequent decisions of the English courts.

I find more helpful the approach of Jacob J in the Secretary for State and Industry V Tjolle and others [1998] BCC, 282, and in particular the further
explanation of his approach by Robert Walker LJ in Re Kaytech International plc, Potier V Secretary For State for Industry, (1999) BCC, 390. In
Tjolle, Jacob J stated at page 290:
"For myself I think it may be difficult to postulate any one decisive test.   I think what is involved is very much a question of degree.  The court takes 
into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (e.g management accounts) on which to base decisions, and whether the  individual had to make major decisions and so on.	Taking all these factors into account,  one asks 'was this individual part of the corporate governing structure?', answering it as a kind of jury question.  In deciding this, one bears very much in mind why one is asking the question.  That is why I think the passage I quote from Millett J is important.   There would be no  justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real  control, 

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either in fact or law".
When citing that passage with approval in Re Kaytech plc, Robert Walker LJ at page 402 then stated:

"I do not understand Jacob J, in the first part of that passage, to be enumerating tests which must all be satisfied if de facto directorship is to be established. He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if were a de jure director".

As I have indicated I find this approach helpful and it, therefore, seems to me that the task which this court must perform is to determine what he describes as the crucial issue, namely, whether the individual in question has assumed the status and functions of a company director so as to make himself amenable to section 150 of the Act of 1990.

It further appears to me that if a person is considered to be a de facto director then he is a director within the meaning of Section 2(1) of the Act of 1963 and, therefore, has inter alia the common law duties and powers of a director.   In considering whether a person has assumed the functions of a director it is helpful to recall what are the essential duties of a director at common law.   These have been formulated again by Jonathan Parker J in

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Re: Barings PLC and others No. 5 Secretary of State For Trade and_Industry V Baker and others [1991] BCLC, 4333, in the following way:

"Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them".

I would respectfully agree with that formulation of the duties of a director.

Hence, what I must decide is whether the official liquidator has established on the balance of probabilities that Mr. Tuohy on the facts of this case assumed the status and function of a director bearing in mind the above formulation of the duties or function of a director.

Since the hearing, I considered the evidence in light of the submissions made by counsel and the law to which I have referred above, and have concluded that as a matter of probability, Mr. Tuohy was a de facto director of this company in the 12 month period prior to the commencement of the winding up.

The reasons for which I have reached such conclusion are primarily the following:

1.	Both of the first and second named respondents who are the two de jure directors of the company

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consider Mr. Tuohy to have acted as a director of the company. They go further and consider that he was appointed a director of the company. I think it is significant that in the unfortunate differences that broke out in the late days of this company that the second named respondent was and had a close working relationship with Mr. Tuohy during that period.

2.	That Mr. Tuohy accepts in his affidavit that he agreed to the description of finance director for his position.

3.	The evidence is that Mr. Tuohy met regularly with the other two directors at what have been characterised as board meetings, though Mr. Tuohy sought to characterise them as management meetings.  I have concluded as a matter of probability that they were in reality board meetings of this company.

4.	Mr. Tuohy was a cheque signatory whilst not being an employee of the company.

5.	Mr. Tuohy appears to have had full information about the affairs of the company and in particular he himself controlled the availability of the financial information in this company.

6.	It would appear from Mr. Tuohy's affidavit that he accepts that he had responsibility for the

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financial function within the company.	It is common case that he was not an employee of the company.
Mr. Tuohy asserts that the function which he was discharging was one of providing professional services to the company. However, I cannot accept that characterisation of his function in relation to the company.	It seems to me that it went well beyond that. He was not just providing services to the other two directors, but rather he himself seems to have accepted a responsibility for the financial function within the company.

7.	Mr. Tuohy's involvement in the control and supervision of the affairs of the company went beyond the pure financial function. He appears to have had a role in the negotiation of property matters also, 
in relation to the landlord he guaranteed the lease to the landlord. Crucially, at a difficult time for this company in the summer of 2002, he attended meetings with the principal supplier and the landlord along with the second named respondent and appears to have signed a letter to the principal supplier.

So for all those reasons I have concluded that Mr. Tuohy, on the facts this case, did assume the status and function of a director and, therefore, is a director within the meaning of Section 2(1) of the 
Act of 1963. Hence, having regard to the undisputed fact that this company is a company to which section

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149 of the Act of 1990 applies I must, therefore, consider under section 150 whether or not the three respondents have satisfied the court that they acted honestly and responsibly in relation to the conduct of the affairs of this company.

There is no issue on the facts in relation to the honesty of the three respondents, and I am quite satisfied that they acted honestly in relation to the conduct of the affairs of the company.

On the facts raised by the official liquidator there is in relation to all three respondents one generalised issue raised which goes to the question of whether they can satisfy the court that they acted responsibly.

It is asserted, and I think it is fair to say that it is not disputed, that this company was under capitalised and traded at a loss from start to finish.

The issue is whether or not that of itself indicates that this court should find that the directors have not satisfied the court that have they acted responsibly.

The parties have relied upon the decision of the Supreme court in Squash Ireland, (2001) 31R, 35, and

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in particular the statement of McGuinness J at page 39:

"The question before the court is whether they acted responsibly and this, as was correctly stated by counsel on behalf respondent, must be judged by an objective standard.  In the case of all companies which have become insolvent it is likely that some criticisms of the directors may be made.
Commercial errors may have occurred, misjudgments may well have been made, but to categorise conduct as irresponsible I feel that one must go further than this."

The question is what is that further matter to which McGuinness J refers. I think it is fair to say that she then answers that by referring to the well known matters which had been set out by the late Shanley J in La Moselle Clothing Limited y Soualhi, (1998) 2 ILRM, 345. It is unnecessary for me to set out all five matters to which this court should have regard, but it does appear that the commencing of a substantial business, as was done in this instance, with a company that was under capitalised raises an issue under the fifth heading raised by Shanley J, namely:
"The extent to which the director in the conduct of the affairs of the company has displayed a lack of commercial probity or want of proper standards".

It is envisageable on certain facts that for directors to set out with an under capitalised company and to commence trading with limited 

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liability and incur significant debts may raise questions about a lack of commercial probity or want of proper standards.

On the facts this case I am satisfied, however, that there was no such lack of commercial probity or want of proper standards.

I am satisfied that the first two respondents were experienced businessmen and the third respondent had significant experience of financial and accounting matters. Whilst they did start trading through an under capitalised company there is no suggestion that they were improperly attempting to avail of limited liability. Rather they appear to have organised the financing for this company in a way in which the first two respondents using their existing business profile would be able to obtain loan finance for the company which they then personally guaranteed.

I am satisfied that they genuinely anticipated and believed that whilst this would be a loss making company in its initial stages that it had the potentiality to be a successful venture. Unfortunately the illness of the first named respondent and the subsequent personnel difficulties between the respondents at a critical time in the company seems to have constituted a significant impediment to that ultimately being achieved. It

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forms no part of the function in this court to decide whether or not independently of those factors this company could have succeeded.	 On these conclusions, I am satisfied on the major issue raised in relation to the responsibility that the directors have satisfied the court that they have acted responsibility.

There were two matters of lessor importance raised, namely, the failure to hold an AGM within the required time. This was a very short period prior to the liquidation. Also, the acceptance of deposits during the summer of 2002 in respect of Christmas 2002. Neither of those matters, it appears to me, precludes me from concluding looking at the overall tenure of these directors that they acted responsible.

There were two further matters raised only in relation to the second named respondent Mr. Michael McLoughlin.  One matter relating to a loan from the ICC, what is now the Bank of Scotland, and secondly, some payments which were made after the date of presentation of the petition out of the AIB bank account of the company.	I am satisfied that Mr. McLoughlin has adequately explained both of these matters in his affidavit and has dealt with both in a responsible manner. He has already put in place arrangements to refund the company an amount agreed

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with the official liquidator (which the court has approved) in respect of the Bank of Scotland debt and has given an undertaking to repay any monies which  the liquidator finds due in respect of the payments out of the AIB account and, therefore, these matters likewise do not preclude me from concluding that Mr.
Michael McLoughlin acted responsibly whilst a director of the company.

So I will dismiss the application under section 150 against all three respondents.