In Fennell v Appelbe, a director of an insolvent company appealed a restraining order made against him by the High Court, which barred him from acting as a director for five years. The Court of Appeal dismissed the Director’s appeal and upheld the High Court’s findings that the Director had failed to demonstrate that he had acted responsibly throughout his tenure as Director. The case confirms that a director in a restriction proceeding must provide detailed evidence to the court to show that he acted honestly and responsibly with respect to the affairs of the company.
This section of the Companies Act 2014 provides that, on application by a liquidator, the court shall order that a person, who was a director of an insolvent company, be restricted for a period of five years. The extent of the restriction means that they cannot be appointed or act in any way, directly or indirectly, as a director or secretary of a company, nor intervene in the constitution or promotion of a society.
The court must make a restraining order unless it is satisfied of the three questions set out in subsection (2):
- the director acted honestly and responsibly with respect to the conduct of the affairs of the company in question, whether before or after it became an insolvent company,
- the administrator has, at the request of the liquidator of the insolvent company, cooperated as much as could reasonably be expected with respect to the conduct of the liquidation of the insolvent company, and
- there is no other reason why it would be fair and just for the director to be restricted
Facts of the case
The case concerned Alvonway Investments Limited (the Company), which was in liquidation. A number of loan facilities have been acquired by the National Asset Management Agency (BATNA) in 2011. NAMA subsequently issued letters of demand for nearly €420 million and appointed a statutory receiver in 2013. In 2014, NAMA filed for liquidation of the company and Mr. Fennell was appointed by the High Court as liquidator (the liquidator).
At that time, the Company had three directors (Mr. O’Donovan, Mr. O’Brien and Mr. Appelbe). The Office of the Director of Corporate Law Enforcement (ODCE) advised the liquidator of his duty to prosecute the three directors for their alleged breaches with regard to the Company (two requests for restriction and one for recusal). The liquidator’s claim related to two payments made by the company just before the appointment of a legal receiver. The liquidator acknowledged that Mr. O’Brien and Mr. Appelbe did not personally benefit from the payments, but argued that they did not act responsibly with respect to the conduct of the company’s affairs.
The essence of Mr Appelbe’s argument in the High Court was that he had “little knowledge” of what was going on in the business and was not involved in its day-to-day management. Mr Appelbe maintained that he had no knowledge of the payments, as the company was under NAMA’s “effective control” at the time, which further diminished his liability. He also argued that he was deprived of knowledge of the company during its insolvency (namely, by the receiver, NAMA and the liquidator).
The High Court rejected these arguments and concluded that Mr Appelbe had not acted responsibly in relation to the affairs of the Company. A Section 819 restraining order was later issued against him. In particular, the High Court noted the following:
- Mr Appelbe’s assertion that he had little knowledge of what was going on during the period complained of reveals “a most basic misunderstanding of the grave duties of directors”.
- Mr. Appelbe seems to believe that, to avoid the issuance of a restraining order, he need only demonstrate that he was not aware of the transactions to which the liquidator specifically mentions, but the case law clearly establishes that he the onus is on the respondent director to demonstrate that he acted honestly and responsibly with respect to the affairs of the corporation during his tenure as a director (before and after the corporation became insolvent).
- Mr. Appelbe has provided no evidence as to his contribution to the decisions of the directors at any time during the life of the Company. He has not demonstrated any “active steps” he would have taken as a director to keep himself informed of the affairs of the Company. In addition to denying knowledge of the insolvency and the disputed payments, he was “completely silent” about his activities as a director.
Court of Appeal
The correct interpretation of section 819 was at the heart of the appeal. Mr Appelbe’s main argument was that the High Court judge had erred in making the restraining order against him, because the liquidator had failed to put forward a case for Mr Appelbe to respond.
Justice Faherty of the Court of Appeal rejected this interpretation of the legislation:
- “The provisions of Section 819 are strict. Section 819(2) requires the court to restrain a director of an insolvent company, subject only to the satisfaction of the three matters specified in the subsection.”
- “[T]The most important feature of the legislation is that it effectively places the onus on directors to establish that the insolvency occurred in circumstances where no blame lies with them due to dishonesty or irresponsibility” . (quoting Judge Murphy in Business Communications Ltd v Baxter and Parsons)
If his first argument failed, Mr. Appelbe further argued that he could not be held responsible for the insolvency of the Company, nor for the disputed payments, because he had never been “called” ” to participate, engage in or otherwise adopt an active role in the management of the Company”.
Faherty J also did not accept this argument. Even though NAMA controlled, only liaised with the other directors, and had never asked Mr. Appelbe to attend meetings, this, the judge concluded, “did not relieve him of his obligation as a director to keep abreast of the affairs of the company, in the sense indicated in The Mosel, Re. Mitek Holding Ltd. and Import of vehicles limited“.
The Court concluded that Mr. Appelbe’s allegation that he had “no valid information concerning the affairs of the Company”, coupled with the fact that he had been a director of the Company since its creation in 2005, “demonstrated the degree of irresponsibility which, effectively, served to fix in copper” the restraining order. In addition, the Court noted that Mr. Appelbe was a director of 11 other companies and a qualified lawyer, “who could therefore be considered to know duties of a director”.
In this case, the Court could not rule in favor of Mr. Appelbe, due to his “total inability” to provide information that would convince the court that he had acted responsibly in accordance with his duties as administrator. and therefore should not be limited. In other words, Mr. Appelbe has adduced no evidence that would rebut the presumption against him under section 819.
It should be noted that Mr Appelbe’s co-defendant in the High Court, Mr O’Brien, was not limited. Reflecting on the procedure, Faherty J noted that there were “clear” differences between the two directors, including that Mr O’Brien was appointed about five years after Mr Appelbe, at a time when the company was heavily in debt. However, “more fundamentally”, Mr. O’Brien was exonerated because he provided “extensive evidence under oath demonstrating his knowledge of the affairs of the company, notwithstanding the fact that he had been barred from engagements between NAMA and Mr. O’Donovan”. The case underscores that a director in a restriction proceeding must provide detailed evidence to the court and show that he acted honestly and responsibly with respect to the conduct of the company’s affairs.
This case also recalls, not only what is required by a procedure under section 819, but also the active nature of the duties of a director with a corporation; what Keane J has described as the distinction between “abdication of responsibility” and “delegation of responsibility” (Re Laragh Civils Limited).
The key takeaways, which were referenced in the High Court, are as follows:
- Each individual director has a duty to the company to inform himself about the affairs of the company and to associate with his co-directors in monitoring and controlling them (Re Vehicle Imports Limited (in liquidation)).
- The directors may collectively delegate certain functions, but this delegation does not relieve the directors of their ultimate oversight obligation (Kavanagh vs. Reidler).
- Passive directors cannot be exonerated from liability or exempt from disqualification or restriction based on the passive nature of their role (About Walfab Engineering Limited).