Director Restricted as Company Not Liquidated in a Timely Fashion

In Wallace v Edgeworth & ors [2017] IEHC 475, the liquidator of Shemburn Limited (the Company), sought to restrict the respondents from acting as directors. As the first named respondent (ME) did not oppose the application, and the third named respondent did not appear, they were both restricted as directors.   The second named respondent (GE), a commercial airline pilot, and the son of ME, opposed the application.

The Company's primary activity was the leasing of aircraft to associated companies, including The Pilot Training Centre of Ireland Limited (PTCI). PTCI was placed into liquidation in September 2012 when it was owed approximately €1.5 million by the Company. ME engaged with the liquidator in an attempt to realise the assets of the Company for the benefit of PTCI.  However, negotiations with the Bank who had a lien over certain assets failed and the Company was put into liquidation in May 2014.

The liquidator argued that GE had failed to wind up the Company in a timely fashion. The Company's main source of revenue was PTCI and when PTCI was wound up, the Company ceased to have any prospect of survival and should have been placed into liquidation as soon as possible. The failure to do so, meant that assets were devalued and sums owing for storage of aircraft substantially increased. The liquidator also argued that GE failed to respond to a request for information when he wrote to him in June 2014, informing him of his appointment as liquidator and enclosing a questionnaire to be filled out and returned.  

At the time of his initial appointment as director, GE was still in attendance at college and his role was minimal. In 2006, GE completed his college studies and took up a more involved role in the business. After the group was severely impacted by the recession in 2008, GE trained as a commercial pilot. From this point on, he ceased to have full-time involvement with the Company and was kept up to date with matters by ME. GE told the Court that he agreed with the steps taken by ME in relation to the Company at this time and in his non-executive role he was reliant on ME for information and trusted his judgment.  GE did not seek any independent advice or engage with the Company auditors to ascertain whether the approach taken by ME was indeed the correct one or whether an alternative course of action would be more appropriate, such as the placing of the Company, which was at this stage hopelessly insolvent, into liquidation.

GE also denied any failure to cooperate and stated that his lack of response to the questionnaire was because the questionnaire was sent to an incorrect address.  GE stated that he was aware that ME was fully cooperating with the liquidator at this time and was providing all necessary information. Although he was not a "passive director", he was reliant on ME for information and so was not in a position to offer any further information.

The Court noted that the liquidator's primary concern was the failure to wind up the Company in a timely fashion, and particularly the delay following the liquidation of PTCI in July 2012, until the appointment of the liquidator to the Company in May 2014, some 22 months later. The Court was of the view that when PTCI ceased trading it should have been obvious that the Company would have to be liquidated. It should also have been clear that aircraft would have to be stored pending sale which would incur costs. While a short delay might have been acceptable, a delay of over 18 months was not responsible conduct.  The Court refused to excuse GE from responsibility on the basis that his role as a director was non—executive as this would ignore GE's general duties as a director, even as a non-Executive Director, to exercise supervision over the affairs of the Company. The Court noted that there was no evidence that GE had any contact with the Company accountant or auditor, or sought any outside advice as to the appropriate action to be taken by or in respect of the Company.

The Court was of the view that the question as to whether or not to appoint a liquidator to the Company immediately post the liquidation of PTCI was not commercial judgement but a question that had to be addressed in the context of the duties owed by the directors under the Companies Acts. If GE had objectively, properly, and responsibly considered the position of the Company in the summer of 2012 he should have realised that incurring further debt for storing aircraft pending sale would have implications for new or existing unsecured creditors, who would ultimately be unable to recover their debt. At the very least he should have sought advice rather than accepting ME's decision-making and strategy, apparently without question. Had he consulted with an independent accountant or the company auditor he would almost certainly have been advised that the Company should immediately be put into liquidation – and if not so advised he might still be held to have acted responsibly by seeking and relying on professional advice.

The Court did not accept that GE acted irresponsibly in in failing to complete the questionnaire. It accepted his evidence that he had not received the and that he was not in possession of any information that could have added to the information already provided to the liquidator by ME who did provide a Statement of Affairs.

Accordingly, the Court held that GE did not act responsibly in failing to take appropriate action to have the Company wound up in a timely fashion following the liquidation of PTCI and ordered his restriction as director.

For further information please contact Paula Mullooly or your usual contact in A&L Goodbody.

Date Published: 5 September 2017