Restriction Orders Imposed on Directors Where Assets Transferred Between Companies

In Leahy v Bailey & ors [2016] IEHC 592, High Court, Keane J, 28 October 2016, the liquidator sought a declaration of restriction against the three respondent directors pursuant to Section 819(1) of the Companies Act 2014.

Facts

The respondents were directors of a Company (Spur), which operated a restaurant in a shopping centre and the specific issue raised by the liquidator concerned the manner in which Spur dealt with a debt that was owed to it by another company (Trinity).  A significant debt due from Trinity to Spur was reduced by the transfer to Spur of franchise rights and the lease of its restaurant premises from Trinity.  The first and second named respondents were also directors of Trinity.

The Liquidator alleged that he had not been provided with any, or any sufficient, details of the transaction whereby the franchise rights were acquired or the valuation of those rights, including the franchise agreement itself.  Similarly, the respondents failed to provide the Liquidator with a copy of the assignment of the lease or with any independent valuation of it.  The Liquidator was of the view, that, given the economic circumstances; the high rent that was being charged; and the anticipated cost of replacing the specialist fit out of the premises, it was difficult to see how any significant value could have been ascribed to the lease at that time.

Decision

Keane J in the High Court accepted, that in the absence of the necessary evidence to support the explanations proffered by the directors, it was not possible to be satisfied that the relevant transactions were not contrived and deliberately backdated. Furthermore, the directors' failure to provide the necessary information and material amounted to a specific failure to co-operate with the Liquidator, capable of amounting by itself to a separate reason why it would be just and equitable to make a declaration of restriction against each of the directors.

Keane J held that the directors had failed to establish that they had acted honestly and responsibly in relation to the affairs of the Company.  He also found that there was failure by the directors to co-operate with the liquidator as they had failed to provide the documentation and information necessary to allow a proper examination of the purported franchise and lease agreements between Trinity and Spur.  He noted that the practical benefit that Spur derived from those purported transactions was, to say the least, questionable, involving, as they did, the acquisition by Spur, at considerable cost, of assets with little or no realisable value on insolvency when Spur was already in financial difficulty. In the circumstances Keane J further held that the directors had breached their fiduciary duty by benefitting Trinity (of which they were directors and shareholders) in transactions between Spur and Trinity.

Keane J did note that the position of the third named respondent director was different; in that he was at all material times a non-executive director and did not appear to have played any part in the conduct of Spur's affairs during his tenure.  However, Keane J was of the view that as the third named respondent had agreed to become a director, it would be contrary to the whole notion of proper corporate regulation to exonerate him from liability or relieve him from restriction on the basis that his role was passive.

Accordingly the Court granted the restriction orders sought against the three directors.

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

Date Published: 24 January 2017