Using tax monies to fund the running expenses of a Company led to restriction of Directors
In Leahy v Doyle & anor  IEHC 177, the High Court issued orders of restriction in respect of directors of two companies (Gingersnap and Scappa), under Section 150 of the Companies Act 1990 (now Section 819 of the Companies Act 2014). While the companies were different, the liquidator and the directors were the same.
Gingersnap operated a pub and nightclub (Redz) from leased premises on D'Olier Street. In 2004 it purchased Bowe’s public house on Fleet Street and commenced trading from that premises also. In 2009, it leased Bowe’s premises to Scappa, a related company and, in October 2012, it sold Bowe’s to another related company.
In December 2009, Gingersnap closed Redz for refurbishment, however, when the premises reopened in April 2011 the venture was not a success and the Company ceased trading at the end of 2012. The liquidator informed the Court that Gingersnap had made significant losses in the three years prior to liquidation, had no realisable assets and a total estimated deficiency of almost €6 million.
Scappa commenced trading in July 2009 when it leased Bowe's from Gingersnap. In September 2012, Scappa failed to obtain a tax clearance certificate and as a result the lease was extinguished. The liquidator informed the court that Scappa had made a loss in every year of its trading life, had no realisable assets and a total estimated deficiency of €340k.
No issue of dishonesty was alleged against either respondent.
The Court noted that it was obliged to make a declaration of restriction against each of the respondents in each set of proceedings unless satisfied that the respondents acted honestly and responsibly in relation to the conduct of the affairs of each company and that there was no other reason why it would be just and equitable to restrict either of them.
In relation to Gingersnap, the liquidator relied on three matters to support restriction:
- It had operated its licensed premises without a liquor licence (due to its failure to obtain a tax clearance certificate) from April 2011 until the end of 2012;
- It had accrued a liability of over €200k to the Revenue between April 2011 and March 2013 and at the creditors' meeting the first respondent had acknowledged that the monies due to the Revenue had been used as “running expenses”; and
- It had failed to file annual returns for any period after 2010.
In relation to Scappa, the liquidator relied on the following:
- The respondents, as controllers of a group of companies, had walked away from the debts of Scappa by placing it in liquidation, while continuing to operate the same business (that of Bowe’s public house) from the same premises through another company they controlled. The liquidator submitted that this amounted to a classic instance of the so-called ‘phoenix syndrome’;
- It traded while insolvent from 2010 until May 2013;
- It accrued a liability of over €154k to the Revenue which meant that it had traded during 2011 and 2012 primarily at the expense of the Revenue, as well as other creditors.
The Court was satisfied that the companies traded for some years while insolvent and held, that in the case of both companies, there was a lack of commercial probity and a want of proper standards. The Court particularly noted that the companies had failed to pay their taxes and held that there was a conscious and deliberate decision to use these monies to keep the companies going. This amounted to a level of irresponsibility, sufficient in itself to justify the making of a restriction order.
In addition, the fact that Gingersnap was permitted to trade without a liquor licence for a period of approximately 21 months, also demonstrated a lack of commercial probity and want of proper standards on the part of each of the respondents as directors of that company.
With regard to the position of the second respondent as a non-executive director of each company, the Judge was of the view that, even on the most narrow view of the common law duties owed to a company by a non-executive director, the lack of oversight in this case in respect of the lengthy period during which each company was permitted to trade while insolvent and the lack of commercial probity and want of proper standards involved in permitting the diversion of taxes to fund the companies’ trading, amounted to a breach of those duties and was, in consequence, irresponsible conduct.
Accordingly the Court made the restriction orders sought.
For more information please contact Paula Mullooly.
Date published: 7 June 2016