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Directors Duites - Ireland


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Directors Duites - Ireland

  1. 1. LEGAL DEVELOPMENTS FOR DIRECTORS AND OFFICERS IN IRELAND Eoin Caulfield, partner Insurance Unit, William Fry
  2. 2. The changed economic climate, leading as it has to greater levels of insolvency, together with reper- cussions spreading out from the recent financial crisis, have given added focus to the law applicable to directors of Irish companies.The Office of the Director of Corporate Enforcement (‘ODCE’) was established in 2001 as a statutory body charged with upholding and enforcing the Companies Acts. The broad scope and use of its powers is increasingly evident.There have been case law develop- ments, in particular a number of Supreme Court judgments, which have re-visited findings made by lower courts around the liabilities of directors.There is also a prospect of US-style shareholder class action litigation against directors.There will be more developments in this area. The main areas explored here are: • Fyffes plc v DCC plc and Ors • Directors’ restriction and disqualification orders • Directors’ loans • Compliance statements and Companies Consolidation Bill • Administrative sanctions and criminal exposures of directors. Fyffes plc v DCC plc and Ors The report of the inspector appointed by the High Court to investigate matters around insider deal- ing in the shares of Fyffes plc was published in early 2010.This followed a long-running court case. In 2007, the Supreme Court overturned aspects of the High Court’s verdict in the case.The litigation, partially at the behest of Fyffes plc institutional shareholders, was taken against DCC plc, its managing director and two of its subsidiaries.The case, and the court-sanctioned inspectorship which followed, had the role of directors as a central focus. The facts of the case concerned a substantial holding by DCC plc of shares of Fyffes plc, acquired while the latter company was privately held and dating back to 1981. Following a number of intra- group transfers of the shares, in 2000 the group disposed of the shares externally through trading in the open market.There had been a common director and other involvement between relevant DCC plc entities and the board of directors of Fyffes plc, including access to information in management reports. The court’s findings revolve around the insider dealing provision in Part V of the Companies Act 1990, which has since been generally superseded by the introduction of the Market Abuse Directive in Ireland (in the context of companies which are listed on a regulated market e.g. full lists on the Irish or London exchanges). Much of the case turned on the extent to which trading had occurred while in possession of price-sensitive information not available to the market.The High Court judgment also involved the creation of the concept of the ‘reasonable investor’ and the effect the information might have on the trading activity of such a person. However, the Supreme Court in its interpretation dis- agreed with the use of this form of test and allowed the appeal (finding against the defendants).The consequence of this was an exposure for both the DCC plc companies involved and the individual director to material levels of damages.The final quantum of the damages was the subject of an out-of- court settlement. In the aftermath of the Supreme Court judgment, the ODCE applied to the High Court for the appointment of an inspector to investigate areas of suspected wrongdoing in three of the companies involved; the inspector’s report was published in January 2010. It had been anticipated that, subject to the findings of the inspector, the ODCE might pursue an order seeking the disqualification of persons sitting on the board of directors of DCC plc at the relevant time (in particular, its managing director) Executive Risks – A boardroom guide 2010 2 Ireland
  3. 3. from acting as a director pursuant to Section 160 of the Companies Act 1990 (see further below). However, the report concluded that the companies involved and their directors, officers and employees had behaved in a generally appropriate and proportionate manner and there had been good levels of system and control, including the taking of external professional advice when it was appropriate and the following of the advice when proffered.The ODCE has indicated it will now take no further action. The Fyffes plc case highlights a trend towards more vocal shareholder-led involvement in the con- text of public companies.There has been some conjecture that there will be a move towards share- holder class action litigation against directors in the context of banking failures such as the much- publicised Anglo Irish Bank (which the Irish government nationalised during 2009).These types of claim could be grounded on areas such as losses incurred by the holders of shares arising from alleged breaches by directors of the Market Abuse Directive.There is no case law on this to date. Sections 150 & 160 Companies Act 1990 - restriction and disqualification orders Restriction orders Changes made to the Companies Acts in 2001 have made it a mandatory requirement that on the liquidation of an insolvent company, a liquidator applies to the High Court for the restriction of the directors of the company pursuant to Section 150 of the Companies Act 1990, unless relieved of the duty by the ODCE.The increasing number of corporate failures in Ireland has led to far greater activity in this area. Save where a director has acted ‘honestly and responsibly’ (and certain other limited exceptions), the High Court is required to ‘restrict’ such persons for a period of up to five years.This is a restriction from acting in any way, however indirect, as a director or secretary, or in the promotion or formation of a company. It applies unless the company meets minimum capital thresholds, and includes other limitations, for example, with regard to certain relations between it and a restricted director. The increased focus on these Companies Acts provisions has led to a number of recent High Court and Supreme Court pronouncements, in particular, around the notion of acting ‘responsibly’. A num- ber of the cases involve non-executive directors who held what were effectively nominee or titular directorships and who largely did not involve themselves in the businesses conducted out of the companies of which they were officers. In the 2004 High Court case 360 Atlantic (Ireland) Ltd, the directors of an Irish company abstained from involvement in the business activities of a company which existed as part of a tax-planning structure.The company was a subsidiary of a Danish company, which itself was ultimately owned out of Canada.While the directors argued that, given their lack of capacity to influence group policy, they should not be culpable for merely implementing decisions made at a group level, it was held in the High Court that there could be no modification of the ultimate requirement that directors must act in the interests of their company. It was therefore held that the directors had failed to act ‘hon- estly and responsibly’ by their failure to involve themselves. The 2008 Supreme Court case Tralee Beef and Lamb Limited (In Liquidation) overturned High Court findings around the proposed restriction of an accountant appointed to a board of directors, where his appointed role was principally taken to protect the interests of an investment fund.There had been limited board engagement and much of the work was performed not by the director but by officers of the accountant’s firm acting on the nominee’s behalf (ie not at the direct behest of the director).The Supreme Court determined that the director should not face restriction.While not the basis for overturning the High Court’s finding, the Court stated that heightened levels of responsibility applied to a non-executive nominee may be excessive and that ‘there is a yet unmet need to make authoritative findings after full debate as to the respective duties of an executive and a non-executive director and, perhaps, a non-executive director appointed… for a particular pur- 3 Executive Risks – A boardroom guide 2010 Ireland
  4. 4. Executive Risks – A boardroom guide 2010 4 pose’.This statement was made having also considered the leading English case, Re Barings Bank & Others (1999) which made similar obiter comment on the potential need for greater demarcation by the courts of the respective roles of executive and non-executive directors. The 2009 Supreme Court case Worldport Ireland Limited (In Liquidation) brings some clarity to the whole area of ‘shadow directors’ in the context of director restrictions. A shadow director is defined by the Companies Act 1990 as ‘a person in accordance with whose directions or instructions the directors of a company are accustomed to act’ – the same level of liability pursuant to aspects of the Companies Acts can attach to such persons as to individuals formally sitting at board level.The case involved an application by the liquidator of Worldport Ireland Limited seeking the restriction of two directors of the Irish company, together with a restriction of the US parent company of the Irish subsidiary (i.e. on grounds that the latter was a shadow director).The Supreme Court held that, while a corporate entity can be a shadow director and shadow directors are capable of restriction (important points in them- selves), the US parent was a corporate not capable of restriction in the same manner as an individual in these contexts. Disqualification orders As well as restriction, the High Court may disqualify persons from acting as directors of Irish compa- nies for up to five years pursuant to Section 160 of the Companies Act 1990. Disqualification can extend beyond the role of director and may include disqualification from any direct or indirect involvement in the promotion of companies.The grounds upon which the court may disqualify, as well as direct breaches of specific areas of the Companies Acts, such as instances by directors of fraud, reckless trading or failure to keep proper books of account, include broader areas of scope around ‘breach of duty’ by a director and ‘conduct making the director unfit to be concerned in the manage- ment of a company’. Cases involving the ODCE in the context of the activities associated with National Irish Bank have led to recent case law around the disqualification of directors, including most recently the Supreme Court’s judgment in Director of Corporate Enforcement v Byrne (2009). This was one of a number of cases relating to directors and senior management of National Irish Bank and National Irish Bank Financial Services Limited arising from the 2004 report by the High Court inspectors appointed to investigate activities facilitating tax evasion and the levying of unwarranted fees and interest charges. Following the report, applications were granted in the High Court for the disqualification of nine indi- viduals who were previously either directors or senior officers of the relevant entities. Some of the applications were unopposed, while others have been contested through the courts. The judgment in the Byrne case involves a distinction made by the Supreme Court between the restriction procedure (ie see above) and the disqualification procedure and a statement that conduct necessary to lead to a disqualification must of its nature be manifestly more blameworthy than merely Ireland As well as restriction, the High Court may disqualify persons from acting as directors of Irish companies for up to five years pursuant to Section 160 of the Companies Act 1990.
  5. 5. failing to exercise an appropriate degree of responsibility (e.g. as might merit restriction).The Supreme Court also found that, in the exercise of judicial discretion, the courts are entitled to take into account the greater effect of a disqualification on a professional person (as in this case). Judgment in another related case, with similar factual background, is currently awaited. Directors loans and Companies (Amendment) Act 2009 Attention to issues stemming from activities in the Irish banking sector led to the enactment of the Companies (Amendment) Act 2009, aimed at immediately addressing perceived deficiencies in the Irish statute book around areas including those concerning directors.This is in advance of the results of the ODCE and Garda (Irish police) investigations into activities at Anglo Irish Bank, which remain on-going. Key changes in the Act involve extensions to the powers of the ODCE together with amended provisions relating to transactions between companies (and, in particular, credit institutions) and directors and their ‘connected persons’ (including spouses, minor children and associated vehicles). The Act also seeks to improve the transparency around loans made by credit institutions to their directors. Section 31 of the Companies Act 1990 prohibits loans to be made to directors and connected per- sons above low thresholds; this has been an area which has seen far greater levels of prosecution for breach in recent years.The new Act has extended this further. Previously, in order to prosecute a breach of the legislation against the officers of a company there was some difficulty in satisfying the test that a person had actual or sufficient imputed knowledge to believe the occurrence of an offence.The onus is now reduced and if a company contravenes the provision, every officer ‘in default’ (ie who authorises or, who in breach of duties, permits a transaction) is guilty of an offence – regardless of whether they were aware that it was a contravention of the provision. The conse- quence of this will be a far greater obligation on directors to monitor compliance. Although perhaps of lesser scope, the area around disclosures with respect to directors (and their connected persons) of licensed banks has also been tightened and itemised details relating to direc- tor/connected person loans above low de minimis levels must be provided in the financial accounts. The need for compliance with the declarations of interests by directors in respect of their dealings with a company is further strengthened. Companies Consolidated Bill Compliance statements The greater focus on corporate governance and compliance issues has put the need for a general annual compliance statement given by the directors of a company back on the legislative agenda. It is 5 Executive Risks – A boardroom guide 2010 Ireland The greater focus on corporate governance and compliance issues has put the need for a general annual compliance statement given by the directors of a company back on the legislative agenda.
  6. 6. already a criminal offence for a director to fail to take all reasonable steps to comply with the legal requirements relating to the production and content of directors’ reports.The extension of the law in this area is likely to require a statement given by the directors of any company over applicable turnover and net asset thresholds (to be determined).The statement would be given in the context of each financial year end and cover the existence of an appropriate compliance policy, and the company’s adherence to this policy.While compliance statements are an existing feature of certain types of com- panies with a regulatory authorisation, they are not currently required more generally. A compliance statement procedure was included in the Companies (Auditing and Accounting) Act 2003 but was not brought into law and instead was referred by the relevant minister to the Company Law Review Group (ie the statutory group established to assist in the updating of Irish company law).The view was expressed that the scope of the compliance statement as proposed be reduced and the applicable thresholds raised before the law is brought into effect.The directors’ compliance statement is some- thing which the Government has indicated will form part of the codification of the Irish companies leg- islation through the Companies Consolidation Bill. This process has been on-going for a number of years and will lead to a consolidation and general overhaul of the entire Irish company statute book. In addition to the compliance statement requirement referred to above, the European Communities (Directive 2006/46/EC) Regulations 2009 provides that Irish companies whose securities are admitted to trading on a regulated market (ie main market) must include a corporate governance statement in their annual report.This must refer to any corporate governance codes to which the company is sub- ject (eg the Combined Code) and describe the main features of the company’s internal control and risk-management systems. It puts existing best practice relating to listed company corporate gover- nance on a statutory footing. Codification of directors’ duties The Companies Consolidation Bill includes a proposal to partially codify the common law duties of directors which are currently based on court judgments.These will instead be set out as eight non- exhaustive principles, similar to the approach in the UK.While this should not in itself add to the duties owed by directors, codification is expected to mean a sharper focus on the behaviour of direc- tors where issues arise. Administrative sanctions and exposure to criminal liability A trend in recent Irish legislation and regulation is to extend criminal liability and administrative sanc- tion from attaching solely to corporate entities to those behind the ‘corporate veil’ – ie the imposition of liability on a company’s directors and officers where a company has committed an offence.This is a partial erosion of the doctrine of separate corporate personality and limited liability. Potential liability of directors for the acts of a company has been included in implementing legislation including safety, health and welfare at work, employment law, competition law and the area of financial services. It is likely that this area of legal risk for directors will further expand.The legislation adopts a common formula, typically including wording such as ‘… where an offence has been committed by a body corporate and the offence was committed with the consent, neglect or connivance of a director, manager, company secretary or other similar officer of the body corporate then that individual shall also be guilty of that offence’. The focus by the Irish courts on this area is evident in the context of cartel arrangements contrary to the Competition Acts. In the 2007 and 2009 cases, DPP v Denis Manning and DPP V Duffy, owner-direc- tors involved in activities relating to price fixing in the motor sector received severe sentences – eg 12 months in prison (suspended for five years) and a fine of €30,000.The courts have expressed the view that a prison sentence in respect of these types of breach is perhaps only a matter of time. An increased willingness to seek direct sanction against directors can be seen in the area of health and Executive Risks – A boardroom guide 2010 6 Ireland
  7. 7. safety legislation (e.g. DPP v Michael Murphy (2006)).The 2006 Australian case Kumar v David Aylmer Ritchie has also been cited in Ireland as grounds for suggesting that an Irish court may be minded to attach extensive personal liabilities to directors and sen- ior managers, even in cases where there may have been no direct involvement, on grounds that such persons have a duty to ensure appropriate checks and balances are always in place. As part of the creation of the Irish Financial Services Regulatory Authority in 2003/2004, a range of new administrative sanctions powers was given to the supervi- sory authority with regard to regulated financial services activities.The enforcement powers allow the Financial Regulator to conduct inquiries in public, fine regulated enti- ties up to €5m, fine individuals up to €500,000 and, in certain circumstances, disqualify persons from working in the financial services industry. The Financial Regulator had indicated it will use its administrative sanctions powers sparingly, however, it has been increasingly visible in the context of recent perceived fail- ures in the sector. In the context of directors, this includes a substantial fine handed down in 2008 to Sean Quinn Senior, a director of Quinn Insurance Limited, of €200,000.The company received a fine of €3.25m. In conjunction with the press release relating to the settlement, Mr Quinn stood down as a director.The fines related to the use of insurance company funds for lending purposes to non-regulated parts of the Quinn Group without the consent of the Financial Regulator. Conclusion The role and responsibilities of directors and senior officers of Irish companies has seen renewed focus.There is a move towards greater levels of personal exposure, evi- denced through recent court judgments, statutory changes and through the greater role of the ODCE.The final form of the Companies Consolidation Bill when it is enact- ed is likely to add further to this, including a new directors’ compliance statement and the codification of the principal duties of directors.There will be more developments in this area. 7 Executive Risks – A boardroom guide 2010 Ireland