HC 180/04
THE HIGH COURT 

[2003 No. 387COS]

IN THE MATTER OF Xnet INFORMATION SYSTEMS LIMITED (IN VOLUNTARY LIQUIDATION) AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001. 

BETWEEN 

JAMES STAFFORD 

Applicant  

-  and -  

AIDAN HIGGINS, KEVIN MOORE, NICHOLAS KOUMARIANOS AND HOWARD ROBERTS 

Respondents 

JUDGMENT of Ms. Justice Finlay Geoghegan given on the 6th day of May, 2004. 
	The applicant is the liquidator of Xnet Information Systems Limited (in voluntary liquidation) (“Company”), having been so appointed by resolution of the 19th July, 2002. 
	The respondents were all directors of the Company within 12 months of the date of commencement of the winding up.  The third named respondent resigned on the 17th April, 2002 and the other respondents remained directors.  
	The applicant seeks a declaration of restriction of each of the respondents under s. 150(1) of the Companies Act, 1990 (as amended).  The application is brought pursuant to the provisions of s. 56(2) of the Company Law Enforcement Act, 2001, the applicant not having been relieved of his obligation to bring such application by the Director of Corporate Enforcement.   
	It is undisputed that the Company was, at the date of commencement of the winding up, unable to pay its debts within the meaning of s. 214 of the Companies Act, 1963.  Accordingly s. 150 of the Act of 1990 applies to the Company and all four respondents.  

The law. 
	Section 150(1) of the Act of 1990 obliges the court to make the declaration of restriction sought unless it “is satisfied as to any of the matters specified in subsection (2)”.  Insofar as relevant subsection (2) provides:
		“(2) The matters referred to in subsection (1) are 
(a)	that the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section…” 
The applicant having established that s.150 of the Act of 1990 applies to the Company and the respondents, the onus shifts to each of the respondents to satisfy the court that he has acted honestly and responsibly in relation to the conduct of the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the declaration of restriction if he is to escape the mandatory declaration of restriction provided for in s. 150(1). 
	In this case each of the respondents, on the affidavits sworn, has satisfied me that he acted honestly in relation to the conduct of the affairs of this company and within the meaning of subsection (2) that “there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section.”  The more difficult issue is whether each of the respondents has satisfied me that he acted responsibly in relation to the affairs of the Company and I therefore propose setting out the law in relation to the appropriate consideration by this court of such issue.  The matters to be considered by this court have been set out by the Supreme Court in Re Squash (Ireland) Ltd [2001] 3 I.R. 35 approving those set out by Shanley J. in La Moselle Clothing Ltd (in liquidation) and Rosegem Ltd (in liquidation)  v. Soualhi [1998] 2 I.L.R.M. 345.  
These are: 
(a)	    The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963 - 1990. 
(b)	The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility. 
(c)	The extent of the director’s responsibility for the insolvency of the company. 
(d)	The extent of the director’s responsibility for the net deficiency in the assets of he company disclosed at the date of the winding up or thereafter. 
(e)	The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.
In addition, the Supreme Court stated that this court should look at the entire tenure of the director and not simply the few months in the run up to the liquidation.  
Finally, it appears clear from the judgment of McGuinness J. (with whom the other members of the court agreed) in Re Squash Ireland Limited that in having regard to the factors identified above the court should do so in the context of the purpose of s.150 namely to protect members of the public, creditors and others from persons whose past conduct as directors of a company have shown them to be a danger.  
The onus placed on directors by the express wording of s.150(2) of the Act of 1990 is wide ranging.  The practice direction of the President of the High Court requires a liquidator to set out the facts which he considers should be brought to the attention of the court for the purposes of determining the matters relevant to s.150(2) of the Act of 1990.  The liquidator prior to bringing an application under s.150 has normally had an opportunity of examining the affairs of the Company.  Accordingly, in practice and as in this case it is in respect of those matters which the respondents must satisfy the court that they acted responsibly.  Exceptionally, in the course of an application, new matters may come to light which require justification or explanation from respondents. 
In this case the matters drawn to the courts attention by the liquidator primarily relate to the conduct of the respondents surrounding the move of the company to new premises in June 2001 and the financing of same.  

The facts. 
	The Company was incorporated on the 22nd November, 1995.  The first and second named defendants were the initial shareholders and initial directors and promoters of the Company.  The Company specialised in the supply and installation of data storage systems and service backup.  It traded from a rented property in Dun Laoghaire, Co. Dublin.  The Company became successful and turnover increased rapidly.  The first named respondent states that by March 2001 the Company employed 26 people and had a turnover of €4.3m.  Further, the Company was in the top ten fastest growing technology companies in Ireland for two years running.  It won the Deloitte and Touche Award for results achieved for the years ended March 2000 and March 2001.  It also made the top 100 European technology companies and received the “Excellence Through People” award and “Investors in People” award.  
	It is stated, by the first named respondent, that in the financial year beginning April 2001 the Company appeared to be in a healthy financial situation.  It is submitted on his behalf and on behalf of the second named respondent that this is the context in which the facts surrounding the move by the Company to the premises in Kilmacanogue must be viewed.  This does not appear to be disputed by the liquidator.  The significant downturn in the technology sector appears to have occurred in the late Spring and Summer of 2001.  The Company had a disastrous period between June and September 2001.  
	The third named respondent was appointed a non-executive director and the chairman of the board on 1st June, 2000.  He was appointed by reason of his prior experience and, in particular, as managing director of Cable and Wireless Ireland and a director of other companies within that group and broad management experience in the technology and communications sector.  He states that over the relevant period he attended by-monthly formal board meetings each year and also attended additional meetings and provided advice and guidance as appropriate.  
	The fourth named respondent was employed by the Company in January 1999 as a technical consultant.  In January 2000, he was promoted to technical director and became a director of the Company. 
	In December 2000 accordingly the first, second and fourth named respondents were executive directors of the Company and the third named respondent a non- executive director and the chairman of the board.  Whilst there is some dispute between the first and second named respondents on the one hand and the third and fourth named respondents on the other as to the precise circumstances in which the property was acquired and, in particular, the knowledge of the third and fourth named respondents in relation to same, I have concluded that, as a matter of probability,  the factual position in relation to the purchase of the property is as set out by the third named respondent at paragraph 7 to 11 inclusive of the first Affidavit sworn by him on the 13th October 2003.  In summary, the following occurred.  Between December 2000 and May 2001 the possibility of the Company moving to new premises was under consideration by the board.  The board agreed that an independent advisor, Peter Cagney be appointed.  He was retained and did give advice until May of 2001.  He ultimately only appears to have given informal advice to the individual directors rather than any formal advice to the board of directors.  His advice appears to have been that the price to be paid for the property was high by market standards but that the proposed rent to be paid by the Company for the property was fair.  
	I am satisfied that the first and second named respondents made the third and fourth named respondents aware that they proposed personally purchasing the property and that it would then be leased by them to the Company.  This purchase was completed by the first and second named respondents in May 2001.  A lease was entered into with the Company, which does not appear to have been approved by the board of directors though the Affidavits of the third and fourth named respondents make clear that they were aware from a conversation between Mr. Cagney and the third named respondent of the proposed initial rent. 
	The Company moved to the new premises in June 2001. 
	I have concluded, on the Affidavits, that the third and fourth named respondents did not become aware of the financing arrangements for the purchase of the premises and for the fit out of the premises until a board meeting of the 18th July 2001.  In particular, I have concluded that they were not aware of any loan obtained by the Company in connection with the purchase nor any loan made by the Company to the first and second named respondents.  
	I have further concluded that the first and second named respondents, in organising the finance for the purchase of the premises at Kilmacanogue in their two names, made the following arrangements without consultation with the third and fourth named respondents, their fellow directors and without approval of the board of directors:
(i)	They obtained a loan to the Company from ICC in the sum of €285,691.  This was expressed to be a business development loan. 
(ii)	The Company made a loan to the first and second named respondent of €285,691.  This appears to have been to provide the balance of the purchase monies payable by the first and second named respondents. 
(iii)	The Company made a loan of €177,763 to the first and second named respondents.  This appears to have been for the purpose of the deposit on the premises in Kilmacanogue.
(iv)	The Company made a loan of €119,355 to the first and second named respondents. This was for the stamp duty payable on the purchase of the premises. 
(v)	The first and second named respondents purported to sell to the Company and the Company purported to agree to purchase the fixture and fittings in the building for a sum of €152,368. 
It appears that when the third and fourth named respondents became aware of the above financial transactions at the board meeting of the 18th July and objected to same, the first and second named respondents indicated that the loans were of a temporary nature only and that it was intended to remortgage the premises within a period of six months and to repay to the Company the loans made to the directors. This appears to have been confirmed in a memorandum from the second named defendant to the third named defendant dated 21st August 2001.  
In August 2001 when, as is accepted by all the respondents, the Company was in very difficult financial circumstances it appears that the first and second named respondents, without seeking the approval of the board of directors of the Company, procured the increase of the rent payable to them by the Company from IR£125,000 per annum  to IR£145,000.  This was done following a special resolution of the Company on the 7th August 2001 and a fresh lease entered into between the Company and the first and second named respondents at this rent.  This lease does not appear to have been approved by the board of directors or to have been brought prior to its execution to the attention of the third and fourth named respondents. 
There is a substantial dispute on the Affidavits as to whether the loans referred to above, which were made by the Company to the first and second named respondents, did or did not contribute to the demise of the Company.  The applicant takes the view that they did contribute to the demise.  The third and fourth named respondents take a similar view.  The first and second named respondents take the opposite view and believe that it was the increased costs associated with the move to the premises in Kilmacanogue rather than the loans made to them which contributed to the demise of the Company.  
By reason of the conclusions which I have set out below, it does not appear necessary for me to reach a conclusion on this issue. 
The first and second named respondents were unable to obtain refinancing of the premises.  They were unable in the Autumn of 2001 to repay the loans to the Company.  Cost cutting exercises took place in the Autumn of 2001.  The employment of the second named respondent with the Company was terminated in December 2001 in circumstances which are a matter of dispute between him and the Company and the first, third and fourth named respondents.  It also gave rise to litigation and an interlocutory application which was determined by this court (O’Sullivan J.).  All parties were in agreement that the facts pertaining to that issue were not relevant to the matters which I have to consider on this application.  
In January 2002 definitive advice was received that the loans made to the first and second named respondents were illegal.  The loans were called in February 2002 but by then each of the first and second named respondents were unable to repay the loan.  
The third named respondent resigned as a director on the 17th April 2002 and it was resolved that the Company be wound up on the 19th July 2002.  

Conclusions
	The positions of the respondents in this application are different.  On the facts it appears appropriate to consider the position of the first and second named respondents jointly and that of the third and fourth named respondents jointly.  
	Insofar as the first and second named respondents are concerned, it is submitted that the facts surrounding the financing of the purchase of the property in the spring of 2001 and the increase in rent in August 2001 is not such that it should preclude this court holding that they have acted responsibly in relation to the conduct of the affairs of this company.  The first and second named respondents were directors from the commencement of the Company until it’s winding up.  It is submitted that these are the only matters which raise issues about their responsibility.  
	On their behalf it is submitted that at the time the financing for the purchase of the property was arranged the prospect for the Company was good; the loans were intended as a temporary measure; it was anticipated that they could be repaid within six months.  It was further submitted that the directors did not take legal advice at the time and were unaware that the making of such loans was or could be considered to be illegal.  
	I accept that at the time the financial arrangements were entered into that the directors may well have taken the view, based on reasonable evidence, that the Company had a good prospect of success.  I also accept that they may have considered the loan arrangements to have been of a temporary nature.  Notwithstanding, I have concluded that I cannot accept that directors of a company, even who do not take specific legal advice, could be regarded as acting responsibly in entering into significant financial transactions which were, in essence, financial transactions between the Company and themselves without either bringing those matters to the attention of the their fellow directors or obtaining formal board approval. 
	Every director must be deemed to know and appreciate the distinction between the Company as a separate legal person and themselves as individuals.  Further, it appears to me that directors must be deemed to be aware of obligations which they have not only to the Company and its shareholders but also to creditors and others dealing with the Company.  Further, directors must be assumed to know, at least in a general way, of their obligations under the Companies Act.  Section 194 of the Companies Act, 1963 provides: 
“  (1) It shall be the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company.”   
	This obligation to disclose and, thereby, bring to one’s fellow directors a potential conflict of interest may properly be regarded as principles of good governance and sound commercial probity and proper standards in commercial dealings.  The board of directors of a company is responsible for managing the affairs of the company.  It appears to me that, independently of any specific legislative requirement, a person who is a director of a company must be aware or ought to be aware and understand that if he or she proposes to enter into a contract with the company that that the full board of directors should be made aware of the fact that he or she, a fellow director is interested in the contract and asked to approve the contract.  
	On the facts of this case the first and second named respondents did not simply fail to declare to the fellow directors an interest in a contract which they proposed entering into with the Company in breach of s. 194 of the Act of 1963.  Rather, they took it upon themselves to decide on behalf of the Company both that the contracts should be entered into and to actually execute and complete the contracts between the Company and themselves without seeking approval from their fellow directors.  They appear to have done this both in relation to the various financial transactions outlined above (including the loan from ICC to be lent on to themselves) and the increase in rent in August 2001. 
	The loans also appear to have been in breach of s. 31 of the Companies Act 1990.  I accept that the first and second named respondents were not aware at the time of such potential breach.  It is unnecessary in the light of the conclusions I have reached to consider whether it was irresponsible not to take legal advice on the loans.
	In relation to the matters which I am required to consider in accordance with the decision of the Supreme Court in Squash Ireland Limited, I have formed the view that the first and second named respondents, by entering into these transactions without consulting with their fellow directors and obtaining the full approval of the board of directors for the transactions, have both failed to comply with their obligations under the Companies Acts and have also displayed a lack of commercial probity and want of proper standards in doing this.  
	In reaching this conclusion I wish to make clear that I am not attributing any bad motive or dishonesty to the first and second named respondents.  It is clear from their Affidavits that they were at the time the sole shareholders of the Company.  Further, the purchase of the premises by them rather than by the Company appears to have been motivated by a desire to minimise the expense connected with the purchase to be incurred in the Company.  Notwithstanding this, they do appear to have shown a considerable disregard for the distinction between the legal person the Company and themselves and a disregard for their obligations as two directors out of four directors of the Company.   
	Regretfully, it appears to me that this disregard for their obligations as directors of the Company surrounding these transactions is sufficiently serious that, notwithstanding the very considerable achievements of the Company at an earlier period and what appears to have been an otherwise responsible attitude in relation to their position as directors of the Company, I have concluded that I cannot be satisfied that they have at all times acted responsibly in relation to the conduct of the affairs of this Company.  Accordingly, under the terms of s.150 of the Act of 1990 I am bound to make the declaration of restriction in respect of each of the first and second named respondents.
	In relation to the third and fourth named respondents, I am satisfied that they have discharged the onus of satisfying me that they have at all times acted responsibly as directors of the Company.  As already indicated, I have concluded that they were not aware of the financial transactions in the spring of 2001 or the increase in rent in August 2001.  Further, I am satisfied that when they did become aware of these matters they took such steps as they could to procure the repayment of the loans and ameliorate the perceived damage caused to the Company by the making of the loans.  Accordingly, I will refuse the application under s. 150 of the Act of 1990 as against the third and fourth named respondents.