THE Supreme Court has reserved judgment in a case on the constitutionality of a section of the Companies Act. The section allows persons involved in fraudulent trading to be made liable for part or all of a company's debts.
The case concerns Ms Sandra O'Keeffe, a director of Aluminium Alloy Refiners Ltd, a scrap metal company in Ranelagh which went into voluntary liquidation in July 1988. Mr Martin Ferris was appointed liquidator.
Mr Ferris is taking action against Ms O'Keeffe and other parties to the case under section 297 of the Companies Act, 1963, to have the parties declared liable for the debts and liabilities of the company, which amount to more than £1 million.
Ms O'Keeffe took a constitutional action against the legislation and the case was heard in the High Court in 1993. Judge Murphy found that section 297 did not infringe the Constitution. The case was appealed to the Supreme Court.
Ms O'Keeffe has argued that the offence described by the section of the 1963 Act under which the case was taken against her is in the nature of a criminal offence and should, therefore, be tried as such. This would include, among other issues, the right to trial by jury. She has argued that the section is punitive in its effect and not simply compensatory.
Ms O'Keeffe has further argued that under the section there is no nexus or causal connection between the fraudulent trading and the liability that can be imposed. She has argued that, in effect, a fraud which had no impact on the survival of the company or the size of its liabilities could land the party concerned with liability for the company's debts.
Mr Ferris has argued that the section is not punitive and is compensatory, in that all that can be recovered under the section is the amount of the debt or liability of the company. An excess would be punitive but this was not allowed under the section.
He has further argued that under the section, if no loss to the company had been caused by the fraud being considered by a court, the court has discretion as to whether the parties would have any liability imposed on them.
If a party committed a fraud that did not contribute to a company's losses but a party was made liable by a court for those losses, that direction could be appealed. A causal connection between the wrongdoing and the loss has to be shown.
Section 297 of the Companies Act 1963 has been superseded by the Companies Act, 1990. Under the new Act parties involved in fraudulent and reckless trading can be made liable for a company's debts.
Depending on the reasoning of the Supreme Court, a finding in favour of Ms O'Keeffe could make the relevant section of the 1990 Act also unconstitutional.
Again depending on the reasoning of the Supreme Court, a finding in Ms O'Keeffe's favour could have implications for the constitutionality of other sections of the 1990 Act, such as section 204, under which a director of a company which has not kept proper accounts can be made liable for the debts of that company.
It is understood that a number of cases have been taken under the 1990 Act under sections which would be affected by a finding in Ms O'Keeffe's favour by the Supreme Court.
