Last week's Supreme Court ruling on restricting directors raises issues for the ODCE, writes Simon Carswell, Finance Correspondent
Nobody likes being the guinea pig, particularly when it comes to testing a complex new system put in place to police the corporate sector. But that was exactly the situation Dublin accountant Simon Coyle found himself in back in 2004 when he was restricted from becoming a director of any company again.
In a test case for non-executive directors, High Court judge Ms Justice Mary Finlay Geoghegan restricted Coyle, a non-executive director of a meat slaughtering company, Tralee Beef & Lamb, in July 2004 from becoming a director of a new company unless it had sufficient paid-up capital. The meat company went into liquidation in 2001 with losses of more than €6 million.
Coyle appealed the ruling amid concerns within the business community about the effect of the decision on non-executive directors generally.
As a partner of the well-known firm Chapman Flood Mazars (now Mazars), Coyle sat on the board of the company representing BES investors. His role was to review financial information from the company's executives and attend certain board meetings, but he had no active part in managing the business.
Many feared the ruling would discourage experienced business people from taking important, non-executive positions on the boards of companies because of the strictness with which corporate regulations, which had come into effect in 2001, were being policed by the Office of the Director of Corporate Enforcement (ODCE).
A week ago, more than three years after the High Court's decision, the Supreme Court overturned the restriction on Simon Coyle in a ruling that was highly critical of the ODCE. One insolvency practitioner said the court's decision would allow non-executive directors to breathe a little easier.
Mr Justice Adrian Hardiman described the law restricting directors as "draconian". He said it compelled liquidators of insolvent companies to apply to restrict a director even when the liquidator had found that the director in question had acted honestly and responsibly in relation to the company.
He said the law also required the courts to restrict a director unless they were satisfied that the director had acted honestly and responsibly, and there was "no other reason" not to make the order. This put the onus of proof on the director and and there was "some doubt" whether this was consistent with fundamental fairness and constitutional justice, the judge said.
In the case of Tralee Beef & Lamb, the ODCE had refused, without giving reasons, a request from Tom Kavanagh, the liquidator of the company, to be relieved of his statutory duty to bring restriction proceedings against Coyle because Kavanagh believed that he had acted responsibly and honestly.
Mr Justice Hardiman said it was not clear to him how the director of corporate enforcement, Paul Appleby, could disagree with Kavanagh's professional judgment when the liquidator had the opportunity to question the directors of the company on the affairs of the business.
"His silence and refusal to grant the official liquidator's request seems to me just as consistent with a rigid policy decision that he will take no position in a case like the present and unload the entire responsibility on to the courts," said the judge.
He also said Appleby's absence in the legal submissions and legal issues raised was "most unfortunate".
Mr Justice Hardiman said the law also forced liquidators to spend a company's money bringing a restriction application when it could pay off creditors instead. The judge described this as "extraordinary". In the case of Tralee Beef & Lamb, Kavanagh is facing "a double hit", as he will have to pay the costs of the High Court and Supreme Court actions.
The judge said the case against Coyle largely relied on the evidence of John Delaney, another director of the company, who was resisting his own restriction, and this was "unsatisfactory". Mr Justice Hardiman said that Delaney was defending himself by trying "to shift the blame on to Mr Coyle".
The judge said this "state of affairs existed due to the delphic posture adopted by the director of corporate enforcement" and that the case against Coyle was left in "an unacceptably ill-defined form".
The judge also criticised the restriction process, saying it was "largely symbolic", as it had "little practical effect" (requiring only that any new company of which the restricted person is a director be modestly capitalised), but was "gravely damaging to the reputation of a person thus afflicted".
The fact the appeal took years to be heard also did not help Coyle's reputation. The irony that Coyle himself has taken restriction proceedings against directors when acting as a liquidator has not been lost on many of his peers. Now Coyle's position as non-executive director has been vindicated.
In response to the Supreme Court's ruling, Appleby has said in a statement that he would "consider whether, and to what extent, he may need to modify the practices adopted by his office when considering cases involving the types of circumstances involved in this particular case."
In the early years of the ODCE, many liquidators privately expressed concerns about the office's initial scattergun approach to restrictioncompany's s and the number of cases they were forced to take. However, the number of applications has fallen in recent years as the courts have established a legal standard, and the ODCE and liquidators have responded. The Tralee Beef & Lamb case arose before this.
The number of liquidators granted full relief from restriction applications has risen from 53 per cent in 2003 to about 75-80 per cent now. The number of restricted directors has risen slightly in recent years, from 113 in 2006 to 120 last year.
The Supreme Court's ruling could change how Appleby's office operates. The ODCE may no longer be able to maintain its back-seat role in restriction cases taken by liquidators against directors. At the very least, it could have to explain why it wants certain directors to be restricted.
