The direct approach

If directors think they can desert their sinking ship they should think again. The authorities are clamping down and are prepared to use force. Barry O’Neill reports

IRELAND’S Company Law Enforcement Act 2001 introduced new and far-reaching powers to arrest directors of insolvent companies. The act, which came into force on 1 June 2002, replaced Section 247 of the Companies Act.

The new act states: “The court, at any time either before or after making a winding-up order, on proof of probable cause for believing that a contributory, director, shadow director, secretary or other officer is about to quit the state or otherwise to abscond or to remove or conceal any of his property for the purpose of evading payment of calls or of avoiding examination about the affairs of the company, may, of its own motion or on the application of the Director [of Corporate Enforcement], a creditor of the company or any other interested person, cause the contributory, director, shadow director, secretary or other officer to be arrested, and his books and papers and moveable personal property to be seized and him and them to be detained until such time as the court may order.”

The act was applied earlier this year in the House of Denmark case. House of Denmark was wound up by a court order on 8 July and Martin Ferris was appointed official liquidator. The directors of the company were a Danish husband and wife resident in Ireland. They were also directors of a connected company named Silven. It transpired that the directors had left the country with their children on Sunday 7 July, the day before the court hearing to wind up the company. Following his appointment, the official liquidator could not contact the directors.

A meeting of the creditors of Silven was advertised for Tuesday 23 July 2002. In the belief that one or both of the directors would return to Ireland for that meeting and believing that they would then leave the country permanently, the official liquidator made an ex parte application to the High Court on Friday 19 July 2002. Mr Justice Kelly heard the application.

Evidence was given to the court that the two directors had left the jurisdiction. The directors’ residence was mortgaged and would release very little equity if sold, and there was reason to believe that it was in the process of being sold. One of the directors had given personal guarantees and the amounts due under these were substantial. There was further evidence that stock belonging to the company had disappeared and the books and records of the company were incomplete. On the basis that one or both of the directors would be in the jurisdiction for the creditors’ meeting of Silven, application was made under the amended Section 247.

Based on the evidence before him, the judge was satisfied that the official liquidator was an “interested party” within the definition stated in Section 247 of the Companies Act, 1963 as amended. The judge was also satisfied that, despite the fact that the directors were not in the jurisdiction when the application was made, he was not precluded from making the order sought as there were reasonable grounds for believing that they, or at least one of them, would be present in the jurisdiction on the following Tuesday.

On that basis, and satisfied that there was probable cause for believing that the directors would then quit the state, the judge made an order directing the police to arrest both directors, detain them in prison and bring them to court at the soonest practicable opportunity. The judge also ordered that all papers, books and moveable personal property of the directors be seized.

Immediately following the creditors’ meeting, one of the directors was arrested and his personal property was seized – the other director had not returned to the jurisdiction. A court sitting took place a few hours later. At that hearing it was ordered that the director be released from custody following the undertakings given by him to the court to: surrender his passport; attend daily and sign in at a nominated police station; to continue to reside at his home address; to furnish the official liquidator with a contact telephone number and to be available at that number; to meet with the official liquidator as required and to account to him regarding the assets of the company; and he was instructed not to move any of the company’s property.

After two subsequent applications to court, it was ordered that the director’s passport be returned to him after 7 September.

This new act is a very important weapon in the arsenal of a liquidator, the Director of Corporate Enforcement and any other interested party. In the present case, without the presence of the director in the jurisdiction and the requirement that he cooperate fully with the official liquidator, the conduct of the liquidation would have been seriously impeded.

However, its purpose, as regards a company in liquidation, is to compel directors to comply with their obligation to assist a liquidator in carrying out his duties. Where the directors are the only people in a position to answer questions relating to the affairs of such a company, their absence from the jurisdiction would make the liquidator’s job extremely difficult and even more time-consuming. This would be especially so where the directors were also unwilling to assist the liquidator, for whatever reason, in carrying out his duties.

The wording of Section 247 would appear to mean that it is not necessary for a director to be preparing to abscond for such an order to be made. It would be sufficient if it could be proven that a director is about to conceal his property within the jurisdiction with the intention of avoiding payment of calls.

Evidence of wrongdoing is not a pre-requisite for the granting of such an order. While there was no evidence before the court of any wrongdoing by the director in this case, there was serious concern in relation to the apparent removal of assets. The new power is, therefore, quite draconian in its effect and directors of Irish-registered companies should be aware of this provision.

Barry O’Neill is a partner at Eugene F Collins