Background

In a recent High Court decision, Quinn J exercised discretion in choosing to impose the lesser sanction of a restriction order as opposed to a disqualification order against the directors of Meridian Motors Limited (company).

The liquidator sought orders of disqualification or, in the alternative, orders of restriction, against the company directors pursuant to sections 842 and 819 of the Companies Act 2014 (CA 2014) respectively.

Ultimately, the directors were restricted by the High Court for a period of five years from involvement with any company (unless such a company meets certain capitalisation requirements as set out in section 819(3) of the CA 2014). 

Restriction Versus Disqualification 

Under section 819 of the CA 2014, the onus is on the director to satisfy the court that he / she acted honestly and responsibly in relation to the conduct of the company’s affairs, that he / she cooperated with the liquidator in relation to the winding up of the company and there is no other reason why it would be just and equitable to impose the order of restriction. 

By contrast, in applications for disqualification, the onus is on the applicant (usually a company’s liquidator) to establish the grounds relied on under section 842 of the CA 2014. Such grounds include the following:

• that the director has been guilty of any fraud in relation to the company, its members or creditors;
• that the director has been guilty of any breach of his or her duty as a director;
• that a declaration has been granted under section 610 of the CA 2014 in respect of the director (i.e. a declaration of personal liability for fraudulent or reckless trading); and
• that the conduct of the director makes him or her unfit to be concerned in the management of a company.

Onus of Proof Necessary for Disqualification Order not Discharged 

In this case, an order for disqualification was sought against the company directors pursuant to section 842(d) of the CA 2014 i.e. that their conduct made them unfit to be concerned in the management of a company. The liquidator identified various areas of concern in his grounding affidavit. The most significant matters relied on by the liquidator to satisfy section 842(d) were alleged VAT fraud, the alleged falsification of invoices and the liquidator’s ‘concerns and suspicions‘ regarding the theft of cars prior to his appointment.

However, Quinn J whilst acknowledged the areas of concern concluded that the liquidator had not discharged the onus of proof necessary for a disqualification order. He stated that :

“For s. 842 the burden is on the applicant to prove grounds for a disqualification order. It is not sufficient, as it may be under s. 819, to simply identify “issues of concern” or “of suspicion” and more is required. Where an applicant applies for a disqualification order it is incumbent on him to identify the provisions within s.842 he invokes, and adduce evidence to prove the relevant ground”.

Quinn J then proceeded to deal with the other, less serious matters raised by the liquidator including a failure to maintain proper books and records; trading whilst insolvent; incurring significant VAT liabilities and unfairly preferring a connected-company creditor over non-connected / third party creditors. In relation to these issues, he held that these were issues which would render the company directors as unfit to be concerned in the management of a company for the purpose of section 842(d) of the CA 2014. However, he said that: 

“… findings on those matters establish that the court has the discretion to make a disqualification order. It seems to me that in exercising that discretion, I should take account of the fact that the respondents have had to meet allegations of fraud which were serious in nature but were presented without adducing probative evidence.”

In conclusion, he said that, taking into account all of the relevant circumstances, he would apply section 845(3) of the CA 2014 and impose the lesser sanction of a restriction order on the company directors.  

Important Takeaway from the Judgment 

This judgment brings into sharp focus the difference between disqualification and restriction in terms of the onus of proof required before an order is made. In particular, the judgment highlights that, in relation to restriction applications, the onus lies on the respondent director or directors to satisfy the requirements set out in section 819 of CA 2014. Whereas, in disqualification applications, the onus lies on the applicant (usually a company’s liquidator) to establish one of the grounds set out in section 842 of the CA 2014.

To discuss any aspect of the judgment in Meridian Motors Limited (In Liquidation) v Companies Act 2014 IEHC 826, or if you have any queries on the topic, please contact a member of the William Fry insolvency team.

Contributed by Sophie Jones