A recent decision of the High Court suggests that experienced directors will not be able to avoid culpability by relying on external legal advice.
In a follow up to his previous article on a director’s fiduciary duty, Ronan McGoldrick examines the recent decision of the High Court which considered the extent to which company directors will be held liable when they do rely on legal advice. Barrett J refused to make a restriction order under section 150 against three directors who relied on legal advice on a company re-organisation which the liquidator believed was illegal.
The defendants were directors of Gerdando Limited which owned two restaurants in Dublin. The liquidator asserted that one of the reasons for Gerdando’s insolvency was a ‘re-organisation’ in 2008. The intention of the re-organisation was that each restaurant would be owned and operated by separate companies. The liquidator claimed the defendants breached their fiduciary duties in allowing a distribution that was allegedly done contrary to section 45 of the Companies (Amendment) Act 1983. The Court did not have to consider whether a breach of section 45 actually took place.
A liquidator is required to apply to the Court to restrict the directors of a company in insolvent liquidation. The Court is required to restrict the directors unless it is satisfied that the directors acted honestly and responsibly and if there is no other reason why it would be just and equitable to do so. There were no ‘honesty’ or ‘just and equitable’ grounds to be considered on the facts in this case. The Court only needed to consider whether the defendant directors had acted ‘responsibly’ in effecting the re-organisation in the way they did.
The law provides that a director will not be subject a section 150 restriction if, acting in good faith, he seeks comprehensive professional advice from qualified advisors, and in good faith acts on that advice. In this case the Judge went further and said that “more exacting standards of behaviour” will be applied when dealing with a director who is professionally qualified, or who directs a large company. It’s this aspect of the decision that is important and is discussed in more detail below.
In refusing the liquidator’s application in this case, the Court determined that the defendant directors:
- had obtained professional legal advice;
- were not experts in matters of law, tax or accounting; and
- did not fail to act ‘responsibly’ in relation to the re-organisation.
The Court went on to say that if a director could be restricted having sought appropriate legal advice then the value of that advice would be nought. The Court also referred to previous case law where, even though the legal advice obtained was plainly wrong, the defendant directors were entitled to rely on it.
However, Barrett J. appears to have drawn a distinction between the responsibility of directors of “small enterprises” who are unskilled in law, tax and accounting, on the one hand, and of directors who are professionally qualified, or who are directors of large or quoted companies, on the other hand. He did not elaborate on what precisely he meant by the “more exacting standards of behavior”. It is possible that a director with some knowledge of company law, tax or accounting, but who is not an expert might now be expected to query expert professional advice.
What then of the director with some professional training such as a qualified but non-practising ACA, or a director of a large or quoted company with no such training. In either case the director might well be dealing with complex issues outside his training or experience and will require specific professional external advice. This is particularly so, as in the circumstances of this case, when dealing with complex matters of re-organisation and restructuring. Both require the advice of specialists with expertise in those areas.
Company directors will have to wait and hope that future cases dealing with section 150 restrictions will clarify the position to the extent that, either no distinction is to be drawn, or the more exacting standards of behavior referred to by Barrett J. are explained in detail.
In the meantime they may be able to rely on another recent decision albeit one handed down in the UK. In one of the Madoff cases a director’s fiduciary duty to act in what the director honestly believed to be the best interests of the company was considered. The court in that case held that it is a breach of duty for a director to allow himself to be dominated, manipulated or “bamboozled” by a dominant fellow director to the extent that he has abrogated his responsibility entirely. However, it went on to say that a director is entitled to rely upon the judgment, information and advice of another director whose integrity, skill and competence he has no reason to suspect. If a director is entitled to rely on the skill and experience of a fellow director it is arguable that he should also be able to rely on external expert advice.