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1.

Introductory Principles
Main Reforms within the Companies Act 2014
 The Company Law Review Group came into existence with the
Company Law Enforcement Act 2001, with the aim of advising on
possible reforms in Irish company law and creating an efficient
world-class company infrastructure. Its chairman was Thomas B
Courtney. This Group made recommendations that over-hauled the
company law in Ireland radically since the 1963 Act.
 The result was the Companies Act 2014 and it contains all previous
Acts, from 1963 to 2012, in a consolidated and amended form. The
below is a summary of changes brought in by the CA 2014:

1. The private company limited by shares now has the same


contractual capacity as a natural person. This means that the
doctrine of ultra vires no longer applies in the case of the
private company limited by shares. A knock-on effect of this, and
of the fact that the Act will apply to all companies limited by
shares, is that companies won't have to have detailed specific
internal regulations (articles of association).
2. A company doesn't have to have two directors anymore, but can
have one. In the past, one of the two was often a token director,
a passive red tape requirement.
3. The two core documents of companies - the memorandum and
articles of association - have become a one-document
constitution.
4. It is now possible, with the consent of the members, to have
"written AGMs"; prior to this physical presence was required.
5. Directors' common law duties are included in the Act; it is
supposed that this will make them more transparent and
accessible.
6. Company acts which require the shareholders to carry out a
ratification procedure (financial assistance, capital reduction,
the regulation of transactions with directors) will all be
governed by the same Summary Approval Procedure
7. Offences will have a new "1 to 4 scale", with 1 being the most
serious, which will make the consequences of breaches of
company law clearer.
8. Charges over cash will not have to be registered with the CRO.
9. The powers of receivers will be enumerated in a (non-
exhaustive) list.
10. The minimum amount of indebtedness which will allow a
creditor to serve a statutory demand on a company, failing
satisfaction of which that creditor may petition for the
company's winding up, will be increased from €1,200 to
€10,000.
11. Restriction and Disqualification Undertakings can be
given to the Director of Corporate Enforcement by directors.

Benefits/ Consequences of incorporation


What is a company ?
 The company is a legal person having a separate legal identity or
“corporate personality”.
 The ability to form a company is derived from the Irish Statute of
Companies Act, 2014, and is then registered with the CRO –
Company Registration Office.

Consequences of Incorporation
Advantages
1. Separate Legal Personality
2. Limited Liability
3. Transferable Interest
4. Continuity of Existence
5. Financing the Company
6. Tax Regime

Disadvantages
7. Regulation and Enforcement

1. Separate Legal Personality


 A company has a legal identity that is entirely distinct from that of
its owners. Among other things, this enables the company to hold
rights and owe duties separately from its members - companies and
their members may even enjoy rights and owe duties towards one
another.
 This means that company property does not belong to its members
- all that the members own is a share in the company itself.
 Separate legal personality is particularly important when
considering the involvement of the companies in legal actions.
Companies can sue and be sued just as a natural person can be
in contract and tort. Companies can also engage in litigation to
vindicate their constitutional rights, and can be prosecuted for
crimes. In all of these cases, it must be remembered that it is the
company, and not its members, that is a party to such litigation: its
members are not entitled to sue on its behalf, and cannot be sued
where the company is the correct defendant.
 Separate legal personality should be distinguished from limited
liability, which is considered next. All companies enjoy a legal
personality separate to that of their members, even unlimited
companies.

2. Limited Liability
 Limited liability is the most significant advantage of incorporation
for many businesses. It fosters enterprise by enabling individuals to
pursue novel business ideas while limiting the level of personal risk
they have to take on. It also helps to promote investment, as
investors would be much less likely to put money into someone
else’s business venture if they could later be called on to pay the
debts of the business in the event of failure.
 In the case of a company incorporated with limited liability, this
acts together with a separate legal personality to insulate the
company’s members from the effects of business failure.
 As with any type of company, a limited liability company is still
liable for every cent it owes, but the members of a limited liability
company will never be required to pay more than the par value of
the shares they own (plus any share premium) towards the
company’s debts. In the case of fully paid-up share, no further
payment to the company can be required. Where share capital has
not been paid in respect of a share owned by a member, the
liability of that member is capped at the level of unpaid share
capital. Such liability as may be outstanding is to the company
rather than directly to its creditors.
 The current common practice of banks requiring directors of small
businesses to provide personal guarantees for the debts of the
companies to the banks has somewhat diluted the benefits of
limited liability in practice.

3. Transferable Interest
 A company is owned by its shareholders. If the shareholders wish
to transfer the company, all that they need do is sell their shares,
which is a relatively straightforward transaction. By contrast, in
order for a sole trader or partnership to dispose of a business, all
the individual assets and liabilities of the business must be
transferred separately. Given that this may require the agreement
of third parties, such as creditors or landlords, this is a very
burdensome process.
 The company also provides a straightforward method for the
ownership of a business to be shared between a number of people,
for the relative size of their respective shares to be changed, and
for new owners (members) to be added. By contrast, if one partner
in a partnership wishes to dispose of his interest, this can be a
complicated process.

4. Continuity in Existence
 Companies enjoy what is known as “perpetual succession”. This
means that a company survives the death of any or all of its
shareholders, directors or managers, and the straightforward
method of ownership transfer means that the business is unlikely to
be disrupted as a result of such occurrences. By contrast, when a
sole trader dies his business will come to an end and any business
assets and liabilities will fall into his estate. Where a partner dies,
the partnership is automatically dissolved.

5. Financing the Company


 While companies are entitled to borrow money, much like natural
persons or partnerships, they are also in a position to offer a
unique type of security which only companies can provide; the
floating charge. A floating charge is a charge over the assets of the
company, but which entitles the company to continue to use those
assets in the ordinary course of business. The financing of
companies and corporate borrowing is dealt with substantively in
chapter on Corporate Borrowing.

6. Tax Regime
 This is a major consideration for businesses considering
incorporation. The difference between corporate and personal rates
of taxation will be crucial in deciding whether it is economically
beneficial to incorporate.
 At present, the standard corporate rate of tax is 12.5% while the
top personal rate is approaching four times that, once levies and
PRSI are factored in. Additionally, there are some tax incentives
which might only apply to companies. For example, the taxation in
relation to pension contributions is more generous for company
directors than they are for employees or self-employed persons.
Similarly, it can be more tax-efficient to offer incentive schemes to
employees of companies than to employees of sole traders or
partnerships.

7. Regulation and Enforcement


 One of the disadvantages of incorporation is the additional
regulation and supervision to which a business will be subject upon
incorporation. A company’s directors and secretaries will have to
comply with notification requirements, auditing and accounting
regulations, and rules governing transactions with insiders.
Companies must display certain information outside their place of
business and on their stationary; annual returns must be made to
the CRO and annual accounts filed.
 Furthermore, if the company becomes insolvent its directors may
be subject to close scrutiny and face the risk of restriction or
disqualification, or even be held liable for the debts of the company
for reckless and fraudulent trading or for failure to keep proper
books. In extreme cases, directors can be prosecuted for failing to
comply with their duties under the Companies Act.

Corporate Enforcement Authority


 The Companies (Corporate Enforcement Authority) Act 2021
amends the Companies Act 2014. The primary focus of the Act, as
set out in Part 2 of the Act, is the establishment of the CEA.
 The policy approach underpinning the CEA’s establishment is that
to be effective enforcement bodies must be statutorily independent,
appropriately resourced, accountable and have a well-defined
mandate.

 The Corporate Enforcement Authority (CEA) was established on 7


July 2022. The CEA’s statutory functions include:
▪ Promoting compliance with company law
▪ Investigating instances of suspected breaches of company law
▪ Taking appropriate enforcement action in response to identified
breaches of company law,
▪ Supervising the activities of liquidators of insolvent companies,
and
▪ Operating a regime of restriction and disqualification
undertakings in respect of directors of insolvent companies.
 The CEA is also conferred with statutory functions in respect of
certain investment vehicles under the Irish Collective Asset-
Management Vehicles Act 2015 and is the competent authority for
the purpose of imposing sanctions on company directors under the
Companies (Statutory Audits) Act 2018.

 The Act builds on the organisational and procedural reforms


already implemented by the Director of Corporate Enforcement in
the period 2012 -2021.
 The Act provides the Authority with more autonomy and flexibility
to adapt to the challenges it faces in its investigation and
prosecution of increasingly complex breaches of company law,
including the ability to recruit the required skills and
expertise. This, allied with the financial and human resources
allocated to the new Authority, will ensure that it is well-placed to
tackle breaches of company law and promote compliance.

 The Authority is structured as a commission, with Members


appointed by the Minister for Enterprise, Trade and Employment.
o Section 944F provides for the membership of the Authority.
Subsections (1) and (2) provide for the structure of the
Authority which is that of a commission, with between 1 and
3 full-time Members, as may be determined by the Minister
for Enterprise, Trade and Employment. Section 944G
provides where there is more than one Member of the
Authority, the Minister shall appoint one of the Members to
be chairperson.
o In the context of the total size of the new Authority, including
expanded Garda resources, a maximum three-Member
Authority was considered the most appropriate and is in
line with other bodies including the Competition and
Consumer Protection Commission (CCPC).
o This approach is designed to future-proof the new
organisation and to ensure it can be agile and can respond to
changing circumstances. For example, if there are significant
increased demands on the Authority, it will be possible for it
to be scaled up further or organised along specific lines of
responsibility.

Promoters and Pre-incorporation contracts


Refer notes

2. Constitutional Documentation

Private Companies Limited by Shares


1. A company may be formed for any lawful purpose by any person or
persons subscribing to a constitution and complying with the
requirements of Part 2 of CA 2014 as to registration of a
company.

2. The liability of a member of a company at any time is limited to the


amount, if any, unpaid on the shares registered in the member's
name at that time. The maximum number of members (i.e.
shareholders) in a private limited company is 149. Any registration
above 149 is void. If two or more persons hold one or more shares
in a company jointly, they are treated as a single member.

3. The constitution of a company must state


o (a) the company's name;
o (b) that it is a private company limited by shares registered
under Part 2 of CA 2014;
o (c) that the liability of its members is limited;
o (d) as respects its share capital, either—
 (i) the amount of share capital with which it proposes to
be registered ("its authorised share capital"), and the
division of that capital into shares of a fixed amount
specified in the constitution, or
 (ii) without stating such amount, that the share capital
of the company shall, at the time of its registration,
stand divided into shares of a fixed amount specified in
the constitution;
o (e) the number of shares (which shall not be less than one)
taken by each subscriber to the constitution; and
o (f) if the company adopts supplemental regulations, those
regulations.

4. Must have a memorandum and articles of association. The


memo lays down the constitution of the company and the
parameters of its activities. The articles stipulate the internal rules
of the company and the rights and obligations as between the
company, the shareholders and the directors.
The optional provisions in the CA 2014 constitute the ‘statutory
defaults’ which will govern the internal administration of the
company unless its constitution provides otherwise.

5. The constitution must


o (a) be in a form in accordance with the form set out in
Schedule 1 of CA 2014 or as near to it as circumstances
permit;
o (b) be divided into paragraphs numbered consecutively; and
o (c) be signed by each subscriber in the presence of at least
one witness who shall attest the signature.
The constitution must be registered with the CRO (for the
documents that must accompany it, see s 21 of CA 2014).

6. One of the key documents which must accompany it is a


statement which states
o (a) the name of each of the persons who are to be the first
directors of the company;
o (b) the name of the person who is, or of each of the persons
who are, to be the first secretary or joint secretaries of the
company;
o (c) the name of the person (if any) who is, or of each of the
persons (if any) who are, to be the first assistant or deputy
secretary or secretaries of the company;
o (d) the address of the company's registered office; and
o (e) the place where the central administration of the company
will normally be carried on.

7. On the registration of the constitution of a company, the Registrar


shall certify in writing that the company is incorporated and shall
issue to the company a certificate of incorporation in respect of
it (s 25 of CA 2014).
8. The subscribers then become transformed into a body corporate - a
separate legal personality is born. It has perpetual succession and
a common seal. The common seal or seals must state the
company's name, engraved in legible characters (s 43 of CA
2014). Save as otherwise provided by this Act or by the
constitution of the company
(a) a company's seal shall be used only by the authority of its
directors, or of a committee of its directors authorised by its
directors in that behalf; and
(b) any instrument to which a company's seal shall be affixed
shall be—
(i) signed by a director of it or by some other person
appointed for the purpose by its directors or by a
foregoing committee of them; and
(ii) be countersigned by the secretary or by a second (if
any) director of it or by some other person appointed
for the purpose by its directors or by a foregoing
committee of them.
If the company has a registered person, that person may use
the seal. The registered person can sign with it, and this must
be countersigned usually by the secretary or a director of the
company.

9. The constitution, when registered, binds the company and the


members of it to the same extent as if it had been signed and
sealed by each member, and contained covenants by the company
and each member to observe all the provisions of the constitution
and any provision of this Act as to the governance of the company
(s 31 of CA 2014). The constitution binds the members inter se.
Members can enforce the constitution against each other and
against the company; the company can enforce it against them. A
company may amend its constitution by special resolution (s 32 of
CA 2014). Any amendment is as valid as if originally contained in
the constitution.

10. A company limited by shares now has the same capacity to


contract as a natural person. This is set out in s 38 of CA 2014. It
states that a company shall have, (whether acting inside or outside
of the State)
o (a) full and unlimited capacity to carry on and undertake any
business or activity, do any act or enter into any transaction;
and
o (b) for the purposes of paragraph (a), full rights, powers and
privileges.

A company limited by shares can nominate an individual who


will have the power to bind the company. Section 39(1) of CA
2014 states: Where the board of directors of a company
authorises any person as being a person entitled to bind the
company... the company may notify the Registrar... and the
Registrar shall register the authorisation.

Designated Activity Company (DACs)


1. Prior to 1 June 2015, every company had to have a memorandum
and articles of association before it can be incorporated. In simple
terms, the memorandum lays down the constitution of the company
and parameters of its activities. The articles stipulate the internal
rules of the company and the rights and obligations as between the
company, the shareholders and the directors. Now, private
companies limited by shares do not need to have these two
documents; they have a simpler document, called "the
constitution".

2. Every DAC and PLC must have a memorandum and articles of


association before it can be incorporated.
3. A DAC is a Designated Activity company. It is dealt with in Part 16
of CA 2014.
4. It is almost exactly the same as the private limited company that
existed prior to 1 June 2015, the commencement date of CA 2014.
What the Act did was to split the private company in two, giving
more freedom and simplicity to the LTD, which is the form of
company that is most popular in Ireland, by allowing it to have a
simple one document constitution, by allowing it to have the same
capacity to contract as a natural person, by allowing it to have only
one director.
5. It was thought, however, that some persons might wish to retain
the two document format and retain the ultra vires doctrine. For
this reason, the DAC was created. In one way, a DAC is an
unreformed version of the private company limited by shares.

6. DACs can be limited by shares or by guarantee (s 965); in either


case, the DAC has a share capital. If a DAC is without share capital
it is treated as a Company Limited by Guarantee (CLG) under Part
18 of CA 2014. The law that is set out in Parts 1 - 14 of CA 2014,
which applies to LTDs, also applies, in general to DACs, the only
difference being that there are some modifications for DACs (such
as the retention of ultra vires).

7. The memorandum of association of a DAC should contain the


following (what follows is an example): [1] The name of the
company is: THE SAFE SKIES SOFTWARE DESIGNATED ACTIVITY
COMPANY. [2] The company is a designated activity company
limited by shares, that is to say a private company limited by shares
registered under Part 16 of the Companies Act 2014. [3] The
objects for which the company is established are the development,
production and sale of computer software designed to enhance the
safety of aviation and the doing of all such other things as are
incidental or conducive to the attainment of the above object. [4]
The liability of the members is limited. [5] The share capital of the
company is €200,000, divided into 200,000 shares of €1 each.

8. What follows then are the Articles of Association. According to CA


2014, s 968(5), the Articles, instead of containing any regulations
in relation to the DAC, may consist solely of a statement to the
effect that the provisions of the Companies Act 2014 are adopted
and, if the articles consist solely of such a statement, subsection (4)
of this section shall apply which gives effect to both Mandatory and
Optional provisions contained from Part 1 to 14 of the CA Act 2014.

9. A DAC must have "DAC" at the end of the company name, unless it
has a charitable object or is a not for profit (s 971). A DAC has the
capacity to do any act or thing stated in the objects set out in its
memorandum (s 972). The reference in it to an object includes a
reference to anything stated in the memorandum to be a power to
do any act or thing (whether the word "power" is used or not).

10. The capacity of the DAC extends to doing any act or thing
that appears to it to be requisite, advantageous or incidental to, or
to facilitate, the attainment of its object and that is not inconsistent
(s 972(2)(b)). A DAC may, by special resolution, alter the provisions
of its memorandum of association by abandoning, restricting or
amending any existing object or by adopting a new object and any
alteration so made shall be as valid as if originally contained
therein, and be subject to alteration in like manner (s 974).

11. Section 973 of CA 2014 is important. It says that a DAC's


capacity isn't limited by what its constitution says. It does remain
"the duty" of directors to "observe any limitations on their powers
flowing from the DAC's objects" but any acts which would be
beyond the DAC's capacity "may.. .be ratified by the DAC by special
resolution." Subsection (4) of s 973 states: "A resolution ratifying
such action shall not affect any liability incurred by the directors or
any other person; if relief from any such liability is to be conferred
by the DAC it must be agreed to separately by a special resolution
of it." Also, important to note is that a party to a transaction with a
DAC is not bound to enquire as to whether it is permitted by the
DAC's objects.

12. A DAC must have at least two directors (s 985). Nothing in


Parts 1 to 14 of CA 2014 that makes provision in the case of a
company having a sole director applies to a DAC. Section 175 (3)
and (4) of CA 2014 (which relate to dispensing with the holding of
an annual general meeting) shall not apply to a DAC if it has more
than one member (s 988). According to s 989, unless the
constitution provides otherwise
o a resolution in writing signed by all the members of a
company who are entitled to attend and vote on such
resolution at a general meeting (or being bodies corporate by
their duly appointed representatives) shall be as valid and
effective for all purposes as if the resolution had been passed
at a general meeting of the company duly convened and held;
and
o if described as a special resolution shall be deemed to be a
special resolution within the meaning of this Act (this is the
unanimous written resolution provision, set out in s 193 of CA
2014).
13. If a DAC is wound up, its members are only liable to the
amount that is unpaid on their shares (s 997). Examinership is
available to DACs (s 998).

Memorandum of Association
1. The name clause – the name of a company limited by share or
guarantee must include "limited" or "teorenta" as the last word
unless special permission is received from the Minister for Jobs to
remove it (e.g. clubs, charities). A public limited company must end
with the letters plc or cpt (CuideachtaPhoibliTeoranta). This
reflects the principle that it should be brought to an individual's
notice that he is dealing with a limited liability entity.
2. Objects Clause –it should be noted that the objects cannot be
changed with retroactive effect.
o In Northern Bank Finance Corp v Quinn, a company
realised that the guarantee it had given to the plaintiff bank
was ultra vires. It attempted to retrospectively change its
objects to allow this. Keane J declared this attempt to be
invalid and spoke of the strange consequences if companies
could retrospectively deprive themselves of certain objects.

Articles of Association
 Often regarded as the document which sets down the company's
"bye-laws", the articles form the internal rules of management and
governance within the company and define the relationship as
between the directors, the shareholders and the company itself.
The rules govern, inter alia, matters such as company meetings,
transfer of shares, voting rights and the appointment and removal
of company officers.
 The Articles are no longer a feature in the private company limited
by shares. What used to make up the articles - a copy and paste
Table at the back of the Companies Act 1963 - has been subsumed
into CA 2014.
 The rules on articles will continue to govern DACs, but according to
CA 2014, s 968(5), the Articles, instead of containing any
regulations in relation to the DAC, may consist solely of a
statement to the effect that the provisions of the Companies Act
2014 are adopted and, if the articles consist solely of such a
statement, subsection (4) shall apply.
 It should be noted that as between the memo and the arts, the
memo is deemed to be the superior document and the articles
cannot extend the area of the company’s activities.
Alteration of the Articles
 Any clause that could lawfully have been inserted in the original
articles may subsequently be inserted by the amendment. However,
the power to alter the articles is subject to two inherent limitations:

o First, the alteration is itself cannot be ultra vires or illegal,


which means that it cannot conflict with the memorandum,
the Companies Acts or the general law.
o Secondly, the alteration must be deemed to have been done
bona fide and in the interests of the company as a whole.
 Allen v Gold Reefs West Africa Limited (1900) – company
sought to change its articles so as to enable it to confiscate the
shares of a member who was indebted to it. Member argued that
the alteration was invalid. The Court of Appeal set down the
guiding principle – ‘must be exercised not only in the manner
required by the law but also bona fide for the benefit of the
company as a whole and it must not be exceeded’. It was thus held
that once the majority were acting in this manner, even an
alteration as drastic as this was permissible.

 When looking to see if an alteration is ‘bona fide in the interests of


the company’ courts tend to apply a subjective test; they look at
whether the shareholders themselves believed it was necessary or
in the company’s best interests.
o Shuttleworthv Cox Bros (1927) – articles were changed to
remove a director who had been appointed for life. Atkin LJ
stated that the test was whether the shareholders ‘honestly
intended to exercise their power for the benefit of the
company’.

 In some circumstances, the alteration might not actually affect the


business of the company as a separate entity but might only affect
the rights and liabilities as between the shareholders themselves.
In these circumstances, the primary test of validity is that of
"unfair discrimination".
o This was articulated in Greenhalgh v Arderne Cinemas
Limited where an alteration allowed direct sale of shares to
a non-member, notwithstanding the existence of pre-emption
rights. This was done by and in the interests of a majority
shareholder. The Plaintiff, a minority shareholder sought a
declaration that this was invalid. Evershed MR held that in
this case; the alteration would only be invalid if it
discriminated the primary test of validity is that of ‘unfair
discrimination’.
 He held that in this case there was no unfair
discrimination as the alteration affected all the
shareholders and therefore the alteration was valid.

 It should be noted that if a challenge is being made to an alteration,


this could be done via an application for relief under s. 212. The
applicant in these circumstances would argue that the alteration is
oppressive, on the basis that it does not conform with the tests laid
down in Allen or Greenhalgh. However, as Forde notes, it is
possible that some alterations which might pass the tests laid down
in those cases could still be regarded as amounting to oppression.
In those circumstances, Forde argues that the alteration would
most likely be allowed to stand, but subject to special
arrangements to redress any prejudice to the s 212 petitioner

S.31 – The Enforcement of the Articles and Memorandum


 Section 31 of the 2014 Act provides that the constitution is to bind
the company and the members as if they had entered into a
contract to abide by them. Section 31 states: “the constitution
shall, when registered, bind the company and the members of it to
the same extent as if it had been signed and sealed by each
member, and contained covenants by the company and each
member to observe all the provisions of the constitution and any
provision of this Act as to the governance of the company.”.

 With regard to DACs, section 31 will operate as it always has, that


is, to make the articles and memorandum binding as between the
company and shareholders. It also operates to make them binding
as between the shareholders themselves ("inter se".)

 In Clark v Workman, Ross J spoke of the nature of the s 31


contract. He said that the articles of association "...constitute a
contract between every shareholder and all the others, and
between the company itself and all the shareholders. It is a
contract of the most sacred character, and it is on the faith of it
that each shareholder advances money.".

 An example of the articles being enforced as between the company


and its shareholders is Hickman v Kent & Romney Marsh
Sheepbreeders, where a shareholder brought proceedings against
the company. Under the articles, it stated that if such a dispute
arose, it must be first submitted to arbitration. The company
invoked this provision and sought to stay the legal proceedings on
this ground. Astbury J found that the articles do create rights and
obligations under a contract between the company and its
members. He thereby forced the member to comply with the
arbitration clause because the clause bound the litigant as a
member.

 An example of s 31 being invoked to enforce rights as between


shareholders inter se can be seen Lee & Company Ltd v Egan
(Wholesale) Limited (1978) – where the articles contained pre-
emption obligations. Here it was accepted that the other
shareholders had a right to be offered shares first, a right which
was enforceable by virtue of the articles of association.

 Must be remembered that the rights and duties which can be


enforced by or against the members pursuant to s 31 are those
conferred or imposed on them in their capacity as members.
o Eley v Positive Government SLA Co Ltd (1876) – a
company's solicitor sought to enforce against the company a
clause in the articles which restricted the company's right to
terminate his employment as their solicitor. The articles of a
company provided that Eley would be the company's solicitor
for life, and that he was only removable for misconduct. Eley
acted as company solicitor for some time without a written or
oral contract of employment. When the company ceased to
engage Eley's services, he sued for breach of contract
grounded on the provision in the articles of association. The
House of Lords held that the articles did not oblige the
company to employ Eley in his capacity of solicitor, and that
there was no contract between Eley (the solicitor) and the
company." Lord Cairns said about the article in question that
it was "either a stipulation which would bind the members, or
else a mandate to the directors. In either case it is still a
matter between the directors and the shareholders, and not
between them and the plaintiff." So, the rule is, as Courtney
concludes: "rights conferred on members are only conferred
on them in their capacity as members." You should note that
Usher, in his well-respected 1986 work, Company Law in
Ireland, encourages the Irish courts to eschew the
artificialities introduced by Eley's case.
 Thus, the articles can only be enforced by the members in their
capacity as members. If a member acts in a different capacity, for
example as director of the company, those rights which relate to
his directorship cannot be enforced.
o Browne v La Trinidad (1877) – a director could not rely on
the articles of association to secure his tenure as a director.
 Relevant clauses can be deemed incorporated into some other
contract. This is sometimes called a ‘special contract’. For
example, where the articles provide that a director is to receive
certain remuneration and the company pays him that
remuneration, then the court may infer a ‘special’ or separate
contract to employ the director on the terms set out in the articles.
o Bailey v New South Wales Medical Defence Union
(1996) – Dr Bailey was a member of the def and had
insurance cover from the union which was largely governed
by the def’s articles. Dr Bailey had obtained insurance and
had done so in a manner which resulted in a ‘special
contract’ and not a ‘statutory contract’. However, because
this was a special contract, the terms of that contract could
not be altered by subsequent alteration to the articles.
o Bratton Seymour Service Company Limited v
Oxborough (1992) – Steyn J set out the difference between
an orthodox contract and the s 31 type contract. The
contract’s binding force is not derived from any bargain
struck between the parties but between statute.
Furthermore, the contract only affects members to the extent
of their capacity as members and that obligation on non-
members or on members in their outsider capacity are not
enforceable under section 31.

3. Separate Legal Personality


 One of the key features of incorporation is that a company is
deemed separate from its members (owners) and therefore the
company’s legal rights and obligations are wholly separate from its
owner’s rights and obligations.

The Principle in Salomon v Salomon


 Salomon v Salomon (1897) –
o Mr Salomon owned a boot manufacturing and leather
business. Sons worked in the business and pressed him to
give them a stake. Advised by his solicitor to incorporate a
newly formed company, make his family directors and give
them nominal shareholdings in the company, sell the business
to the company and take the purchase price in fully paid up
shares. He did this and transferred the business to the
company for £39000 which was made up of 20,000 fully paid
shares of £1 in the company, a cash payment of
approximately £9,000 and a loan (debentures) from Mr
Salomon to the Company of £10,000 secured by a floating
charge.
o The company fell upon hard times and went into liquidation.
Question was whether Mr. Salomon’s secured debt of
£10,000 should be paid by the company in priority to the
debts amount to circa £7500. Liquidator argued that the
unsecured creditors should have priority saying that the
incorporation was a mere scheme to enable him to carry on
the business in the name of the company with limited
liability, contrary to the true intent and meaning of the CA.
CoA agreed with the liquidator and said that the company
was a sham. The HoL took a fundamentally different view
however and in doing so set down the foundations of modern
company law. HoL made clear that once a company was
incorporated, it was distinct from its members and the HoL
observed that the CA did not permit an inquiry into the
motives of the person in setting up the company.
Furthermore, the CA did not stipulate that there should be a
degree of independence between the shareholders and the
company.
o Lord McNaghten stated – ‘The company at law is a different
person altogether from the subscribers to the memo and
though it may be that after incorporation, the business is
precisely the same as it was before…’.
o Generally its implications meant that the courts will not go
behind the separate personality of the company to get at its
members.
o As Salomon prevents an enquiry into the motivations of
persons setting up a company before a company is
incorporated this means that people can create companies for
a wrongful purpose.

The Implications of Separate Legal Personality


 Positive effect: Lee’s v Lee’s Air Farming Ltd (1961) –
plaintiff’s deceased husband held all but one of the def company
shares and was governing director for life. Articles also described
him as a salaried employee. Killed while carrying out work for the
company. Widow claimed social welfare compensation which was
only available to ‘workmen’. Authorities refused her on basis that
he was not an employee. Privy Council rejected this on the grounds
that following Salomon one person could function in dual capacities
and the fact that the deceased could control the company ‘did not
alter the fact that the company and he were two separate and
distinct persons’.

 Avoiding certain legal consequences: Roundabout Limited v


Beirne (1959) – company unwilling to deal with unionized staff
closed a pub which it operated and dismissed all staff. Meanwhile
the directors set up a new company to which the business was
transferred. This company only hired bar men who were non-
unionised and hired them as directors. Since the new company had
no employees, it could not be classed as an ‘employer’ and thus
could not be the subject of a trade dispute. Roundabout Ltd then
sought an injunction restraining the picket which was duly granted.

 Macaura v Northern Assurance Co (1925) – the plaintiff


transferred his business to a company he controlled but
inadvertently allowed the insurance policy on the company’s stock
to remain in his own name. Stock was destroyed in a fire. Held he
could not claim on the insurance policy as he did not possess the
requisite interest in the stock – belonged to company and not him

 As company is deemed separate entity, it means that if that


company suffers loss, the only person who can sue for that loss is
the company itself.
o O’Neill v Ryan and Ors (1993) – plaintiff alleged breaches
in competition law by the 4 defs had caused a diminution in
the value of the shares of the 2 nd named defs, Ryanair Ltd. SC
held that the actions by four of the def companies did not
entitle a shareholder to sue on the basis that the actions of
the companies had reduced the value of his shares. Held that
the plaintiffs shares are merely a right of participation in the
company on the terms of the AoA and the plaintiff still
holding all the shares, does not directly affect his right of
participation by the wrongdoing.

 For a contemporary example of the doctrine of separate legal


personality: Quigley Meats Ltd v Hurley - Principally, the case
shows the importance of suing the correct defendant. A butcher's
business in Cork sued the two defendants, John and Margaret
Hurley, who ran a bar and restaurant in Waterford called An
Seanachie Bar. The Quigleys always thought they were dealing
with John and Margaret personally. In fact, the plaintiffs were
dealing with "The Seanachie Cottages Ltd". More than once, the
plaintiffs were unsuccessful in their attempts to recover the
€26,719 owed to them, because first they sued "Seanachie Bar and
Restaurant", which had no legal existence, so the judgment was
unenforceable. Then they took proceedings against John and
Margaret personally, succeeded at Circuit Court level but saw the
result overturned in the High Court, which found that the receipt of
company cheques from the Seanachie Cottages Ltd "was
sufficient ... to fix the plaintiff with knowledge that the restaurant
was being operated through a limited liability company".

Piercing the Corporate Veil


 Manifest throughout exceptions that lifting the corporate veil is to
avoid a demonstratable injustice from occurring.
 In Petrodel v Prest, the UK SC held that the principle that the
court was justified in piercing the corporate veil if a company's
separate legal personality was being abused for the purpose of
some relevant wrongdoing was well established. It held that under
a limited principle of English law, the courts could pierce the
corporate veil for the purpose, but only for the purpose, of
depriving the company or the person controlling it of the advantage
that they would otherwise have obtained by the use of the
company's separate legal personality. Such cases, if they occurred
at all, would be rare and in practice in almost every case the
facts would disclose a legal relationship between the company and
its controller which made it unnecessary to pierce the corporate
veil.
 The 4 traditional areas where corporate veil could be lifted:
o Statutory authority
o Agency
o Misuse of the corporate form
o Single Economic Entity

Statutory Authority
 There are numerous statutes under which controllers or dominant
shareholders are expressly made personally liable or accountable
for certain activities. For example, under s 610 of the 2014 Act, an
officer of the company such as a director can be declared (by a
liquidator or examiner) to be personally liable, without limitation,
for all or part of the debts of the company for reckless or
fraudulent trading. Personal liability can be imposed for
misfeasance under s 612 of CA 2014. Personal liability can be
imposed on officers under s 609 of CA 2014 where they have failed
to ensure the company has kept adequate accounting records.
 Other types of legislation may provide for the piercing of the veil
such as the Tax Acts contain numerous instances where companies
and their owners are treated as one and the same, for example
where there are transactions with "participators" in "close
companies".
 Equally, health and safety legislation can be directed at both
companies and their officers.
o DPP v Roseberry Construction Ltd (2003) – a company
and its directors were both fined for breaches of health and
safety legislation which had led to a fatality. The director
appealed the severity of the fine and argued that he himself
should not be personally fined as the company and him were
separate persons. The Court of Criminal Appeal held that the
principle of separate legal personality could be pierced by
legislation.

Agency
 Courts have been prepared to infer the existence of agency
between a company and its owner/shareholders particularly where
the owner/shareholder is itself another company.
o Smith Stone & Knight v Birmingham Corporation
(1939) – a holding company was the owner of property in
which one of its subsidiaries was carrying on business. When
this property was compulsorily acquired by the local
corporation, holding company was held to be entitled to
compensation for the disturbance to the business which arose
from the need to relocate. Atkinson J listed the following
factors all based on the control over the day to day operations
to be taken into account:
1. Are the profits of the subsidiary treated as profits of the
parent?
2. Were the persons conducting the business of subsidiary
appointed by the parent?
3. Was the parent the ‘head and the brains’ of the trading
venture?
4. Did the parent govern the adventure?
5. Were the subsidiary company’s profits made by the skill
and direction of the parent?
6. Was the parent in effective and constant control of the
subsidiary?

This reasoning has been criticized by Keane, in his book Company Law,
who points out that these criteria may not be capable of general
application. He says that if an agency were to be inferred in every such
case, a significant number of subsidiaries would be treated as the agents
of their holding companies and if this were so it would potentially expose
those holding companies directly liable for the debts and liabilities of its
subsidiary.

 HC recently affirmed the notion of the agency principle in Fyffes v


DCC (2005) – DCC plc had bought shares in Fyffes which it had
passed onto its subsidiary, Lotus Green. DCC’s CEO Mr Flavin also sat
on the board of Fyffes. Lotus Green sold the shares in February 2000
at an unprecedented high price. Alleged that he was in possession of
insider information. Part V of the 1990 Act held that a company could
not sell shares if one of its directors was in possession of price
sensitive information in respect of those shares. While Flavin was a
director of DCC he was not a director of Lotus Green. Issue over
whether Lotus Green owned and sold the shares as an agent of DCC.
o Laffoy J reviewed the law whereby a company might be deemed
to be the agent of another and distilled the following principles:
 1. As a matter of law, Lotus Green may be regarded as
having acted as the agent of DCC however she adopted
the proviso that a subsidiary would however only be
deemed an agent of its parent where such an inference
was factually justified.
 2. She rejected the argument that only evidence of an
express agency agreement between the parties will
suffice. Rather agency will be determined by reference to
all the facts including the nature of the parent’s interest in
the shares.
o On the facts of the case, she did not find that Lotus Green was
an agent of DCC. Whilst Lotus held the shares, it did so
independently from DCC.

Misuse of the Corporate Form


 Exception to the SLP is where the statutory form is being used for
fraudulent purposes
o Re Bugle Press (1961) – where the holders of 90% of the
shares in the company wished to buy out the remaining. In
order to achieve this, they formed a new company and
transferred their 90% and then attempted to compulsorily
acquire the remaining 10% under the statutory procedure for
buying out a minority shareholding when the company is
subject of a takeover. The CoA said that the arrangement was
effectively a sham.

 Another exception is that one cannot use the corporate veil with a
view to evade legal obligations.
o Gilford Motor Company v Horne (1933) defendant
entered into a contract with plaintiff not to canvass their
customers after he left the company’s employment. He tried
to get around this by forming a company and used it to carry
out the canvassing. Held that he could be stopped from doing
this.
o Jones v Lipman (1962) – the def who had contracted to sell
his house to the plaintiff tried to avoid a claim for specific
performance to sell the house. He conveyed the house to a
company which he owned and controlled in an effort to evade
the Plaintiff’s enforceable contract for sale. The argument of
SLP was rejected.

 There is a fine distinction between a legitimate and illegitimate use


of the corporate form.
o Roundabout v Beirne – the corporate veil can be used to
avoid certain legal consequences (as opposed to avoiding
legal obligation).
o Adams v Cape Industries (1990) – held that the attempt to
avoid future potential liabilities or consequences is not
unlawful or fraudulent. Here the def was a parent of a
number of US subsidiaries which specialized in the
manufacture of asbestos. Number of employees brought
health actions. Defendant parent company was setup in the
UK and the CoA held that one of the reasons for setting up
the corporate structure in this way was to reduce the risk of
the defendant being subject to the jurisdiction of the US
courts. This was entirely legitimate. Slade LJ said
arrangement of the corporate structure so as to ensure that
legal liability if any in respect of particular future activities of
the group will fall on another member of the group rather
than the defendant was a right inherent in company law.

 It is also important to stress that the courts are not willing to


disregard the separate legal personality of a company (and make
the controllers personally liable for company obligations) where
they have been guilty only of mismanagement, as opposed to fraud,
or deliberate misuse of the corporate form. In cases such as
Dublin County Council v Elton Homes Ltd and Dublin County
Council v O'Riordan, where planning permission had been
obtained, yet not pursued by companies, the courts have been
satisfied that whilst same could be construed as mismanagement,
same should not give rise to any personal obligation of directors to
complete works and meet the conditions of the planning
permission, since no evidence of "fraud or the misapplication of
monies" could be established.

Single Economic Entity


 The Establishment of the Concept
o Courts may hold a collection or group of companies to be for
the purpose of a particular legal aim, a single entity.
o This principal is on the basis that the companies in question
are closely related, act in tandem and that justice of the case
so requires.

 DHN Food Distributors Limited v Tower Hamlet LBC (1976) –


DHN had two wholly owned subsidiaries, one of which owned the
property of the group and one which ran the business of the group.
Here the defendant local authority made a compulsory acquisition
of the property of the land-owning subsidiary. The parent company
then sought compensation. Land tribunal offered negligible
compensation since the business owning subsidiary had been
deprived merely of a revocable licence and had no business to lose.
Denning LJ stated that the courts had a general tendency to look at
the economic identity of the whole group and that this was
particularly applied when the holding company held all the shares
in the subsidiary and can control it. It went on to hold that the
parent should not be deprived of compensation due to a technical
point when it was justly payable and so the companies in question
would be treated as one company.
 Power Supermarkets Limited v Crumlin Investments et al
(1981) – defendant owned Crumlin shopping centre. Entered
agreement with Plaintiff who controlled Quinnsworth to grant a
lease and agreed not to grant a similar lease to anyone of a similar
unit for the purpose of selling groceries. Shares in defendant were
then sold to Cornelscourt Shopping Centre Limited which was part
of the Dunnes Stores Group. Dunnes wished to have its own retail
outlet and set up a company called Dunnes (Crumlin) Ltd to acquire
one from the defendant. This unit was conveyed to Dunnes
(Crumlin) Ltd. The question was whether Dunnes (Crumlin) Ltd
was bound by the original covenant to the plaintiff. Costello J found
that Dunnes (Crumlin) Ltd was so bound and said that he could
treat two or more related companies as being a single entity.

 The Move Away from the Single Economic Entity


 In UK there has been a noticeable shift from the DHN approach.
Suggest the justice of the case will only permit the company to
be regarded as part of a single economic entity where it is
established merely as a ‘façade’ to conceal improprieties.
 Woolfson v Stathclyde Regional Council (1978) – ‘I have
some doubt…whether the CoA properly applied the principle
that it is appropriate to pierce the corporate veil only where
special circumstances exist indicating that it is a mere façade
concealing the true facts’.
 Adams v Cape Industries plc – Slade LJ noted – ‘The court is
not free to disregard the principles of Salomon v Salomon
merely because it considers that just so requires’. Law
recognises the creation of subsidiary companies with all the
rights and liabilities which would normally attach to separate
legal entities.

 In Ireland a similar trend can be gleaned. State (McInerne&


Co Ltd) v Dublin County Council (1985) – a subsidiary
served a purchase notice on a local authority under planning
legislation in respect of land which its holding company owned.
Subsidiary relied on DHN arguing that the companies should be
treated as one. Carroll J rejected this responding that the
business group operated its corporate structure so as to
maximize the benefits to be gained from the distinct legal
personality of each subsidiary. It would not be allowed to lift
that veil at the same time just because it now suited them.

 The limitations to the single economic entity concept were


clearly marked out in Allied Irish Coal Supplies Ltd v Powell
Duffryn International Fuels (1998) – plaintiff alleged the
defendant was in breach of commercial contract concerning the
supply of industrial coal. Def was a wholly owned subsidiary of
Powell Duffryn plc. The plaintiff applied to join the parent
company as a co-defendant. It appears that the plaintiff was
concerned that the defendant would have insufficient funds to
pay the debt. In the HC Laffoy J refused the application state the
concept of single economic entity ‘Cannot be used to render the
assets of a parent company available to meet the liabilities of a
trading subsidiary, to a party with whom it has traded.’
o In the SC, Murphy J agreed and also pointed out that if he
was to accede to the plaintiff’s request it could work an
injustice on the creditors of the parent company as it could
mean that assets which should be used to pay them would
be used to pay the creditors of the sub.

 Currenty Ambiguity in Relation to Single Economic Entity :


Fyffes v DCC
 The facts of Fyffes v DCC have already been outlined above.
It may be recalled that one of the defences made out by DCC
was that Lotus Green was not in possession of the price-
sensitive information because Mr Flavin was not its director.
One of the other arguments made by the plaintiffs was that
DCC and Lotus Green could be a single economic entity. In
this way, although Mr Flavin was not a director of Lotus
Green, he could be deemed a director of the "group".
 Laffoy J set out the relevant principles that could be applied
in relation to single economic entity. She stated that both
companies could only be treated as a single economic entity
where the plaintiff has established:
o (a) an evidential basis exists for finding that, as regards
the holding and disposal of the shares, to borrow the
terminology used by Murphy J. in the Lac Minerals
Limited case, there was a factual identification of the
acts of Lotus Green and DCC; and
o (b) not to so treat the companies would allow the DCC
Group to evade its obligations under Part V of CA
1990 (which dealt with Insider Dealing).
 In relation to the point at (a), Laffoy J found that in fact there
was this factual identification because:
o (i) the shares were an asset of the DCC group and
treated as such in consolidated balance sheet.
o (ii) Mr. Flavin made the agreements to sell the shares
as agent for DCC group. The three companies in
question implemented that agreement
o (iii) Profit from the sale came about from the
implementation of the agreement.
 In relation to point (b) above, it was clear that the purpose of
incorporating Lotus Green was not to avoid liability for
insider trading but to mitigate tax liability. However, despite
this Laffoy J held that by defending the claim on the basis
that Lotus Green was a separate entity from DCC, the DCC
Group was effectively trying to evade liability for insider
trading.
 In summary, she concluded that not to treat them as one
would result in DCC evading its obligations under the insider
trading laws under Pt V of the Companies Act 1990.
 You should consider whether the underlying reasoning of
Laffoy J chimes with what the UK Supreme Court said (in
Prest) in relation to piercing the veil where a party is seeking
to evade legal obligations, in which case there is no need to
invoke the SEE concept, or whether the true emphasis is on
the "justice of the case", in which case her comments rely on
the language found in the SEE concept.
 The UK Supreme Court, in its pithiest formulation, stated
that "if piercing the corporate veil has any role to play, it is in
connection with evasion."

4. Doctrine of Ultra Vires


 With regards to DACs, the objects in the memorandum set out the
legal parameters in which a company must act.
 Any transaction which is beyond the objects in the memorandum is
deemed to be outside the company’s powers, or ultra vires. If so,
the act is invalid (or void) in law and has no legal effect.
 The objects are entirely a matter for the promoters, and they can
insert any object they wish so long as it is lawful.
 The rationale firstly, is to protect members so they know the
purpose to which their money would be applied. Secondly, is the
protection of outside creditors, who could discover from the objects
clause the extent of the company’s powers and ensure that the
company funds are not dissipated in unauthorised activities.

 One of the great innovations - or it has been heralded as such - of


the CA 2014 is that it has abolished the ultra vires doctrine.
 Currently, the Ltd has the same capacity to contract as a natural
person.
o This is set out in s 38 of CA 2014. It states that a company
shall have, (whether acting inside or outside of the State) (a)
full and unlimited capacity to carry on and undertake any
business or activity, do any act or enter into any transaction;
and (b) for the purposes of paragraph (a), full rights, powers
and privileges.
o Section 39(1) of CA 2014 states: Where the board of directors
of a company authorises any person as being a person
entitled to bind the company ... the company may notify the
Registrar ... and the Registrar shall register the
authorisation.
o Section 39(2) of CA 2014 states: A person so authorised ... is
referred to in this Act as a "registered person"; where, in a
provision of this Act, that expression appears without
qualification, it shall be taken as a reference to a registered
person authorised by the board of the directors of the
company.
o Section 39(3) of CA 2014 states: Where the board of directors
of a company revokes an authorisation of a person as a
person entitled to bind the company ... the person shall,
notwithstanding that revocation, continue to be regarded for
the purposes of this Act as a registered person unless and
until the company notifies the Registrar in the prescribed
form of that revocation.
o Section 39(4) of CA 2014 states: References in this section to
a person's entitlement to bind the company are references to
his or her authority to exercise any power of the company
and to authorise others to do so.
o Section 39(5) of CA 2014 states: "power of the company"
does not include— (a) any power of management of the
company exercisable by its board of directors (as distinct
from any power of the board to enter into transactions with
third parties), or (b) a power of the company which this Act
requires to be exercised otherwise than by its board of
directors.
o Section 39(6) of CA 2014 states: For the avoidance of doubt,
for the purposes of this section the provisions of a company's
constitution with regard to a person's office or powers shall
not, in themselves, be taken as an authorisation by the board
of the directors of the company of the person as a person
entitled to bind the company (i.e. the person must be
registered with the CRO).

o Section 973 for DACs and Section 1012 for Plc –


circumstances where a person enters into a transaction with
a company in good faith
The Consequence for a DAC of acting Ultra Vires
 In the old days, it used to be possible for a private company to act
beyond its powers. Now, given section 38 for LTDs and section 973
for DACs and 1012 for Plc, the landscape has changed. Even if a
DAC does act beyond its objects, s 973 says that the act can be
ratified by special resolution and that the company can pursue the
directors for having permitted the transaction to go ahead. In the
old days, the transaction was simply void. Not so anymore.
o Ashbury Railway Carriage and Iron Company v Riche
(1875) – the company was incorporated with, inter alia, the
object of making and selling railway carriages. w/o regard to
the company’s objects, the directors purported to construct a
railway line. They subsequently claimed they were not bound
by the agreement because the entire transaction was ultra
vires the objects clause. The House of Lords held that
because the memorandum was a public document, all
persons were deemed to have constructive notice of its
contents. It was held that the contract was ultra vires, void
and unratifiable by the shareholders.

 Interpreting Objects Clauses


o As a result of this harsh approach to acting ultra vires,
lawyers began drafting very lengthy objects clauses, a
process which was upheld in Cotman v Broughman (1918).
However, the courts developed the ‘main objects rule’, which
meant that the main objects would be found, and all ancillary
objects would only be valid to the extent that they fitted with
the main objects.
o This rule was then followed by the ‘independent objects
clause’ which was developed by lawyers. This was inserted
into the memorandum which stated that each sub-clause was
independent and not to be read in terms of the other objects
clauses.
o Another device frequently used is the Bell House Clause,
named after a case called Bell Houses Limited v City Wall
Properties (1966). This clause empowers directors to enter
into any contract which they consider advantageous to the
company. In the Bell House case it was stated that all that
was necessary for the act to be intra vires was that the
directors hold a bona fide opinion that the activity be
advantageous.
o Northern Bank Finance Corp v Quinn (1979) – this case
suggests that the decision reached by the directors must be
reached “reasonably”. In this case the company gave a
guarantee to the plaintiff in respect of a loan to one of its
directors. The company contained a Bell House type clause.
Keane J held that the giving of the guarantee could not
reasonably be regarded as ancillary to the company’s main
business nor was it advantageous to the company.

 Objects v Powers – the distinction


o In some cases, the courts may conclude that a clause in a
memorandum is not an object, but a power which the
company has to achieve its objects.
o Rolled Steel Products v British Steel Corporation
(1985) – this case involved the giving on guarantees and it
was held that while this could constitute the objects of the
company, in this case it was an ancillary power and not a
substantive object. Slade LJ accepted that a company could
have an independent objects clause, which meant each object
be consider independently. Thus, each clause must be treated
as containing a substantive object unless either (i) the subject
of this sub-paragraph is by its nature incapable of
constituting a substantive object or (ii) the wording of the
memo shows expressly or by implication that the sub-clause
was intended merely to constitute an ancilliary power only’.
However, in this case, not even the presence of a separate
objects clause can “save” what purports to be an object from
being construed as a power “if in fact that is what it is”.
 Powers can only be exercised for the benefit of the company :
Courtney points out the most common limitation on powers is that
they are exercisable only ‘as may seem expedient for the
furtherance of the objects of the company’.
 There must be a commercial benefit to the company. Even if there
is no express condition to this effect, there will always be an
implied condition that the power be exercised in this way.
 This was affirmed by Slade LJ in Rolled Steel, where it was held
that the giving of the guarantees by one co to another could not be
deemed for the benefit of the first company.

Relief for third parties


 In the previous legislation, third parties were protected to some
extent by s 8 of CA 1963 and also by an EU directive which was
implemented in Ireland by Statutory Instrument (S.I.) 163 of 1973
(the EC Companies Regulations 1973, Regulation 6).
 It provided some support to third parties who had entered into an
ultra vires contract with the BOD of a company in good faith.

Section 8(1) of the 1963 Act


 The doctrine of constructive notice in relation to ultra vires was
limited by sec 8 of the 1963 Act which facilitates outsiders where
they do not have actual notice of the company’s lack of capacity but
punishes the insiders for authorising such a transaction – ‘Any act
or thing done by a company, which if the company had been
empowered to do….shall notwithstanding that the company had no
power to do such act or thing, be effective in favour of any person
relying on such an act or thing who is not shown to be actually
aware at the time when he so relied thereon, that such act or thing
was not within the powers of the company’.
 2 requirements are necessary before an outside can enforce a
transaction:
(i) Must show that he was not actually aware transaction was ultra
vires
(ii) Must show transaction was lawfully and effectively done.
 Notwithstanding the apparent straightforward meaning of “actual
awareness” its interpretation proved more complex in the case
below and stands as an evidence of failure of of the doctrine in
protecting shareholders and creditors
 Section 8 of 1963 was of no help in Northern Bank Finance
Company Ltd v Quinn and Achates Investment Co because the
party in question had read the memorandum and articles but
misunderstood them. The court deemed that party to have
nonetheless been "actually aware" of their contents. Did reg 6 of
1973 play a role? No, because it was not invoked.
 Bank of Ireland Finance Ltd v Rockfield Ltd concerned s 60 of
the 1963 (the giving of financial assistance in the purchase of own
shares). The contract in question unlawfully assisted in the
purchase of the company's own shares. This falls foul of section 8's
"lawfully and effectively done". Thus the contract could not be
saved by invoking s 8; the plaintiff bank was successful, however,
because the Supreme Court decided that the transaction between
the plaintiff and the borrowers was the loan of money simpliciter,
not the loan of money for the purpose of buying shares in the
defendant company. Note that "effectively" also means that if there
is any uncertainty the contract will be void.
 Re Fredericks Inns – the Revenue tried to rely on sec 8 arguing
they were not aware the transaction was ultra vires.
o In this case, a group of companies under common ownership
were indebted to the Revenue. It was agreed that the pubs
would be sold to pay off some of the revenue debts of the
group as a whole. The payments went above and beyond what
the 3 companies themselves owed, and the revenues went to
pay for the tax liabilities of 6 other companies who were in
the same group. Lardner J sated that these constituted ex
gratia payments to 3rd parties for no consideration and, in the
absence of evidence that they benefited the companies, were
ultra vires the capacity of the company. He held that the
payment was ultra vires because – ‘(a)…it effected a
gratuitous reduction or alienation of its assets and (b) it was
done when the company was insolvent’.
o This decision was upheld by the Supreme Court and Blayney J
pointed out that the payments were ultra vires as they were
not within contemplation of the objects that were relied upon
by the Revenue Commissioners.
 Courtney in his text states that Fredrick Inns totally emasculates s
8 because a party can’t rely on it when the transactions are made
during insolvency.

WHAT WERE THE ARGUMENTS IN FAVOUR OF REMOVING THE


DOCTRINE OF ULTRA VIRES?
 Notwithstanding the varied impositions on the 'old' harsh concept
of Ultra Vires — by the development in drafting, the impact of the
Rolled Steel decision and the legislative amendments noted above
— the doctrine still remained harshly criticized in some quarters.
Thomas Courtney, Chairman of the Company Law Reform Group
was at the forefront of the effort to abolish the doctrine for the
LTD.
 This Group's review of the scope of company law resulted in the
publication of the Companies Consolidation and Reform Bill, which
we have already seen was published in 2011. This Bill became the
CA 2014, which abolished the Ultra Vires doctrine for LTDs. Such
companies now have the legal capacity of a natural person and will
therefore have unlimited corporate capacity. As the new company
constitution will not contain an objects clause, private companies
will no longer be restricted by stated corporate powers, thus
abolishing the ultra vires rule.
 89% of all companies registered in Ireland are private companies
limited by shares of the LTD variety. The Company Law Review
Group suggested that where a contract is ultra vires it should not
invalidate the contract, but should ground an action against the
directors. The Group, arguing that the doctrine did more harm than
good through the decades, recommended that the doctrine be
abolished for private companies limited by shares (PLCs are not
included), and that companies be given the legal capacity of a
person. It argued that the reasons for the doctrine — that
shareholders be aware of the objectives of the company, and that
creditors know the nature of the business — were no longer
compelling in the contemporary commercial world.

Gratuitous Dispositions
 Generally speaking, any transaction which purports to give away a
company’s assets will be deemed suspect.
 The first issue is whether there is an express object or power
allowing for such a transaction. A company’s objects can be drafted
so as to allow these types of dispositions. If a co does contain an
express power or object to make gratuitous dispositions, then any
payment to this effect will not be ultra vires even if they do not
benefit the company.
 That said, it seems that there may be a limitation on these express
objects or powers. The courts will strictly construe the objects and
powers and will only deem them capable of allowing gratuitous
dispositions where it is clearly stated.
 In Re Fredricks inns the Revenue tried to argue that the
payments to them were allowed in the companies memo. If there is
no express power object allowing for gratuitous dispositions, it will
be very difficult to argue that there is an implied power allowing
for them unless there is a clear benefit to back the company.
 A key case is Re Horsley & Weight Ltd - the former director of a
carpentry business was given a £10,000 retirement pension policy
by the new directors. Soon after his retirement the company went
into liquidation and the liquidator sought to recover that money as
an ultra vires act. The Court said that the giving of the policy might
have been misfeasance if the company had been "doubtfully
solvent" on the date it was granted but this was not the case and
the liquidator's suspicion that the company could not afford it was
"largely based on hindsight. Buckley LJ stated that "[t]he objects of
a company do not need to be commercial; they can be charitable of
philanthropic; indeed, they can be whatever the original
incorporators wish, provided that they are legal. Nor is there any
reason why a company should not part with its funds gratuitously
or for non-commercial reasons if to do so is within its declared
objects
 Re Greendale Developments Ltd (1998) – a company paid one
of its directors £435,000. When the company was being wound up
the liquidator sought the return of the monies. Keane J pointed out
there was no object or power authorising the payment in question.
The director argued that the payment had been made with the
assent of all the shareholders and there was no evidence that the
company had been insolvent at the time. Keane J accepted the
principle (originally established in Buchanan v McVey (1954)
that where all the corporators agree to a certain course of action,
such an act is valid subject to 2 prerequisites:
(i) The transaction agreed should be intra vires the company,
and
(ii) The transaction should be honest.
In this case the payment fell foul of the first principle. The fact that
the shareholders had approved the payment could not save it as the
payment was no intra vires the company.

5. Corporate Authority
Introduction
 Prior to the enactment of CA 2014, difficulties sometimes arose
when directors acted beyond their delegated authority and
purported to enter contracts on behalf of the company.
 Usually, directors acting alone do not have such power. Only the
board has the power to enter into binding contracts. The board can
delegate this power to a Managing Director.
 Third parties, who thought they entered a binding contract with the
company in question, would seek to enforce the contract. They
would argue was that the director had a certain kind of authority to
do so. They could not argue that the director had the actual
authority to do so. But they could ask the court to infer that the
director had ostensible authority to do so. This would require a
consideration by the Court of the state of knowledge of the board:
the key being, did the board know that the director in question was
acting in the manner in which he was acting, in which case, they
will be deemed to have "given him their blessing", so to speak, and
the company would accordingly be bound by contracts entered into
by such a director, acting on his or her own.
 s 39 of CA 2014 states: Where the board of directors of a
company authorises any person as being a person entitled to bind
the company (not being an entitlement to bind that is, expressly or
impliedly, restricted to a particular transaction or class of
transactions), the company may notify the Registrar in the
prescribed form of the authorisation and the Registrar shall
register the authorisation.
 Section 39(2) states: A person so authorised, where his or her
authorisation is registered in the foregoing manner, is referred to
in this Act as a "registered person"; where, in a provision of this
Act, that expression appears without qualification, it shall be taken
as a reference to a registered person authorised by the board of the
directors of the company to which the provision falls to be applied.
 Two things should be noted. First, the statute does not make the
registering of a registered person mandatory. It says the company
"may", etc, etc. Second, will the courts decide that a third party
must consult the CRO to see if the company he or she is dealing
with has a registered person? If so required, that will quickly
answer the question as to whether the person the third party is
dealing with has the authority to bind the company to the contract
under discussion.
 Companies conduct business by entering into contracts. However,
a company requires agents to enter into these contracts on its
behalf because a company, in and of itself, is a notional entity
without a physical existence. It must give its authority to agents
(usually directors) to carry out this function.

Different Types Of Authority


Actual Authority
 This comes from a consensual arrangement between the company
and its agent whereby the latter has the authority to act on behalf
of the former.
 Freeman & Lockyer v Buckhurst Park Properties (1964) –
Lord Diplock stated in this case that “actual authority is a legal
relationship between principal and agent created by a consensual
agreement to which they alone are parties.”
 Actual authority can be express or implied, but in most cases it will
be expressly set out in the articles of association. Furthermore,
authority can be expressly or impliedly conferred on agents by the
board itself.

Deemed Authority
 Section 40 of CA 2014 – where there is a question whether the
person who exercised or purports to exercise, the company powers;
the following namely BOD and any registered person, shall each be
deemed to have authority to exercise any power of the company
and to authorise others to do so
 Section 40(8) – does not include the power of management but only
the power to enter transactions with third parties
 S. 40(11) – this in an addition to the Rule in Turquand’s case not in
substitution

Ostensible Authority
 This arises where a person acts on behalf of a company without any
actual authority, but in such a manner that it would be unfair on
other persons to deny that the company is bound by that person’s
act. It is essentially a form of estoppel, preventing the company
from denying an agent’s ostensible authority, which the company
represented the agent as having.
o Kett v Shannon and English (1987) – distinguished actual
and ostensible authority. Actual authority exists when there
is an actual agreement between agent and principal, whereas
ostensible authority does not derive from a consensual
arrangement and exists where the principal makes a
representation.

 The seminal case for the principle of ostensible authority is the


case below.
o Freeman & Lockyer v Buckhurst Park Properties
(1964)–the co’s articles provided that the directors could
appoint a managing director. A Mr Kapoor acted in such
capacity, with the knowledge of the other directors, even
though he had never been formally appointed. When he
engaged plaintiff architects there was a dispute over the cost.
The co sought to repudiate the contract, saying that Kapoor
had no actual authority to bind the co as he had not been
formally appointed managing director in accordance with the
articles. The court stated that he could be deemed to have
ostensible authority, and Diplock LJ set down a four-step test.
He said it must be proven that:
(i) A representation that the agent had authority to
enter on behalf of the co into a contract of the
kind sought to be enforced.
(ii) Such representation was made by someone with
actual authority
(iii) The 3rd party was induced by those
representations
(iv) The memorandum and articles allowed the co to
enter a contract of this kind, and to delegate
authority in this manner.
 On the facts, the court held that the company was liable for the
fees as Kapoor had the ostensible authority to bind the company.

The Four Step Test in Operation


Step 1: The Representation
 Generally, the representation can take many forms. In Armagas v
Mundaga SA (1985) – Goff LJ stated – ‘The representation which
creates ostensible authority may take a variety of forms but the
most common is a representation by conduct, by permitting the
agent to act in some way in the conduct of the principal’s business
with other persons’.
 As Courtney points out, the most common way in which a company
makes a representation is by its conduct, whereby the other
directors hold the agent out as having the usual authority of a
person in a particular position, or as holding a particular office.
 Ulster Factors v Entonglen (1997) – an example of tacit
representation can be seen in this case. The pl and def entered into
an agreement whereby Ulster Factors agreed to make payment to
the order of Entonglen when requested. For 3 years no instructions
or formalities were complied with in relation to the draw down. The
draw down which was disputed concerned an instruction from a Mr
Hollan to the pl to make a cheque of £35000 payable to a firm of
Northern Irish solicitors. Holland in fact had no authority to direct
payments to 3rd parties on his own. Laffoy J held that Holland did
not have actual authority, but did have ostensible authority; there
had been tacit representation. Entonglen had failed to tell the pl
that draw downs directly to itself were authorised differently to
draw downs which were to be paid to 3 rd parties. This constituted a
tacit representation that all draw downs were to be authorised in
the same manner.

Step 2: The Representor must have actual authority


 It is crucial to note that the representation cannot come from the
purported agent. It must come from the principal i.e. the company.
This means that the person who makes the representation must
themselves have actual authority to bind the company. This will
invariably be the board of directors.

Step 3: Reliance
 The 3rd party must have relied on the representation. Usually the
fact that the outsider entered the transaction might constitute
evidence that they were assuming and relying on the belief that the
agent in question had ostensible authority.
Step 4: The memorandum and articles
 Step 4 requires two things. First, that the transaction must be
within the objects set out in the memorandum. Second, that the
purported agent have the power to do what he did if he had actual
authority in the first place.
 For example, if the articles stated that the MD did not have the
power to enter into certain contracts, then he cannot bind the co.
therefore, even if an outside was not actually aware that the
articles prevented the MD from entering into this type of contract,
the company will still not be bound.
 Step 4 is based on the doctrine of constructive notice. The
doctrine of constructive notice will deem the outsider to know of
the contents of the memorandum and articles, as they are available
to the public for examination, whether he actually knows them or
not. Individual directors will have little or no potential actual
authority in the model regs.

The Rule in Turquand’s Case/Indoor Management Rule


 The rule in Turquand is a rule which modifies the doctrine of
constructive notice.
 This rule modifies the doctrine of constructive notice. It operates
where an agent has authority but that authority is subject to an
internal requirement or pre-condition. The rule relieves outsiders
from inquiring into whether this internal requirement or pre-
condition has been complied with.
 Royal British Bank v Turquand (1856) – a co borrowed monies
in a way which required an ordinary resolution under its articles.
The resolution was not obtained and the co argued that the loan
was unenforceable because the bank had notice of its articles. This
was rejected and the court stated that once the outsider read the
memorandum and articles, he “would not find a prohibition from
borrowing but a permission to do so on certain conditions…he
would have the right to infer the fact of a resolution authorising
that which on the face of the document appeared to be legitimately
done.”

 Re Motor Racing Circuits (1997) – a debenture was challenged


because it had not been counter-signed by a director or secretary
as was required by the articles. The Supreme Court rejected the
challenge, stating that the bank was entitled to assume that the
internal arrangement of the company had been correctly complied
with.
o Blayney J summed up the rule: "Turquand's case says that
where a matter appears to be regular then the party dealing
with the company is not affected if in fact by reason of some
error in the internal management of the company there is an
irregularity."

Limitations to Turquand
1. Where the irregularity is of public record:
o It can have no application where the outsider is shown to
have been aware of the irregularity.
o If the irregularity is a matter of public record, the outsider
might be said to have constructive notice of the irregularity.
See the case below.
o Irvine v Union Bank of Australia (1877) – the articles
required special resolution of members to allow director to
borrow above a certain amount. Such an amount was
borrowed without a resolution and it was held that the bank
could not rely on Turquand. It had constructive notice that
the resolution had not been passed as no copy was filed in the
Companies Office.

2. Circumstances giving to suspicion of irregularity


o The rule in Turquand does not apply where the circumstances
are such as to put an outsider on inquiry as to whether the
transaction was irregular. This usually arises where there are
ground for reasonable suspicion of irregularity.
o Underwood v Bank of Liverpool & Martins (1924) – it
was held that the fact that a director was lodging company
cheques to his own personal account was sufficiently unusual
to have put the outsider on enquiry.

3. Actual reliance on Memorandum and Articles


o If it is proved that the outsider had in fact not read the
articles of memorandum in the first place, then there is
authority to the effect that such an outsider cannot rely on
the rule in Turquand.
o Rama Corporation v Proved Tin & General Investments
(1952) – the PL entered into a contract with a director of the
DEF but the director had no actual authority, although the
memorandum and articles provided that he could have had so
long as the power had been delegated to the director. The PL
argued Turquand saying that the delegation was a matter of
internal management of which it could not have been aware.
However, it was held that because the PL had not even read
the articles, he could not rely on the rule in Turquand.
Constructive notice will not suffice and there must be actual
reliance on the existence of the power to delegate.

6. Directors
Introduction to Directors
 Part 4 of the CA 2014 deals with corporate governance, i.e.
directors and secretaries, proceedings of directors, definitions of
members, rules relating to meetings and resolutions, and so on.
Some of this chapter relates to Part 4, but more of it relates to Part
5, which deals with director’s duties in general.
 Section 128(1) states:
o A company shall have at least one director (prior to CA 2014,
the minimum amount of directors was 2; this still holds good
for DACs). If default is made by a company in complying with
this provision for 28 consecutive days, the company and any
officer of it who is in default shall be guilty of a category 3
offence.
o One director companies are only permitted in relation to the
private company limited by shares. A company may not have
a body corporate or an unincorporated body of persons as
director of the company (s 130). Any purported appointment
of a body corporate or an unincorporated body of persons as
a director of a company is void.

Company Secretary
 A company must have a secretary, who may be one of the directors
(s 129(1)).
 The secretary is appointed by the directors of the company for such
term, at such remuneration and upon such conditions as they may
think fit; and any secretary so appointed may be removed by them.
 The directors of a company have a duty to ensure that the person
appointed as secretary has the skills or resources necessary to
discharge his or her statutory and other duties (this is new - s
129(4) - and the skills aren't specified). This rule applies also where
one of the directors of the company is appointed as secretary.
 Where a company has only one director, that person may not also
hold the office of secretary of the company. The performance of
acts by a person in dual capacity as director and secretary is not
permitted (this relates to certain documents which may have to be
signed by a director and a secretary) (s 134).
Director’s Consent to Appointment
 Any purported appointment of a director without that director's
consent shall be void (s 144). The first directors of a company are
those persons determined in writing by the subscribers of the
constitution (or a majority of them).
 In the case of a single-member company the directors of the
company may from time to time appoint any person to be a director
of the company, either to fill a casual vacancy or as an addition to
the existing directors, (as long as the total number of directors of
the company does not at any time exceed the number, if any,
provided for in its constitution). Note also that any director
appointed thus holds office only until the next following AGM, and
is then be eligible for re-election. Put at its simplest, a single
member company may from time to time, by ordinary resolution,
increase or reduce the number of directors (s 144(3)(d)).

Removal of Director
 A company may remove a director before the expiration of his or
her period of office notwithstanding anything in its constitution or
in any agreement between it and him or her by ordinary resolution
(s 146), though this provision does not authorise the removal of a
director holding office for life (s 146(2)).
 In the case of a resolution to remove a director
o (a) the company shall be given not less than 28 days' notice of
the intention to move any such resolution except when the
directors of the company have resolved to submit it;
o (b) on receipt of notice of such an intended resolution, the
company shall forthwith send a copy of it to the director
concerned, and the director (whether or not he or she is a
member of the company) shall be entitled to be heard on the
resolution at the meeting; and
o (c) the company shall give its members notice of any such
resolution at the same time and in the same manner as it
gives notice of the meeting or, if that is not practicable, shall
give them notice of it, either by advertisement in a daily
newspaper circulating in the district in which the registered
office of the company is situated or in any other manner
allowed by this Act or by the constitution, not less than 21
days before the date of the meeting.
Types of Directors
1. Nominee Directors
 Nominee directors are persons who are appointed to the board
of the company with a view to protecting or representing some
special interest
 The nominee director may find himself in positions where
simultaneously under some obligation to a third party whilst
owing a duty to the company of which he is now a director.

2. Non-Executive Directors
 The issue of delegation and supervision becomes particularly
pertinent in relation to nonexecutive directors within a
company.
 A non-executive director is a director who is not involved in the
day to day business of the company. They usually adopt a more
advisory role and are appointed for their expertise and/or
experience which can help guide the direction of the company.
Two Irish cases are vital for their discussion of the role of non-
executive directors.
 They arise in the context of restriction proceedings and are
discussed in detail in later. The two cases are Re Matter of
Tralee Beef and Lamb Ltd (in liquidation) and Re Mitek
Holdings.

3. Shadow Directors
 A shadow director is someone who is not appointed to the board
of directors or is not manifestly involved in running the
business, but who nevertheless has a decisive say in managing
the company from a distance.
 Section 221 of CA 2014 defines shadow directors. A body
corporate is not to be regarded as a shadow director of any of its
subsidiaries. A shadow director is "a person in accordance with
whose directions or instructions the directors of a company are
accustomed to act. Such a person shall be treated as a director
of the company unless the directors are accustomed to act in
accordance with their directions or instructions by reason only
that they do so on advice given by him or her (i.e. the alleged
shadow director) in a professional capacity".
 A shadow director is someone who is not appointed to the board
of directors or is not manifestly involved in running the
business, but who nevertheless has a decisive say in managing
the company from a distance. It was thought that this person
should be equally amenable to the law as regular directors and
have the same duties as regular directors, and for that reason
the 1990 Act brought in a definition of shadow director (now
replaced by s 221 of CA 2014)
 It must be shown that there is a well-established practice or
pattern of the company's director carrying out someone's
directions before he can be regarded as their shadow director.
As can be seen, an exception is made for persons who advise
directors in a professional capacity. The application of "shadow
directors" is very prominent in a number of different
circumstances, for example, in transactions involving directors
and the company, the restriction or disqualification of directors
and reckless and fraudulent trading.

 In England, the meaning of what constituted a shadow director


was the subject of some debate.
o Re Unisoft Group (1994) – it was held that the shadow
director must be the “puppet master” controlling the
actions of the company and the directors his “cats paws”.
o Secretary of State for Trade and Industry v Deverell
(2000) – Cooke J said that the other directors must exhibit
“subservience” and “surrender of discretion”. However, on
appeal it was said that it may not be necessary to find this
degree of surrender and that a person who gave advice
which contained an element of instruction could fall within
the definition of shadow director.

 In Ireland:
o Re Worldport Ireland Ltd (2005) – the Supreme Court
held that that a body corporate could not be a shadow
director for the purposes of a restriction application (i.e.
you can't restrict a corporate body having acting as a
shadow director). (The High Court had found that you
could). Persons who can be restricted does not extend to
corporate persons. Corporate persons cannot be directors
of companies, so it would be "meaningless and arguably
absurd", said Fennelly J, to restrict a corporate person -
because that would imply that a corporate person could be
a director of a company, as long as the capital
requirements were met by that company.
o Fyffes plc v DCC (2005) – the factors to be taken into
account were considered by Laffoy J in this case. It
involved a case of alleged insider trading in which it was
claimed that Mr Flavin was a shadow director of a
company called Lotus Green. DCC was a parent company
of Lotus Green. Mr Flavin was a director of DCC but not
an official director of Lotus Green. Thus, it was argued
that he was a shadow director of Lotus Green.
 Laffoy J agreed that a person giving advice would be
deemed a shadow director. The directions emanating
from the alleged shadow director must have an
imperative quality. Sec 27 did not require that the
board should always act on the direction and
instructions for a shadow directorship to exist. The
word “accustomed” precludes this requirement. In
respect of directors who are so accustomed to act,
this refers to the board or the majority of directors.
 Laffoy J concluded that Mr Flavin was not a shadow
director of Lotus Green. Whilst he did order them to
sell the shares, that was not sufficient to being him
within sec 27 of the Act

 The leading Irish authority is Re Hocroft Developments Ltd a


decision of McKechnie J. The learned judge held that whether or
not a person was a shadow director was a matter of statutory
interpretation, which would be influenced by the purpose of s
221 and the fact that a person found to be a shadow will be
vulnerable to applications for restriction or personal liability for
debts where there was reckless trading. For a finding to be
made there must be directors of the company; directions must
be given to them; and the true directors (or a majority of them)
must be accustomed to act on those directions. There must be
cause and effect between the communication and the
implementation. The communications must be repetitive,
customary and recurring, not infrequent, rare or occasional. The
character of the words must be capable of carrying the meaning
'instruction.' Any communication falling short of the above is
excluded. Advice given by professionals in a professional
capacity is excluded. The entire circumstances must be taken
into account. Where the involvement of the person in question is
explicable by the exercise of a role other than that of director
then a finding that that person was a shadow director should not
be made.
 In the more recent case of Devona Ltd, the above criteria was
applied and Dunne J held that the directors acting on a
communication from the former book keeper and company
secretary, their so acting did not have the force of habit and
declined to find that he was a shadow director.

4. De Facto Directors
 Section 222 defines de facto directors. A de facto director is "a
person who occupies the position of director of a company but who
has not been formally appointed as such director". Such a person
shall be treated, for the purposes of Part 5 of CA 2014, as a
director of the company (i.e. all the directors' duties set out in Part
5 apply to de facto directors). Just as in the case of shadow
directors, a person shall not be a de facto director of a company by
reason only of the fact that he or she gives advice in a professional
capacity to the company or any of the directors of it.
 A person who is held out as a director by the company and purports
to act as a director, although never validly appointed as such, will
be deemed to be a de facto director of the company.

 English cases:
 Re Hydrodam (Corby) Ltd (1994) – Millet LJ distinguished
de facto from shadow directors. He said a de facto director
was someone who, whilst not formally appointed, undertook
functions in relation to the company which could be properly
discharged only if he was a director. These persons claim to
act as directors even though they have not been appointed.
However, shadow director claim not to be directors even
though they direct those who are the formally appointed
directors.
 Secretary for Trade and Industry v Tjolle (1998) – Jacob
J stated the test for whether someone is a de facto director
will depend on a no of factors, including:
a) Whether the co held out the individual as director;
b) Whether the individual used the title director;
c) Whether the individual had proper information of the co
on which to base decisions;
d) Whether the individual was truly in a position to exercise
the powers of a director.

He stated that one must ultimately look at where the person


was “part of the corporate governing structure.” Such de
facto director can be made personally liable for fraudulent
trading and it has been accepted that de facto directors could
be restricted under sec 150 of the 1990 Act.
 Irish cases:
 In Re Lynrowan Enterprises Ltd (2002) – O’Neill J said
that it would be nonsensical to not permit restriction in
relation to persons who acted in the form of directors but
were not formally appointed.
 Gray v McLoughlin (2004) – it was alleged that one of the
directors, a Mr Tuohy, was a de facto director in the context
of restriction proceedings. Finlay Geoghegan J referred to the
reasoning as set out in Re Lynrowan Enterprises and the fact
that this had been subject to some criticism. Instead, she
preferred to rely on the reasoning as set out in Secretary of
State for Trade and Industry v Tjolle and referred to the four
factors set down by Jacob J (see above). Finlay Geoghegan J
found Mr Tuohy to be a de facto director because:
- The other directors considered him to be a director and
believed him to be appointed as such.
- He had accepted his description as finance director with
the company.
- He sat in regularly at meetings which could be considered
board meetings.
- He had full information about the affairs of the company.
- He had responsibilities over the financial affairs and
negotiated and guaranteed a lease agreement on behalf of
the company.

The court concluded he was a de facto director. However,


the court ultimately concluded the directors had acted
honestly and responsibly and dismissed the restriction
proceedings against them.

Duties of Directors
 Directors will have duties arising in common law and equity. They
also have duties arising under statute. Over the years the courts
have recognised three main duties which directors owe and they
are now codified as Section 228 of CA 2014 which sets out the
principal fiduciary duties. You can now refer to them as the “S228
Duties” rather than the “Directors’ Common Law Duties”:
o Section 228 is a codification of the common law duties:
(1) the duty to exercise their powers bona fide and in
the interests of the company as a whole;
(2) the duty to exercise proper skill, care and diligence
in the discharge of their duties; and
(3) the duty to avoid conflicts of interests between the
director and the company.

1. Duty to exercise powers bona fide and in the interest of the


company as a whole
 Every director is obliged to act in good faith for the benefit of the
co and not to use his power for his own benefit, or the benefit of
some other 3rd party.
 Sometimes it is difficult to know what is meant by “the interests
of the company” and this will depend on the circumstances.
However, it generally means that the directors will act in a way
which benefits the economic interest of both the corporate entity
and its members.
 While directors’ duties are owed to the co, the courts will often
recognise the reality that the shareholders are the ultimate owners
of the separate entity and their interests are therefore aligned with
the interests of the company.
 The duty also requires the directors exercise their powers bona
fide or in good faith; which implies directors must act honestly.
Thus, when examining the bona fides of the director’s actions, the
intentions of the directors will be paramount.
 Even if the courts feel that from an objective point of view, the
actions of the director did not benefit the co, if the director
honestly believed he was acting in the co’s best interests then he
will not have breached his duty.
o Regent Crest v Cohen (2001) – a director had waived a
contractual provision which would have entitled the co to
claim £1.5 million against the vendors of land to the co. the
director claimed that he had good commercial reasons and in
determining there was no breach of duty the court held “…
Rather the question is whether the Director honestly believed
that his act or omission was in the interests of the company.”

 Exercising a power for its proper purpose


 One way of determining whether a director has acted bona fide
is to analyse the proper purpose for which that power was given.
Generally, a power will be given for a particular reason. If a
director exercised a power for a different or ulterior purpose,
this may be seen as a breach of duty.
 The cases which deal with this issue generally relate to the
power of directors to issue shares; this is to raise capital or
investment for the co. however, directors may be tempted to use
this power as a tool to preserve their own position within the co.
o Howard Smith v Ampol Petroleum Ltd (1974) – the
directors issued shares in a co to raise new capital for that
co and to ensure that a takeover bid by a particular party
would not be successful. The latter purpose was improper
as directors cannot issue shares with a view to blocking a
takeover bid. Lord Wilberforce said that the court must –
‘examine the substantial purpose for which it was
exercised and…will necessarily give credit to the bona
fides opinion of the Directors’.
 The fact that some shareholders are excluded from an allotment
will not of itself render the allotment unlawful so long as it is
bona fide use of the director’s power for the benefit of the
company.
o Mutual Life Insurance Company of New York v The
Rank Organisation (1985) – the Directors excluded
foreign shareholders in the new allotment because they
considered that there would be technical problems in
extending the new issue to them. It was held that this was
not an improper use of their powers.
o Teck Corporation v Millar (1972) – it was held that
directors may reasonably consider who is seeking control
of the company and why. If the directors believe there will
be substantial damage to the company’s interests if the co
is taken over, the exercise of their power to defeat those
seeking a majority will not necessarily be improper
however, there must be reasonable ground for this belief.

 Fettering of a discretion granted


 It is a general rule that directors cannot fetter their discretion
i.e. they cannot disable themselves from exercising their own
judgment.
 Leading case: Clark v Workman (1920) – a director of the
company agreed to approve a transfer of shares from one
shareholder to an outsider before properly considering whether
such a transfer would be in the company’s best interest. Ross J
set down the principle and stated that directors were “bound to
consider the interests of all the Shareholders, unfettered by any
undertaking or promise to any intending purchaser”. The judge
held that by acting as he had, the director had fetter himself by
his own promise and had thereby disqualified himself from
acting bona fide in the interests of the co.
 There are exceptions to this, for example, directors will be
allowed to fetter their own discretion if to do so is in the best
interest of the co.
o Fulham Football Club v Cabra Estates (1994) – The Pl
entered into a contract with the Def whereby the football
club would receive £11 million towards the re-
development of the stadium, in return of supporting any
planning permission that Cabra Estates might make over
the next 7 years. The judge found that the directors had
exercised their discretion in a way that was in the best
interests of the co. He found that the Pl co had received
substantial benefits from the original agreement and that
it could not be said that the directors had acted
improperly.

 Duties of nominee directors to act in the company’s best


interests
 Nominee directors are persons who are appointed to the board
with a view to protecting some special interest. They may be
simultaneously under an obligation to a 3 rd party whilst owing a
duty to the company of which he is now a director.
o It has been specifically recognised in England in the
following case of Scottish Co-op Wholesale Society v
Meyer (1959)– that nominee directors are not absolved
from the general duty to act in the interests of the
company as a whole.
o In Ireland the position of nominee directors was examined
by Barron J in the case of Irish Press Plc v Ingersoll
Irish Publications Ltd (1993) – where he stated – ‘Their
duty is to act in the interests of the company. They have
also got a duty to act on the instructions of their
nominating party…there is nothing wrong with appointing
body or party having a view as to where the interests of
the company lie and ensuring that its nominees follow that
direction provided that in so doing that they are not
seeking to damage anybody else’s interest in the
company’.

2. Directors Duties of Care, Skill and Diligence


 The Director must also exhibit a degree of skill care and diligence
in the exercise of his or her functions. This duty arises not only
from the director’s fiduciary duties as agents but also from the fact
that directors will owe a duty of care in tort to the co which
foreseeably relied upon their actions.
 Re City Equitable Fire Insurance Company (1925) – the MD
engaged in fraud resulting in massive losses. The liquidator sought
to make the other directors liable for failing to exercise reasonable
care. The court held that a director must act honestly, but also
must exercise a degree of skill and diligence. In setting out the
standard of care which a director should owe, the court set out the
following 3 principles:
(i) A director should exhibit a degree of skill that may
reasonably be expected from a person of his knowledge
and experience
(ii) A director is not bound to give continuous attention
to the affairs of the co, but is bound to attend all
meetings he might reasonably be expected to attend.
(iii) A director may delegate a function to another
director as long as he has no grounds of suspicion and
trusts that person to act honestly.

 Re Barings Plc (1996) – Parker J made the following


propositions:
(i) Directors have a duty to acquire and maintain sufficient
knowledge of the co’s business to enable them to
properly discharge their functions.
(ii) Whilst directors are entitled to delegate some
functions, the power of delegation does not absolve the
duty to supervise these functions.
(iii) The extent of the duty to supervise depends on the facts
of each case.

 An issue that constantly reoccurs is whether the director has acted


diligently. In some cases, a director will be liable for the action of
another for failing to properly monitor or intervene.
o Jackson v Munster Bank (1884) – some of the directors of
a bank authorised granting loans to themselves without
providing adequate security which was in breach of the banks
regulations. A director, who was not involved, did nothing to
investigate after some shareholders had made allegations. He
was held to have been negligent for not looking into the
matter and raising it at the general meeting. He was based in
Dublin and his principle job was to look after the bank’s
business in Dublin but all the misappropriations were taking
place in Cork. It was held that whilst he was innocent
personally, the fact that he had been alerted by a shareholder
meant he was under an obligation to take action. As he failed
to do so, he was in breach of his duties.

 The issue of delegation and supervision becomes pertinent in


relation to non-executive directors within a company. A non-
executive director is a director who is not involved in the day to day
business of the company. They usually adopt a more advisory role
and are appointed for their expertise.
o Re Tralee Beef and Lamb; Kavanagh v Delaney (2005) –
a co went into liquidation after the BSE crisis. The co had 4
directors. Mr Delaney was the only executive director and his
was 1 non-executive director. It was held that Mr Delaney
had been irresponsible for failing to hold regular board
meetings and to produce relevant financial figures to inform
the non-executive directors of the extent of the financial
difficulties. Could the non-executive directors be held
responsible? Finlay Geoghegan J referred to the Barings case
and stated that all directors must take reasonable steps to
place themselves in a position whereby they can inform
themselves as to the company’s affairs and guide the
management of the co. Mr Delaney’s wife took no active role
and although she was aware of the financial difficulties, she
left it on her husband to inform the non-executive directors.
When he failed to do so, she took no further action. This was
a breach of her duties. As for the other 2 non-executive
directors, the judge found that they did not adequately
discharge their function of ensuring they were informed of
the co’s affairs and they did not adequately monitor the
affairs of the co.
o This was challenged in the Supreme Court and they felt that
the nature of common law duties owed and the role of non-
executive directors had been “amplified” in the hearing and
urged that due consideration of the distinctions in
responsibilities must be maintained. This might be viewed as
a warning not to expand the role and duties on non-executive
directors to extremes, but does not detract from the fact that
such obligations remain and are due and owed by such
partied.
o Kavanagh v Reidler (2004)–Finlay Geoghegan held that a
non-executive director was entitled to rely upon information
provided by his fellow directors and that his fellow directors
were performing their functions properly. However, he said
that there might be cases where a non-executive director
would be on notice of facts which will indicate that he should
not continue to rely upon info that he is receiving from other
directors.

 There is a statutory duty upon the BOD to maintain proper


books of account. However, there is also a common law duty to
this effect and it is deemed a joint duty upon all the directors.
o Re Vehicle Import Limited (2000) – Murphy J held that
the obligation to keep proper books of account was not
limited to one director but was a joint and several
responsibility of all the directors.
o Re Colm O’Neill Engineering Services (2004) – it was
held that the detailed recording in the books of particular
transactions and detailed info was a matter for the executive
directors and not for the non-executive directors.
 In some cases, the courts have held that this duty to exercise skill,
care and diligence should also be afforded to 3 rd parties or
outsiders.
o Shrinkwin v Quincon (1993) – the Pl was an employee and
suffered a severe injury while operating a circular during
work. The Pl sued the employer co but also sued the manager
and owner of the co personally as he had been responsible for
the employees training. The Supreme Court held that it could
be possible that the manager be personally liable,
particularly where he had involved himself so closely in the
operation of the factory and the supervision and training of
the PL. However, it is important to note that Fennelly J did
not consider that to be lifting the corporate veil. The claim of
negligence was not against the manager in his capacity as
shareholder but as a person who by his own actions placed
himself in a situation where he assumed an obligation to
exercise care.

3. Conflicts of Interest
 Directors, as fiduciary agents, can be required to account for the
company for benefits which they have received as a result of
their position as directors. A director is bound to avoid a
situation where his own personal interests conflict with those of
the company. The case law can be categorised into 2 separate
sets of circumstances:
(I) Where the directors come across an opportunity by
virtue of his directorship in a co and takes that
opportunity for himself thereby taking a personal profit.
(II) Where the director enters into a transaction between
himself and the co, directly or indirectly, thereby
putting his interests at odds with the co.

 Liability of directors to account for benefits


 Leading case: Regal Hastings v Gulliver (1942) – the
company owned a cinema and the directors decided to acquire 2
further cinemas with a view to selling all 3 as a going concern.
In order to provide the subsidiary with sufficient capital, the
directors took up a no. of shares in the subsidiary themselves.
When being sold, it was decided to sell both the parent company
and its subsidiary by way of share transfer. The sale realised a
profit for the directors and proceedings were instituted against
the directors by the co claiming that the profit belonged to the
co. importantly, it was not suggested that the directors had
acted otherwise than in good faith or that they had acted for an
improper purpose. Notwithstanding this, the House of Lords
held that the directors were obliged in law to account for the
profit which they had made. Lord Russell stated that it in “no
way depends on fraud or absence of bona fides. The liability
arises from the mere fact of a profit having in the state
circumstances been made”.
 It should be noted that had the directors formally notified
the co of the proposal they could have been released from their
fiduciary duty by the members passing a resolution either before
or subsequent to the director’s actions.

 Industrial Developments Consultants Limited v Cooley


(1972)– the Def was the MD of the PL firm which offered to its
customers a wide range of construction services. The Pls had
discussions with a potential customer. Mr Cooley had conducted
these discussions on behalf of the Pl but they were rejected.
However, the customer then approached Mr Cooley to carry out
the lucrative contract by himself. Mr Cooley agreed, pretended
he was ill and left the Pl to work for the customer. Mr Cooley
argued that the co could not have benefited from the contract.
The court rejected this and held that a fiduciary obligation
existed and that by using the info he had received as a director,
he had breached that fiduciary obligation and he was compelled
to account to the co for the profit he had made.

 Another issue that arises is whether a director can enter into


competition with his own company. Generally, it is not
automatically a breach of a director’s duty to be involved in a
business which competes with that of his company.
 The leading authority is the Irish case of Moore v McGlynn
(1894) – where the court held that it would not hold a director –
‘guilty of a breach of trust in setting himself up in a similar line
of business in the neighbourhood, provided that he does not
resort to deception or solicitation of custom’.

 However more recent Irish authority suggests that competing


with your own company could amount to a breach of duty
particularly where using confidential information.
o In Springgrov Services Ltd v O’Callaghan (2000) –
Herbert J stated ‘a director of a company owes strict
obligations of good faith, fair dealing and honesty to the
company of which he is a director…includes a duty not to
compete with the company and a duty not to use
confidential information obtained as such’.

 It seems however that there is a recognised exception to the


above principles i.e. a director comes across an opportunity and
informs the company of that but the company declines to take it
up then the director would appear to be free to acquire the
opportunity for himself.
o Peso Silver Mines v Cropper (1966)– a director of the
PL co became aware that certain mining claims were up
for sale. He advised the board but they decided not to
acquire the claims. The director then pursued the claims
himself. Subsequently, the Pl co changed hands and the
new owners initiated proceedings against the Def for
breach of fiduciary duties. The court held that this was
distinguishable from the Regal Hastings case as the Pl co
had been informed of the opportunity but rejected it. The
court refused to compel the director to account for the
profit made.

 However this exception will not apply where the director does
not inform the company of the opportunity in the first place.
o Gencor v Dalby (2000) – the MD of a group of companies
used the companies name and staff for the sale of 2 ndhand
equipment, the profits of which were to go to a co
controlled by him, he argued that the companies did not
deal in 2nd-hand equipment and therefore would not have
availed of the opportunity. The judge rejected this; the
exception does not apply where the director does not
inform the co of the opportunity.

 The normal remedy if a director makes a profit in breach


of his fiduciary duty is that the director will be made liable to
account for any profit made.
 The underlying rationale behind this is that opportunities are
treated as if it were the company’s property and the director
becomes a constructive trustee of the fruits of his abuse.
However, an account of the profits may not be the appropriate
remedy in all cases.
o Aerospares Ltd v Thompson(1999) – the Pl claimed for
losses of business allegedly poached by the defs the court
found that while the Pl might recover damages, it would
not extend to profits obtained over an indefinite period
from a poached client. Rather, damages for that part of
the business that had been poached be awarded to the Pl.

Contracts between directors and the company


 Whenever a director enters into a contract with the company there
is an automatic conflict of interest. This is because the director's
interests and the company's interests cannot be the same. Thus,
any contract entered into between the director and his company
will be deemed voidable at the company's instance unless such
contract has been authorised by the shareholders or board of the
company. This principle was laid down in a case called Aberdeen
Railway Company v Blaikie Brothers where the plaintiff
contracts with the defendant in circumstances where the managing
director of the defendant was also the chairman of the plaintiff. The
court held the contract was voidable, which meant that the
contract could be set aside and reversed. It should be noted that
much of the law in this area is now subsumed into statutory
regulation. In particular you should note s 231 (Duty of director to
disclose his or her interest in contracts made by company), s 238
(Substantial transactions in respect of non-cash assets and
involving directors, etc) and s 239 (Prohibition of loans, credit
transactions, guarantees, provision of security, etc., to directors
and connected persons).

General Duties of Directors


 It is the duty of each director of a company to ensure that the CA
2014 is complied with by the company (s 223(1)). When
consenting to becoming a director, the person must state:
"acknowledge that, as a director, I have legal duties and
obligations imposed by the Companies Act, other statutes and at
common law.''
 Section 224 states that directors have a vague duty to "have
regard" for the interests of the company's employees in
general, as well as the interests of its members ("in the
performance of their functions"). The duty is not worth much
because employees and members cannot enforce it personally; the
duty is owed "to the company (and the company alone) and shall be
enforceable in the same way as any other fiduciary duty owed to a
company by its directors."
 Section 228 sets out the principal fiduciary duties of
directors. A director of a company shall:
 act in good faith in what the director considers to be the
interests of the company; (the only modification to this is
where a director of a company may have regard to the
interests of a particular member of the company because that
director has been appointed or nominated for appointment by
that member);
 act honestly and responsibly in relation to the conduct of the
affairs of the company;
 act in accordance with the company's constitution and
exercise his or her powers only for the purposes allowed by
law;
 not use the company's property, information or opportunities
for his or her own or anyone else's benefit unless— (i) this is
expressly permitted by the company's constitution; or (ii) the
use has been approved by a resolution of the company in
general meeting;
 not agree to restrict the director's power to exercise an
independent judgment unless: (i) this is expressly permitted
by the company's constitution; (ii) the case concerned falls
within s 228(2) or (iii) the director's agreeing to such has
been approved by a resolution of the company in general
meeting;
 avoid any conflict between the director's duties to the
company and the director's other (including personal)
interests unless the director is released from his or her duty
to the company in relation to the matter concerned, whether
in accordance with provisions of the company's constitution
in that behalf or by a resolution of it in general meeting;
 exercise the care, skill and diligence which would be
exercised in the same circumstances by a reasonable person
having both - (i) the knowledge and experience that may
reasonably be expected of a person in the same position as
the director; and (ii) the knowledge and experience which the
director has;
 in addition to the duty to have regard to the interests of its
employees in general, have regard to the interests of its
members.

Duty of Director to Disclose His or Her interest in Contracts Made by


Company
 A director has a duty to disclose his interest in contracts made by
the company (s 231). The nature of his or her interest must be
declared at a meeting of the directors of the company. This rule
does not apply in relation to an interest that cannot reasonably be
regarded as likely to give rise to a conflict of interest. The
declaration should be made at the meeting of the directors at
which the question of entering into the contract is first taken into
consideration or, if the director was not at the date of that meeting
interested in the proposed contract, at the next meeting of the
directors held after he or she became so interested; in the case of
his or her becoming interested in a contract after it is made, be
made at the first meeting of the directors held after the director
becomes so interested (s 231(3)(a) and (b)).

Power of Director to Act in a Professional Capacity for Company


 Save to the extent that the company's constitution provides
otherwise (a) any director may act by himself or herself, or his or
her firm, in a professional capacity for the company of which he or
she is a director, and (b) any director, in such a case, or his or her
firm, shall be entitled to remuneration for professional services as
if he or she were not a director.
 The only exception to this is that a director cannot act as statutory
auditor to his company.
Breaches of Certain Duties: Liability to Account and Indemnify
 Where a director of a company acts in breach of his or her duty
under section 228 (l)(a), (c), (d), (e), (f) or (g), he or she shall
be liable to do either or both (as the corresponding common law
rule or equitable principle with respect to the matter would have
required) of the following things, namely—
 account to the company for any gain which he or she makes
directly or indirectly from the breach of duty; and
 indemnify the company for any loss or damage resulting from
that breach.
 Section 227(2) provides a third party who is ‘an accessory to a
breach of duty or has knowingly received a benefit therefrom’ can
be liable to indemnify the company or account for profits.

General Power of Management and Delegation


 Before directors can exercise any powers they must first be given
those powers by the members of the company. The Companies Act
2014 requires that some major and mainly constitutive decisions be
taken by the members in general meeting; for instance, authorising
the issue of additional shares and waiver of pre-emption rights to
new shares. Otherwise, the allocation of powers is matter for a
company's own regulations to determine. Where authority over
some matter is not delegated to the directors, it falls to be decided
by the general meeting of members.

 Section 158(1) of CA 2014 gives the exclusive day-to-day


management powers to the directors.
 The general understanding of s 158 (or model reg 80) is that
the shareholders cannot interfere with the director's
functions except by altering the articles or, indirectly, by
removing the existing directors. So, for example, in Smith v
Ampol (1974) – by virtue of s158, directors can, within their
management powers, take decisions against the wishes of the
majority of shareholders and these shareholders cannot
control them in the exercise of these powers while they
remain in office. This seems to hold true for matters which
would concern the practical day-to-day management of the
company.
 Scott v Scott (1943) – members passed resolutions in
relation to the payment of interim dividends. It was held that
the resolutions were invalid as this was an “ordinary financial
matter” and was “purely a matter of the management of the
business”.
 Breckland v London and Suffolk Properties (1989) – the
members sought an injunction preventing its directors from
passing a board resolution. Harman J refused the injunction,
holding that s 158 confides the management of the business
to the directors.

 An important case is Ryanair Ltd v Aer Lingus plc. Ryanair held


29.82% of the shares in Aer Lingus. The directors of Aer Lingus
had recommended that no dividend be paid for the year. Ryanair
tabled a resolution that Aer Lingus should declare and pay a
dividend of 30m. It was trying by a resolution to override the
recommendation of the directors on a matter of management.
Ryanair also wanted no more payments to be made into Aer
Lingus's employee pension scheme without prior shareholder
approval. Aer Lingus refused to table the resolutions.
 McGovern J upheld their refusal. On the pension scheme
issue McGovern J stated: "the board has been given power to
determine what (if any) pension benefits the Company will
provide and to determine what payments are to be made to
the Company's pension scheme. Since this power is given to
the directors under the Articles of Association, the members,
in general meeting, cannot, by ordinary resolution, seek to
override or fetter that exclusive power. If the directors
cannot or will not exercise a power vested in them, then the
general meeting may do so. But that has not happened here."
 If you delegate powers to directors then directions to them
in those areas will be nullities. If something could be argued
to fall outside the management of the business, then
members may be able to issue directions in that respect. So,
the reality is that if you want to control the power vested by
the articles you have to muster enough voting power to pass
a special resolution and amend the articles.

 Irish v English laws:


 It should be borne in mind when examining the English case
law, that the UK equivalent of s 158 does not correspond to
the Irish provision, in that the UK provision refers to the
prescription of 'regulations' rather than the giving of
'directions'.
 The English provision has been interpreted as meaning that
the shareholders cannot interfere in the exercise of the
director's powers unless the shareholders amend the articles
of association by inserting a new 'regulation'.
 Courtney argues that the use of the word "directions" in the
model reg 80/ s 158 demands a different approach. He states
this implies that the articles themselves (apart from reg 80)
expressly give the directors certain powers and the members
cannot act in disregard of those powers by directing as to
how such powers should be exercised. However, where no
such powers are given by the articles, the members can
direct the directors to do or refrain from doing certain acts.
 Whilst s 158 serves to delegate powers to director or
management, this is subject to:
(i) Companies Acts
(ii) Any regulations in the constitution of the co.
(iii) Such “directions” given in general meetings

 The Irish term of directions can be interpreted more


broadly and to effectively act as a broader limitation on
the free exercise of powers of directors, in comparison to
the English term regulations. There is more potential to
curtail the Directors authority on foot of the above
subjections.

 Situations where Members Resume Control


o In some circumstances, the shareholder must resume control
of the company notwithstanding s 158 and of the most
common occasions are:
(i) where there are no directors capable of acting
(ii) where the directors exceeded their delegate authority;
or
(iii) act in breach of their duties

o The power and authority is only vested in directors by virtue


of s158-, so if directors should die, reign or become
incapacitated; the power will default back to the members.
Residual or root power in the company always vests initially
in the members by virtue of s 31.

- no directors capable of acting:


o Mahony v East Holyfod Mining Co (1875) – where it was
held that with no official board of directors, the members
would have the power to hold out certain persons as being
directors. Furthermore, if the board becomes deadlocked
then it will fall to the shareholders in general meeting to
resolve the matter at hand.
o Barron v Potter (1914) – one of the 2 directors refused to
discuss company business. The court that there was power in
the co to do itself that which, under other circumstances,
would be otherwise done by the directors.

- If a director exceeds his authority delegated authority or


breaches his duty, it will be up to the shareholders to either
ratify the action or take action against the director.
o Re Burke Clancy & Co. Ltd – where the directors borrowed
more money than what was allowed in the articles, the
members approved the accounts at the general meeting.
Although the power to borrow the specific amount was
beyond the scope that had been given to the directors,
borrowing itself was intra vires and can be ratified by
shareholders in a general meeting.
o Bamford v Bamford (1970)– the directors allotted shares
for improper use. The court stated that if director breach
their duties they can seek forgiveness from the shareholders
and provided the acts are not ultra vires, everything will go
on as if things were done right from the beginning. However,
the majority could decide not to forgive and the director must
pay for it. Furthermore, it was not necessary to get a special
resolution to ratify the wrong, so long as it was done within
the articles.

Directors Duties to the Company


Duties are owed the Company
 Directors occupy a fiduciary position towards the company because
they are the company’s agent and look after the business of the
company. Accordingly, the duties are owed to the company and
nobody else.
o First established this in - Percival v Wright (1902) –. Here,
a director purchased shares from a member and did not
disclose to him that the directors were aware that
negotiations were in progress for the purchase of all the
shares of the company at a higher price. When the member
sought to make the director account for the profit, it was held
that there had been no breach of duty on the part of the
director to the company.
o This principle was affirmed in the Scottish case - Dawson
International v Coats Paton (1989) – it was held that this
legal principle may entitle the directors of a public company
which is involved in a takeover battle to act in a way which
may be disadvantageous to shareholders wishing to dispose
of their shares. The Def argued that the company’s directors
had a duty to inform members of all possible takeover bids.
The court rejected this and held that their only concern
should have been the interest of the company – “Directors
have but one master, the company”.

Duties to Shareholders
 Generally, a director may be taken to owe a duty to his
shareholders only where he assumes, expressly or impliedly, that
duty.
 Coleman v Myers (1977) (NZ case) – the directors acquired
shares from shareholders who were family members. The directors,
by withholding information as to the value of the shares, had acted
in breach of their fiduciary duty. Woodhouse J stated that there can
be special circumstances where such a duty can be owed to the
shareholders. For example, where there was dependence by the
shareholders upon information and advice, the existence of a
relationship of confidence, the significance of some particular
transaction for the parties and the extent to which those directors
took positive action to promote that transaction. This approach was
expressly approved in Ireland by Keane J in Crindle Investment V
Wymes (1998).
o Courtney argues that the true authority of this case is that
directors are not automatically precluded from standing in a
fiduciary relationship to the shareholders, and where they are
the agents of the shareholders, on the facts, they may be in a
fiduciary position to them.

 Allen v Hyatt (1914) – company directors induced shareholders


to give them options to buy their shares on the basis that it would
help them negotiate an amalgamation with a third company. The
directors then exercised their option and made personal profits. It
was held that the directors in this case must be ‘taken to have held
themselves out to the individual shareholders as acting for them on
the same footing as they were acting for the company itself, that
was, as agents’.

 There is a different approach however to the issue of whether


directors should owe duties to shareholders which was
demonstrated in the Australian decision of Brunninghausen v
Glavanics (1999) – Here the company had two shareholding
directors and one became inactive in relation to the running of the
company. The ‘active’ director agreed to buy the inactive director’s
shares but did not disclose that he was in discussions with a 3 rd
party concerning the sale of the entire shareholding. It was shown
here that there was no relationship of trust and confidence
between the parties and unlike Allen and Hyatt the def had not
placed himself in a fiduciary relationship with the other
shareholders. The court held that the directors owe a duty to their
company, however, the court also held that this should not
preclude the fiduciary duty to shareholders in relation to dealings
in their shares where this would not compete with any duty owed
to the company. On the facts, it was found that the defendant did
owe the plaintiff shareholder a fiduciary duty.

Duties to Creditors
 It has been made clear in Ireland that in the case of an insolvent
company, the duty owed by the directors to the company is
effectively transposed into a duty to act in the interests of the
company’s creditors.
 This principle can be traced back to the Australian decision below.
o Kinsella v Russell Kinsella Properties (1986) – Company
faced imminent collapse. The directors here leased the co’s
premises to themselves at an undervalue with an option to
purchase the premises below market valuation. They, as
shareholders, ratified the transaction. The co was then placed
into liquidation and the liquidator sought to have the
transaction set aside. The directors argued that even if there
was a breach of duty, the same was ratified by the
shareholders i.e. themselves. Street CJ rejected this and held
that where a company is insolvent the interests of the
creditor intrude. They become positively entitled through
liquidation to displace the power of the shareholders and the
directors to deal with the company’s assets.

 the existence of a duty to creditors was recognised in Ireland in


this case.
o Parkes & Sons v Hong Kong and Shanghai Bank (1990)
–The Pl company gave a guarantee and supporting charge to
the Def bank in relation to monies owed by another co. at the
time, the Pl co was insolvent. Blayney J approved Street J in
Kinsella and accepted the distinction between solvent and
insolvent companies and that the director of insolvent
companies owed duties to that company’s creditors.
o Re Frederick Inns (1991) – SC decision, the same principle
was recognised and applied. The directors of a group of
companies, which were insolvent, sold assets of some
companies and paid the Revenue the sum owed by the
company in question, but also those owed by other companies
in the group. Lardner J held that the payments were in
breach of the duty which the company and the directors owed
to the general creditors. This was upheld by the Supreme
Court. Blayney J held that the directors of a company do owe
duties to the creditors when the company is insolvent.

 The reasoning in Kinsella has been interpreted slightly differently


in England. Whilst it does create an obligation on directors to
consider the interests of directors, it was held in Yukong Line
Limited v Rendsburg Investment Corporation (1998) – it was
held that this duty is owed to the company and therefore the only
redress available to the creditor are the remedies available in any
liquidation. The directors does not owe a fiduciary duty to the
individual creditor nor is the creditor entitled to sue for breach for
the duty owed by the director to the company.

 This appears to be in contrast to the view taken in the Irish courts.


In Jones v Gunn (1997) – McGuinness J held that, entirely
separate from statutory framework, directors of insolvent
companies owe a fiduciary duty to their creditors.

 That said, other commonwealth authorities suggest that there


could exist a duty on the part of directors based on the principles of
tort law and the neighbour principle.
 In Nicholson v Permacraft (NZ) Ltd (1985) – Cooke J held that
creditors of a company are entitled to consideration where the
company is insolvent, where it is doubtful of solvency or where a
proposed course of action places the creditors in jeopardy.

Duties To Employees
 Traditionally, the courts have not required directors to consider the
interests of employees.
o Park v Daily News (1962) – the directors, after selling the
business of the co, made gratuitous payments to the
employees, an action which the majority of the shareholders
approved. The Court of Appeal held that there was no
authority which supported the principle that directors were
entitled to consider the interest of the employees.
 Section 224 – directors have vague duty to have regard for the
interests of the company’s employees in general. This was first
introduced in 1990, sec 52 of the Companies Act which imposed a
duty on directors to have regard to the interest of the co’s
employees.
 However, this duty is only owed to the co itself and that is only
enforceable in the same way as any other fiduciary duty is owed to
the co. Thus, the net effect is that the directors are only required to
have regard to the interest of the employees. Even if they do fail to
do so, it is unlikely that they will be held to account unless the
employees can get the co to sue, for example, where the employees
were also shareholders and had sufficient voting power to influence
the actions of the co.
 Apart from this example, the change regarding a duty to employees
being owed by directors is merely symbolic as the duty is
practically unenforceable.

7. Restrictions and Disqualifications


Introduction
 First, a number of definitions are important,
o "director of an insolvent company" means a person who was a
director or shadow director of an insolvent company at the
date of, or within 12 months before, the commencement of its
winding up;
o "insolvent company" means a company that is unable to pay
its debts;
o "restricted person" means a person who is subject to a
restriction under a declaration made under CA 2014, section
819 (1) that is in force.
o A company is unable to pay its debts if-—(a) at the date of the
commencement of its winding up it is proved to the court that
it is unable to pay its debts (see also section 570), or (b) at
any time during the course of its winding up the liquidator
certifies, or it is proved to the court, that it is unable to pay
its debts.

Restriction – section 819


 The following persons have locus standi to make restriction
applications:
o (a) the Director of Corporate Enforcement,
o (b) the liquidator of the insolvent company, or
o (c) a receiver of the property of the company.
 The court may order that the person who is the subject of the
declaration shall pay
o (a) the costs of the application, and
o (b) the whole (or so much of them as the court specifies) of
the costs and expenses incurred by the applicant—
 (i) in investigating the matters that are the subject of
the application, and
 (ii) in so far as they do not fall withinparagraph (a), in
collecting evidence in respect of those matters,
including so much of the remuneration and expenses of
the applicant as are attributable to such investigation
and collection.

 Section 819(1) states that on the application of a person referred


to above and subject to s 819(2), the court shall declare that a
person who was a director of an insolvent company shall not, for a
period of 5 years, be appointed or act in any way, directly or
indirectly, as a director or secretary of a company, or be concerned
in or take part in the formation or promotion of a company, unless
the company meets the requirements set out in subsection (3).
 Section 819(2) states: The court shall make a declaration under
subsection (1) unless it is satisfied that
o (a) the person concerned has acted honestly and responsibly
in relation to the conduct of the affairs of the company in
question, whether before or after it became an insolvent
company,
o (b) he or she has, when requested to do so by the liquidator
of the insolvent company, cooperated as far as could
reasonably be expected in relation to the conduct of the
winding up of the insolvent company, and
o (c) there is no other reason why it would be just and
equitable that he or she should be subject to the restrictions
imposed by an order under subsection (1).
 The requirements referred to in subsection (1) are that
o (a) the company shall have an allotted share capital of
nominal value not less than—
 (i) €500,000 in the case of a public limited company
(other than an investment company) or a public
unlimited company, or
 (ii) €100,000 in the case of any other company,
o (b) each allotted share shall be paid up to an aggregate
amount not less than the amount referred to in paragraph
(a), including the whole of any premium on that share, and
o (c) each allotted share and the whole of any premium on each
allotted share shall be paid for in cash.
 Where subsection (1) refers to being appointed or acting as a
director or secretary of a company, or taking part in the formation
or promotion of a company, "company" means any of the following:
(a) a private company limited by shares; (b) a designated activity
company; (c) a public limited company; (d) a company limited by
guarantee; (e) an unlimited company; (f) an unregistered company.

What is the restriction?


 If a person is restricted, that person cannot act as a director, nor
be involved in the promotion or formation of another company
during a five-year period unless the company has a minimum paid
up share capital. In respect of public companies, the minimum paid
up share capital must be €500,000. In the case of a private
company, the minimum must be €100,000 and payment for all such
shares must be in cash
 In addition, any company which has an officer who is restricted is
precluded from using the Summary Approval Procedure usually
available to companies who wish to provide financial assistance.
So, if a restricted person is accepting an appointment as a director
or secretary in another company, he must notify that company that
he is a restricted person. He must also notify the Registrar of
Companies.

The Defences to a Restriction Application


 Pursuant to s 819(2) The court shall make a declaration under
subsection (1) unless it is satisfied that—

(a) the person concerned has acted honestly and responsibly in relation to
the conduct of the affairs of the company in question, whether before or
after it became an insolvent company,
(b) he or she has, when requested to do so by the liquidator of the insolvent
company, cooperated as far as could reasonably be expected in
relation to the conduct of the winding up of the insolvent company, and
(c) there is no other reason why it would be just and equitable that he or
she should be subject to the restrictions.
 In the past, the primary defence has been the first one—of acting
honestly and responsibly; s 819(2)(b) is new.
 It has often been considered that the statutory make-up of s 819
casts the onus of proof upon the respondent director, thus they are
placed in the position of being automatically restricted, unless they
can satisfy one of the defences above.
 In the Matter of Tralee Beef and Lamb Ltd (in liquidation)
(2008)– the comments of Hardiman J has perhaps opened the
constitutional arguments as to the fairness of this reversal.

 “Honesty” and acting “responsibly” are seen as 2 distinct criteria.


Usually, if there is dishonesty it would be easier to prove that the
director should be restricted. What is more difficult is establishing
the level of responsibility that is required to warrant a restriction
order.
 Indeed, this recent case may be seen as raising a number of
questions as to the correctness of the nature of restriction orders
with several criticisms being leveled against what the SC viewed as
a draconian regime in some respects.
 Honest and acting ‘responsibly’ are seen as two distinct criteria.
o In Re USIT World Plc (2005) this was elaborated upon.
Usually if there is dishonesty it would be easier to prove that
the director should be restricted. What is more difficult is
establishing that the level of irresponsibility that it required
to warrant a restriction order.

 The seminal case which sets out the criteria to be taken into
account when determining whether somebody has acted
irresponsibly is La Moselle Clothing Ltd (1998) – Shanley J said
that the court should have regard to the following 5 factors when
determining whether somebody has acted irresponsibly:
(1)The extent to which the director has or has not complied
with obligations imposed by the Companies Acts;
(2)The extent to which his conduct could be regarded as so
incompetent as to amount to irresponsibility;
(3)The extent of the director’s responsibility for the
insolvency of the company;
(4)The extent of the director’s responsibility for the net
deficiency in the assets at the date of winding up or
thereafter;
(5)The extent to which the director had displayed a lack of
commercial probity or want of proper standards.

 These were expressly approved by McGuinness J in the Supreme


Court in Re Squash Ireland Ltd (2001).

In analysing whether they have complied, follow the decision of


Shanley J in La Mosselle Clothing Ltd:
Factor 1 – Complying with the Companies Act
 A good example is failing to keep proper books and records. This is
seen as a vital obligation of directors. The courts take the view that
if proper books are not kept, directors cannot have an accurate
picture of the company's financial health. Furthermore, commercial
errors and negligent decisions are more likely to occur in the
absence of accurate financial data. In addition, the absence of
books and records renders the orderly winding up of the company
almost impossible.
 Re Costello Doors Ltd (2001) – Murphy J said that the
maintenance of proper books and accounts and the employment of
appropriate experts would go a long way to discharge the onus of
showing that the directors behaved responsibly. Here, although the
books were not properly kept for a certain period of time, the
person responsible had become ill and it was clear that the failure
did not contribute to the company’s insolvency.
 In Re College Freight Limited t/a Target Express the directors
were restricted because they (a) delayed in lodging a statement of
affairs of the company with the court; (b) refused to adequately
explain certain behaviour with the Revenue Commissioners both
pre- and post- liquidation; and (c) failed to put in place reasonable
measures to maintain company records.
 Re Vehicle Imports Limited (2000) – the keeping of proper
books and records is a joint responsibility on all the directors.
However, the task may be given to one particular person,
particularly where there are executive and non-executive directors
within a company.
 Re Colm O’Neill Engineering Services (2004) – it was held that
the detailed recording in the books of particular transactions and
detailed information was an executive matter and not a matter for
non-exec directors.
 McLaughlin v Lannen (2005) – where the directors of the
company, knowing that the company was insolvent, paid back some
creditors in an unfair preference to others. This was specifically
prohibited by s 286 of 1963 Act as it was a fraudulent preference
(now s 604, CA 2014). It was accepted by the directors that this
should not have been done and that this prejudiced the company's
ability to properly pay the other creditors in accordance with their
priority in winding up. Clarke J held that this one singular action
would be sufficient to warrant a restriction order. He said that one
of the most important obligations of any director is to ensure that
the company's assets are dealt with and properly distributed in
accordance with the law.
Factor 2 – Incompetence Amounting to Irresponsibility
 This is not a very clear category. The failure of a director to
properly manage the company can amount to irresponsibility.
Commercial misjudgment is not enough. The lack of commercial
honesty should be extreme. If there is incompetence, it should be
"total". If there is negligence, it should be "gross." An important
factor is whether the directors took appropriate expert advice.
Being overly optimistic will not necessarily amount to
incompetence which amounts to irresponsibility.
 In Re First Class Toy Traders Ltd; Gray v McLoughlin [2004]
IEHC 289, ex tempore (Finlay Geoghegan J), even experienced
directors that began trading with an under capitalised company
weren't restricted, partly because they gave personal guarantees in
respect of the company's borrowing.
 Kavanagh v Delaney (Re Tralee Beef and Lamb) – Here Finlay
Geoghegan J considered the position of non-executive directors of
insolvent companies. There was only 1 executive director in this
company, Mr Delaney and 3 non-executive directors. In the last 2
years of trading, there were no board meetings and the judge found
none of the 3 non-executive directors had made any serious
attempt to acquaint themselves with the affairs of the company.
The judge concluded the Mr Delaney had acted incompetently in
not holding proper board meetings to inform the other directors of
the problems. Furthermore, the other non-executive directors had
also acted irresponsibly in failing to that everybody was properly
informed about the affairs of the co.
 Re Squash Ireland – the Supreme Court examined the meaning of
acting responsibly and held that this must be one which is judged
by an objective standard.
 In Re BOD Investments (IRL) Ltd the Court restricted the
husband director because he had not acted responsibly, there had
been a persistent failure to comply with statutory obligations and a
lack of commercial probity in relation to monies due to the Revenue
Commissioners; the Court refused to restrict his wife, who claimed
to be a "passive" director, because she had been deceived by her
husband in relation to certain issues and had moved immediately to
retain independent advice on learning of them.

Factor 3 – The Director’s Responsibility for the Insolvency of the


Company
 The courts will look at the reasons why the company failed and
whether the director was responsible.
 Re USIT World Plc (2005) – one of the reasons for the company’s
collapse was the events of September 11, 2001. It was clear from
the evidence that while some question could be raised by the
director’s conduct, the ultimate demise of the company came
largely from circumstances outside their control. Peart J accepted
that ‘some reasonable effort…to attempt to trade out of a difficulty
is not an irresponsible act…short term emergency fire-fighting
must be permitted to take place without those efforts, provided
that they are reasonable and responsible from being made.’
o It was also acknowledged in the case above that when a
company ceased trading can be relevant but it was equally
accepted that the creeping nature of insolvency can
sometimes make this a difficult question to determine. The
longer the company is trading whilst insolvent, the more
difficult it will be for a director to prove that he acted
honestly and responsibly.

Factor 4 – The Responsibility of the Directors for the Net Deficiency in


the Assets of the Company
 Under this point, the courts will look for dishonesty (and it's very
rare that they find that a director has been dishonest). Such
behaviour would include issuing false invoices for the purposes of
avoiding VAT and a deliberate policy of directing payments towards
the company's bank overdraft and trade creditors in preference to
other creditors. Another example is unreasonable delay in putting
the company into liquidation.
 La Moselle Clothing – the directors made no attempt to wind up
the company or to stop trading even though it was clear the
company was insolvent. This meant that the debts and liabilities of
the co were larger than if they had stopped trading. Furthermore,
there were unaccounted expenses including a withdrawal by a
director of £139,000. In addition, one of the directors caused the
company to waive debts of almost £.5million which were owed to it
by a related company. All of this meant that the directors should be
restricted.

Factor 5 – Displaying a Lack of Commercial Probity or Want of Proper


Standards
 The facts in La Moselle Clothing were a clear example of factor 5
in operation.
 Re Verit Hotel Ltd (2002) – the co kept monies which it should
have paid to the Revenue in order to keep the co going when it was
short of funds. This was held to be totally irresponsible and was
sufficient to warrant the restriction of the directors.
 Re Digital Channel Partners Ltd (2003) – a limited failure to
pay tax may not amount to irresponsibility and result in
restrictions. What is needed is a total disregard of obligations to
pay tax, evidence of preferring to pay other debts over tax and
using monies owed to the Revenue to finance activities of the
company.
 It may also be seen where directors fail to apply any standards or
care to their obligations.
 Halley V Edward Nolan & Others (2005) – the question for the
court was whether 2 directors who were formally appointed, but
had given evidence to suggest that they merely had a duty to sign
documents, should be restricted. The directors had shown a lack of
independence and quality in the performance of their obligations.
This was not the responsible exercise of directors functions and a
restriction order was granted against both. This case reaffirmed
the principle that those who accept formal appointment as
directors, but act merely as “puppets”, do so at their peril.

Delay in Bringing Restriction Applications


 In Murray v Browne the liquidator had delayed excessively in
bringing his restriction application (13 months). Barrett J began his
judgment with: "To expect perfection is to expect too much". The
liquidator misplaced the letter from the ODCE advising him that he
was not relieved of his obligation to bring restriction proceedings
in this case. The liquidator must report to the ODCE within 6
months of his appointment (section 682(2)). Restriction
applications must be brought by the liquidator not later than 2
months after the date on which the ODCE has notified the
liquidator that the liquidator is not relieved of the obligation to take
the application (section 683(4)). This used to be slightly different.
"A liquidator of an insolvent company shall, not earlier than 3
months nor later than 5 months (or such later time as the court
may allow and advises the Director) after the dateon which he or
she has provided to the Director a report under subsection (1)
apply to the court for the restriction under section 150 of the Act of
1990 of each of the directors of the company, unless the Director
has relieved the liquidator of the obligation to make such an
application."

Relief from Restriction Orders


 Section 822 empowers the court to grant "relief" from a
restriction order. The court can do so "if it deems it just and
equitable to do so". It can grant relief "on such terms and
conditions as it sees fit.". The restricted director has to tell the
liquidator about his intended application, and the liquidator will
pass on this information to the (former) company's creditors - and
they are entitled to come to court and be heard at the application.
 In Re Xnet Information Services Ltd, O'Neill J stated that the
court's primary concern when considering an application for relief
was the protection of the public, and that the court must also have
regard to factors such as the past and present conduct of the
applicant. In that case, relief was granted in the form of a reduction
in the level of capitalisation required of any company of which the
applicant became a director or secretary or in which he took up any
position, from the statutory threshold of €63,487.00 (as it then was;
it's now €100,000) to a level more affordable for the applicant,
namely €7,500.00.

Jurisprudence from Recent Cases


 Where a company is solvent and fully tax compliant there will of
course be no restriction (Keane v O'Callaghan). Where directors
act responsibly, they will seldom be restricted (see Re Pearse
Contracting). There will be no restriction where bona fide
attempts were made to reduce costs and increase company
turnover were made, and there are no allegations of dishonesty
(Arkins v Murphy).
 In Cahill v O'Brien the NED avoided restricted by giving an
undertaking which effectively amounted to self-restriction: he
undertook not to be involved in commercial affairs for a similar
period (to the five year period) and this was enough to satisfy the
judge. The executive director, however, who consciously failed to
file annual returns, was restricted.
 Re JPM CAD Design Ltd the Managing Director was restricted
because he allowed pay to keep rising as the company's fortunes
kept declining

Non-Executive Directors & Restriction Orders


 The position of non-executive directors - what level of duties they
owe to the company - is far from clear in Ireland. Only two cases
discuss the matter, and they are set out here for you. To make a
long story short, the Courts have agreed that NEDs have some
duties but the Courts aren't sure what the extent of them is. The
Courts recognise that the NEDs are dependent on the executive
directors for information. NEDs can't be held as responsible for the
company's insolvency as the executive directors, but they are on
the board to give their advice, expertise and experience.
 Read - Re Tralee Beef and Lamb and Re Mitek Holdings.
 Re Tralee Beef and Lamb :
o Here Finlay Geoghegan J considered the position of non-
executive directors of insolvent companies. There was only 1
executive director in this company, Mr Delaney and 3 non-
executive directors. In the last 2 years of trading, there were
no board meetings and the judge found none of the 3 non-
executive directors had made any serious attempt to acquaint
themselves with the affairs of the company. The judge
concluded the Mr Delaney had acted incompetently in not
holding proper board meetings to inform the other directors
of the problems. Furthermore, the other non-executive
directors had also acted irresponsibly in failing to that
everybody was properly informed about the affairs of the co.
o The position of imposing restrictions on non-executive
directors came into question in the Supreme Court in the
appeal of this case. Mr Coyle, who was a Chartered
Accountant and a non-executive director, submitted that he
had acted honestly and responsibly in relation to the affairs of
the co. The liquidator had formed the view that Mr Coyle
should not have been restricted but was subject to the
provisions of section 56 of the 2001 Act to take a restriction
applications. Interestingly, the application by Mr Coyle was
unopposed by the ODCE or the liquidator, the liquidator was
not obliged to and had, in any event, formed the view that Mr
Coyle should not have been restricted.
o The Supreme Court through Hardiman J expressed concern
over the draconian nature of the statutory regimes and the
reversal of the normal burden of proof. Furthermore, they
highlighted that where the respondent is a professional man,
as was here, the implications were much more significant due
to the reputational damage that would be caused. On the
facts, the Supreme Court felt that Mr Coyle had acted
honestly and responsibly and felt that the High Court were
grossly unfair to him and had “amplified” the normal
common law duties of a director and the criteria laid down in
La Moselle Clothing Limited did not take account of Mr
Coyle’s actual position – noting that distinction must be
drawn between the duties of a highly paid executive director
of a bank, as opposed to a non-executive director appointed
to keep BES investors informed.
 Re Mitek Holdings.
o In this case, the HC order a restriction of the directors for a
period of 5 years on the ground that certain transfers were
made while the company was insolvent and had created a
debenture as security.
o On appeal to the SC, the appellants relying on Tralee case,
argued that the HC erred in considering the common law
duties of the directors.
o The court upholding the decision of the HC stated that – a
court can take into account whether there has been any
breach of the common law duties of a director, in addition to
La Moselle criteria, thus clarifying the principles applicable
to a restriction order under Section 819.
 The court also noted that there will usually be a real
difference between the duties of executive and non-
executive directors. The latter will usually be
dependent on the former for information about the
affairs and of finances of the co, a fact which will
correspondingly larger duties on the former.

Section 842 – Disqualification Of Directors


 "Disqualification order" means an order of the court that a person
shall be disqualified;
o "disqualified", in relation to a person, means the person's
being disqualified from being appointed or acting as a
director or other officer, statutory auditor, receiver,
liquidator or examiner or being in any way, whether directly
or indirectly, concerned or taking part in the promotion,
formation or management of each of the following: (a) any
company (b) any friendly society within the meaning of the
Friendly Societies Acts 1896 to 2014; (c) any society
registered under the Industrial and Provident Societies Acts
1893 to 2014. (You only have to be concerned with (a)).
 Automatic Disqualification - Section 839(1) states that a
person is automatically disqualified if that person is convicted on
indictment any offence under CA 2014 in relation to a company, or
of any offence involving fraud or dishonesty. A person disqualified
under s 839 (1) is disqualified for a period of 5 years after the date
of conviction or for such other (shorter or longer) period as the
court, on the application of the prosecutor or the defendant and
having regard to all the circumstances of the case, may order.
 Locus Standi – Section 844 –
o The circumstances in which the Court may make a
disqualification order are set out in s 842 of CA 2014. The
circumstances range from (a) to (i). Before we consider them,
we will note who has locus standi for each category. Locus
standi is set out in s 844. The DCE can make an application
under every category. The DPP can make an application
under (a) to (g). The Registrar of Companies may only make
an application under (f). Finally, a broad number of persons
may make applications under (a) to (d): they include any
member, any officer, any employee, receiver, liquidator,
examiner or creditor of the company in question. Any of these
persons may be required by the court to provide security for
costs before they are allowed to take the application. The
Court can also make a disqualification order "of its own
motion".

Categories Under Which Disqualification Will be Made:


The s 842 categories are as follows:
(a) that the person has been guilty, while a promoter,
officer, statutory auditor, receiver, liquidator or
examiner of a company, of any fraud in relation to
the company, its members or creditors,

(b) that the person has been guilty, while a promoter,


officer, statutory auditor, receiver, liquidator or
examiner of a company, of any breach of his or
her duty as such promoter, officer, auditor,
receiver, liquidator or examiner,

(c) that a declaration has been granted under section


610 in respect of the person (i.e. they have traded
recklessly or fraudulently)

(d) that the conduct of the person as promoter,


officer, statutory auditor, receiver, liquidator or
examiner of a company makes him or her unfit to
be concerned in the management of a company,

(e) that, as disclosed in a report of inspectors


appointed by the court or the Director under this
Act, the conduct of the person makes him or her
unfit to be concerned in the management of a
company,
(f) that the person has been persistently in default in
relation to the relevant requirements,

(g) that the person has been guilty of 2 or more


offences under section 286 (i.e. failing to ensure
the company keeps proper accounts)

(h) that the person was a director of a company when


a notice was sent to the company under section
727 (the section that deals with the registrar
giving notice to a company of an intention to
strike it off register) and the company, failing to
take the proper remedial steps was struck off the
register (under section 733) or

(i) that— (i) the person is disqualified under the law


of another state (whether pursuant to an order of
a judge or a tribunal or otherwise) from being
appointed or acting as a director or secretary of a
body corporate or an undertaking, and (ii) it
would have been proper to make a
disqualification order against the person
otherwise under this section if his or her conduct
or the circumstances otherwise affecting him or
her that gave rise to the foreign disqualification
had occurred or arisen in the State.

Disqualification Jurisprudence
 The SC in Re CB Readymix Ltd: Cahill v Grimes, the respondent
had purported to act as liquidator of a company but was never
formally appointed. In pursuance of a feud with the Revenue, he
dumped with a view to destruction all the company’s books and
records. He was disqualified for 7 years and this was upheld by the
Supreme Court.
o The SC adopted a passage from the English decision as a
proper approach of s.842 in re Lo-Line Motors Ltd (1988)
where Browne-Wilkinson VC stated that “the primary
purpose of the Section is not to punish the individual but to
protect the public against the future conduct…”
o Murphy J stated that an experience liquidator, which the
respondent claimed to be, should have appreciated the
importance of the records and was unfit to hold the office and
therefore upheld the disqualification order.
 The English Courts have identified five types of conduct which will
more than likely call for a disqualification order:
o 1) Acquiring the assets of a company which was insolvent for
another company with which the same directors were
involved.
o 2) Failing to keep proper books of account or to make annual
returns even if there was no personal gain to the directors
responsible.
o 3) Gross incompetence.
o 4) Trading when there is no prospect of the company
surviving, i.e. recklessly.
o 5) Was the person involved in avoiding the payment of debts
to the Revenue? Re Cladrose stated that this was more
serious than the non-payment of ordinary debts. But in Re
Sevenoaks Stationers (Retail) Ltd it was held that while
same does not mean automatic disqualification, it is an
important factor.

 Unlike restriction, disqualification orders are not mandatory.


 Unlike restriction, In the case of disqualification the burden is not
on the director and the burden is a substantial one. As Murphy J
stated in Business Communications Ltd v Baxter (2005) there
is a ‘substantial burden to be discharged before the court can make
the order’.
- It is important to note the rationale behind the provisions, as set
out by Harman J in Re Cladrose Ltd (1990) – where he stated
that the power to disqualify was – ‘a power to be exercised to
protect the public against those who displayed a lack of commercial
probity, rip-off the public in colloquial terms or otherwise shelter a
totally rash and unjustified venture behind the shield of limited
liability’.

 Later English cases have suggested that the view that the power to
disqualify is purely for protective reasons has been diluted
somewhat. In Re Westmid Packing Services Ltd (1998) Lord
Woolf Mr said that the court should have regard to the gravity of
the conduct concerned but also to the importance of deterring
others from repeating the conduct.
 Re Clawhammer Ltd (2005) – the DOCE brought a number of
disqualification applications for failing to file annual returns. Finlay
Geoghegan J stated that if the DOCE had produced the necessary
proofs showing that the directors had received a warning letter
from the Registrar informing them of the intention to strike off
unless returns were filed, then the respondent directors would be
disqualified unless they could offer exculpatory evidence in their
defence. In respect of a number of other directors, they had offered
evidence that after receiving the warning letter from the Registrar,
they had paid most of the creditors of the company.
o However, Finlay Geoghegan J pointed out that they still had
failed to submit certain annual returns and accounts, had
only paid trade creditors after the company ceased trading
but had not discharged debts owing to the Revenue
Commission. However, the respondent directors indicated
that, having regard to their circumstances, a declaration of
restriction for a period of five years would be more onerous
than an order for disqualification for a shorter period.
Accordingly, the court made an order for disqualification of
the respondents for a period of one year only.

 Director of Corporate Enforcement v D’Arcy (2005) – the


DOCE applied for a disqualification order in light of an inspector’s
report which reported that the respondent, who was the manager
of the department at the bank, was involved in the sale of offshore
insurance policies with a view to facilitating tax evasion. The court
considered whether the inspector’s findings made the respondent
unfit to be concerned in the management of the company. Kelly J
referred to Browne-Wilkinson VC and focused on the view that a
lack of commercial probity would warrant a disqualification order.
He noted the role and responsibility of the respondent and the
special position of trust that banking is built on. He held there was
a lack of commercial probity and the order for disqualification
should be made.
o In respect of the appropriate period Kelly J referred to re
Clawhammer where it was considered that the min period of
5 years should apply unless the respondent put material
before the courts to persuade it to take a different approach.
o Kelly J also referred to 2 English decisions (Re Sevenoaks
Stationery Ltd (1991) and Re Westmid Packing Services
Ltd) where it was held that 10 years should be reserved for
particularly serious cases. A period of 2 – 5 years should be
applied where the case is relatively but not very serious. For
all other cases, 6-10 years would apply.
o Kelly J concluded that the period should add a deterrent
element to it, and believed that the appropriate period should
be 12 years. However, he also looked at certain mitigating
factors, in particular, that the respondent had not contested.
Therefore, the court was satisfied that the disqualification
period should be reduced from 12 to 10 years.

 Re Barnroe Ltd (2005) – The DOCE sought an order pursuant to sec


160 seeking disqualification of the respondent. It was brought on foot
of an investigation which showed that in the company’s books and
records a number of breaches of the Companies Acts were identified,
including the misappropriation of money to personal bank accounts; 2
sets of financial statements to give a false impression of the company.
The court held that these facts not only amount to a breach of the
respondent’s duties as director, but also to fraud. O’Leary J concluded
that there was a lack of commercial probity and that the protection of
the public from the respondent’s future misuse of company law
required a lengthy period of disqualification. The court was satisfied
with 5 years.
o A person who acts as a director when disqualified from doing so
is deemed guilty of an offence and will be liable to both
summary conviction or indictable conviction; furthermore, that
person will be the subject of another disqualification order
whereby his disqualification will be extended for ten years or
such other period as the court deems fit. In addition, there are a
number of civil consequences. For example, a company is
entitled to recover any remuneration or other consideration
which it paid to persons who acted as a director whilst
disqualified. Furthermore, if the company with whom a
disqualified person has acted is wound up or goes into
liquidation within 12 months of him so acting or working for the
company, the court may declare that that person be personally
liable without limitation of liability for all or any part of the
debts or other liabilities of the company.

 Bovale disqualifications (citation, [2013] IEHC 561) - Michael


and Thomas Bailey, developers, were disqualified for 7 years for
"particularly serious" misconduct and fraud by Finlay Geoghegan J.
They were guilty of a fraud in relation to Bovale and the Revenue over
two years to the end of June 1998.This involved "systematic
falsification" of books of account, plus a €6 million understatement of
the brothers' gross remuneration. The Court said this left them unfit
to be directors of a company and would justify a period of 14 years of
disqualification were it not for certain mitigating factors. They
acknowledged and apologised for the misconduct, said they had
"learned from their mistakes" and intended to set matters right. A
managing partner with accountancy firm PricewaterhouseCoopers
(PwC) had given evidence that, during his 35-year career in public
accounting in Ireland, he had never encountered such a failure to
maintain proper books and records. The mitigating factors were (1)
the fraud and misconduct at issue occurred more than 15 years ago
and the brothers had in 2000 made what they described as "voluntary
disclosure" to the Revenue, leading to their having paid tax, interest
and penalties in "significant amounts" - some €22 million. The director
of corporate enforcement had "with some justification" queried to
what extent the disclosure was voluntary. It was also not disputed the
brothers had been tax compliant since 2001. (2) The brothers swore
they had since 2001 ensured that Bovale kept proper books and
records. There was some objective support for those sworn statements
arising from a "forensic review" of Bovale's accounts conducted by
PwC and from their co-operation with Nama, the Court said.

Useful Examples from the UK


 In Official Receiver v Doshi the respondent was disqualified for
12 years where there was false invoicing and the company's
business was partly financed by retaining £1,666,801 from VAT
revenues collected on behalf of the Revenue. In Re Firedart
Ltd;Official Receiver v Fairall the respondent was disqualified
for six years. Of particular relevance was the continued trading of
the company when it was insolvent, the taking of benefits above
what was a proper level of remuneration, and the failure to keep
proper accounting records. Many payments made by the company
for travel expenses were found to have been properly categorized
as personal expenditure by therespondent or his wife.

Disqualification and Restriction Undertakings


 Where the DCE has reasonable grounds for believing that one or
more of the circumstances specified in section 842 (a) to (i) applies
to a person, the Director may, in his or her discretion, deliver to the
person, or to the person's duly authorised agent, a notice which
states (i) which of the circumstances specified in section 842 (a) to
(i) the Director believes apply to the person; and (ii) particulars of
the facts and allegations that have given rise to that belief.
 These are referred to as "underlying facts and circumstances". The
notice should then go on to specify the period of disqualification
which, in the Director's opinion, is warranted in relation to the
person by the underlying facts and circumstances. It should give
the date that will be the date of commencement of the
disqualification period, if a disqualification undertaking is given by
the person. The letter should state that the clock is now ticking on
the "notice period", i.e. the person has 21 days to answer, during
which the Director will refrain from making a disqualification
application.
 The person who is being written to may (I) notify the Director, in
the prescribed form, of his or her willingness to give a
disqualification undertaking for the disqualification period; and (II)
return to the Director the disqualification acceptance document
duly signed. If the person accedes to the disqualification then the
whole court process - and the costs associated with that - is
avoided. This is all set out in s 850.
 The same process applies to restriction, and is set out in s 852.

8. Membership And Shareholders


Membership In General
 The people who control the company are called the members. It is
to be presumed that all members of a company are on the same
footing unless the memorandum and the articles stipulate
otherwise. By this, we mean that the shares have an equal status
unless the company’s constitution says otherwise.
 The power and influence of members will be determined by the
number of shares they own. Most importantly, the number of votes
to which the member is entitled will usually be the same as the
number of shares he owns.
 It is essential for a person to be placed on the Registrar of
Companies in order to become a member of the company. The only
exception is the first subscribers i.e. those who originally become
members when the company is first set up.

The Register of Members


 Every company must keep a Register of members and it must
include the following:
(1)Names and addresses of the members;
(2)Statement of the shares held by each member, distinguishing
each share by its number and the amount paid;
(3)The date each person was entered in the Register as a member;
(4)The date the person ceased to be a member.

 The Register is open to inspection by any member of the public.


The Register is prima facie evidence of membership but this can be
challenged.
 Pursuant to s 173 of CA 2014, the Register can be rectified by the
company itself without application to court so long as the
rectification does not adversely affect the rights of any person.
Furthermore, s 173 gives the power of rectification to the court on
the application of either
o a) an aggrieved member,
o b) a member of the company, or
o c) the company.

This application can be made where a name has been entered or


omitted from the Register without sufficient cause. If a name has
been omitted by the Board of Directors, challenging the refusal
or the omission can prove difficult.

Trusts on Shares
 The EU AML IV and AML V, requires EU MS to oblige trusts to
establish registers of their beneficial owners and establish a central
register of beneficial ownership for trusts.
 Section 66(6) states: Except as required by law, no person shall
be recognised by a company as holding any share upon any trust
and the company shall not be bound by or be compelled in any way
to recognise (even when having notice of it)—
o (a) any equitable, contingent, future or partial interest in any
share or any interest in any fractional part of a share; or
o (b) save only as this Act or other law otherwise provides, any
other rights in respect of any share, except an absolute right
to the entirety of it in the registered holder.

This rule does not preclude the company from requiring a


member or a transferee of shares to furnish the company with
information as to the beneficial ownership of any share when
such information is reasonably required by the company. These
are important provisions. They mean that the effective control of
the company may be in the hands of persons whose identity
cannot be traced and who own the shares through appointed
nominees.

 The purpose of this section was laid down in:


o Riordan v Provincial Bank of Ireland (1896) – Porter MR
stated that the purpose of the section was to spare the
company the responsibility of attending to any trusts
attached to the shares and to ensure that the company might
safely deal with the person who was on the Register, freeing
the company from all embarrassing enquiries into conflicting
claims as to shares etc.
 The fact that no notice of any trust may be entered on the Register
does not mean that equitable interests in shares cannot be created,
as was pointed out in the case below.
o Societe Generale de Paris v Walker (1885)–it is perfectly
possible for the person appearing on the Register to hold the
shares in trust for somebody else, and section 66 does not
affect the validity of any agreement between that person and
the beneficiary. However, the shareholder on the Register
remains the person who exercised the rights attaching to
those shares and the person who will be liable in respect of
obligations on those shares.

 Furthermore, the court may intervene by injunction at the instance


of the equitable owner to prevent a transaction being completed
which would adversely effect the equitable owner’s interest in the
shares.
o Riordan v Provincial Bank of Ireland (1896) – Mr Barry
held shares on trust for Mrs Riordan. Mr Barry then became
indebted to the bank and the bank attempted to exercise a
lien over the shares as security for Mr Barry’s personal debt.
Before attempting this, the bank were informed of Mrs
Riordan’s interest in those shares. The bank argued that sec
66 permitted the bank to ignore all equitable interests.
 This was rejected by the courts and it was stated that
the immunity conferred by these provisions could not
assist a company which ignored facts within its own
knowledge and acted contrary to good faith. Porter MR
stated that the provisions were intended to protect the
company but were not intended to enable the company
to commit frauds.

 McGrattan v McGrattan (1985) – the principle in Riordan was


upheld in this case. The courts declared that a resolution passed by
the trustees of shares was deemed to be invalid because in voting
the company had knowledge of the fact that the trustees were
acting in breach of trust.

 The Rules of the Superior Courts also provide a mechanism for the
beneficial owner of shares to protect their interests. Pursuant to
Order 46 of the RSC, a beneficiary can file a stop notice with the
Central Office at the High Court and then serve the notice on the
company. Once received, the company must notify the beneficiary
of any attempt by the legal owner to transfer the shares or to pay
the dividends and must delay the transfer or payment for 8 days to
allow the beneficiary to take steps to protect his position.

Members Rights And Duties


 The rights and duties of a member will usually be defined by their
shareholdings. The rights and duties attached to their shareholding
is in turn defined by 3 things:
(1)The company’s memorandum and articles;
(2)Any resolutions passed under the articles; and
(3)The terms in which the shares were issued in the first place

 Scottish Insurance Corporation v Wilson (1949) – it was stated


that members’ rights ‘must depend on the terms of the instrument
which contains the bargain that they have made with the company
and each other’.
 Similarly, in Cork Electric Supply Company v Concannon
(1932) –it was held that most disputes about shareholders’ rights
are to be found in the correct construction of the company’s
articles. Kennedy CJ stated that one set of articles cannot be
construed by the construction applied to another set of articles.

 That said, shareholders ordinarily have 5 key rights:


(i) Right to certain info concerning the company’s affairs;
(ii) Right to vote at general meetings;
(iii) Right to a dividend if declared;
(iv) Right to transfer their shares; and
(v) Right to a return of capital and any surplus if the company
is wound up.
 As we will see, a company’s articles may give classes of
shareholders special rights, which will usually entail a variation of
the above rights.

Right to Information Concerning the Company


 Shareholders are entitled to certain info concerning their
company’s affairs either by virtue of the terms their shares were
issued, the memorandum, articles or legislation.
 The 2014 Act states - in s 216(8) - that every register kept by the
company shall be open to the inspection of any member of the
company without charge. What this includes is:
(i) the copies of directors' service contracts and memoranda;
(ii) the copies of instruments creating charges;
(iii) the directors' and secretaries' register;
(iv) the disclosable interests register;
(v) the members' register; and
(vi) the minutes of meetings.

 Under the Companies Act 2014, shareholders are entitled to


notices of all general meetings and of all resolutions proposed to be
passed at those meetings (s 175 on AGMs and s 181 on Notice).
In addition, they are entitled to annual accounts together with the
company auditor's report and directors' report.
 It has been held in the UK - on one occasion (see Re Sam Weller)
that the failure to provide further information, over and above that
required by the articles over legislation, could amount to
oppression in certain circumstances. This was held in the context of
an application brought pursuant to s 212 of CA 2014.
 Re Clubman Shirts Ltd (1983) – a company was in serious
financial difficulties and was threatened with receivership and
liquidation. The directors decided to transfer the entire business of
the company to another company for no payment. An application
was brought by a 20% shareholder in the company who had sought
and not received details from the directors about the transfer.
O’Hanlon J stated that in the circumstances a minority shareholder
ought to be provided with adequate information about a matter
such as this. He held that the failure to provide this info could
amount to oppression.

The Right to Vote


 Shareholders are generally entitled to vote in general meetings in
accordance with the terms under which their shares were issued.
Every member at the general meeting has one vote on a show of
hands and, when a poll is taken, one vote per share. This will be
subject to any special voting rights or restrictions attached to any
class or classes of shares that may be issued.
 Where it is sought to allocate control in a company in a different
way, it is possible to create shares which carry weighted voting
rights. For example, shares may be divided into separate classes
with one class carrying more voting rights per share than the other
class. Alternatively, shares may be given certain loaded voting
rights in respect of particular issues.
o An example of this can be seen in the case of Bushell v
Faith where the articles of association provided that on any
proposal to remove a director from office, that director would
have three votes per share instead of the usual one. The
House of Lords upheld the validity of such clauses.
The Right to a Dividend
 A dividend is a payment or distribution out of the company's profits
to the shareholders.
 Where a company's business is profitable, the shareholders will
expect to be rewarded by being paid dividends. Circumstances
under which dividends will be payable depends on the terms in
which the shares were issued and on the memorandum and articles
of association.
 The concept of "distributable profits" is an important one. It is dealt
with in Chapter 7 of Part 3 of CA 2014.
o Section 117(1) states: "A company shall not make a
distribution except out of profits available for the purpose." A
company's profits available for distribution are its
accumulated, realised profits (so far as not previously utilised
by distribution or capitalization) less its accumulated,
realised losses (so far as not previously written off in a
reduction or reorganisation of capital duly made). A company
must not apply an unrealised profit in paying up debentures
or any amounts unpaid on any of its issued shares.

 A company may, by ordinary resolution, declare dividends but no


dividend shall exceed the amount recommended by the directors of
the company.
 The directors of a company may from time to time:
o (a) pay to the members such interim dividends as appear to
the directors to be justified by the profits of the company;
o (b) before recommending any dividend, set aside out of the
profits of the company such sums as they think proper as a
reserve or reserves which shall, at the discretion of the
directors, be applicable for any purpose to which the profits
of the company may be properly applied, and pending such
application may, at the like discretion either be employed in
the business of the company or be invested in such
investments as the directors may lawfully determine;
o (c) without placing the profits of the company to reserve,
carry forward any profits which they may think prudent not
to distribute.

 Subject to the rights of persons, if any, entitled to shares with


special rights as to dividend, all dividends must be declared and
paid according to the amounts paid or credited as paid on the
shares in respect of which the dividend is paid. All dividends must
be apportioned and paid proportionally to the amounts paid or
credited as paid on the shares. The directors may deduct from any
dividend payable to any member, all sums of money (if any)
immediately payable by him or her to the company on account of
calls or otherwise in relation to the shares of the company. No
dividend bears interest against the company.

 Re Sam Weller & Sons Ltd (1990) – it was held that there can
exist circumstances where no dividend has been paid for a long
period, without any reasonable justification, a court could be
justified in making an order under sec 212 for oppression.
 A shareholder will, save for a claim for oppression, have no right to
a dividend until the dividend is declared and payable. However,
once this occurs, the shareholder may enforce his entitlement to
same in the normal way as any creditor would for a contractual
debt.

 A shareholder’s entitled to a dividend will cease where the


company goes into liquidation. Furthermore, if a dividend has been
declared but has not yet been paid, the debt will be deferred until
all the other debts owed to the company’s ordinary creditors have
been first satisfied. This is because the capital available for
distribution in the form of the dividend ceases in liquidation
to be “profit” and instead becomes part of the assets. This
was held by Kenny J in Wilson v Dunnes Stores Cork Ltd (1976)

 The question of dividends however inevitably only arises where a


company is solvent. Not only would directors be in breach of their
common law duties to creditors and potentially engaging in
reckless trading if they were to recommend a dividend whilst the
company is insolvent, but there is in any event a specific statutory
prohibition, under s 122 of CA 2014, against the distribution of
dividends other than out of distributable reserves. This provision
obviously equally acts against any overriding of a limited amount of
reserves either, by declaring a dividend in excess of same.
 Section 122 deals with the consequences of making unlawful
distributions. It states: "Where a distribution (or part of one)
made by a company to one of its members, is made in
contravention of any provision of this Part [of the 2014 Act] and, at
the time of the distribution, he or she knows or has reasonable
grounds for believing that it is so made, he or she shall be liable to
repay it or that part, as the case may be, to the company or (in the
case of a distribution made otherwise than in cash) to pay the
company a sum equal to the value of the distribution or part at that
time.
o "Distribution" means every description of distribution of a
company's assets to members of the company, whether in
cash or otherwise, except distributions made by way of—an
issue of shares as fully or partly paid bonus shares; the
redemption of preference shares; a distribution of assets to
members of the company on its winding up.
 So, the shareholder shall be liable to return the dividend received
to the company, where at the time of the distribution, he knows or
has reasonable grounds for believing the distributions to be in
contravention of s 122. Furthermore, the director, will be
accountable to and responsible to the company for causing such
unlawful payments to be made. This has been established in
various cases including Re: Flitcroft’s Case (1882) and Bairstow
v Queens Moat Houses plc (2001) where because of the
particular fiduciary position and responsibility of directors, they
were made liable not just for the difference between the unlawful
dividends and those that may lawfully have been made but for the
full amount paid to shareholders.

Right to Transfer Shares


 By virtue of s 94 of CA 2014, shares are deemed to be personal
property and are deemed to be transferable like any other piece of
personal property ("a member may transfer all or any of his or her
shares in the company by instrument in writing in any usual or
common form or any other form which the directors of the
company may approve"). That being said, within private companies
there will always be restrictions on share transfer.

Right to Return of Capital and Share in the Surplus


 Where a company is being wound up and all its creditors are paid
off, the shareholders become entitled to be repaid their investment
from the company’s remaining assets/ furthermore, if there is a
surplus remaining, members will be entitled to a proportionate part
of that surplus determined by the amount of shares held by each
member. However, the article/memorandum may provide another
method in the event of surplus.

Duties of Shareholders – Section 77, 78 and 79


 The primary duty of a shareholder is to pay for his shares. This
liability continues when the company is being wound up as this
forms part of the creditor’s fund.
 This duty is a contractual duty and if the shares are not paid this
would become a debt which is actionable against the shareholders
for 12 years.
 Furthermore, liability in this regard passes with the transfer or
transmission of the shares to somebody else.

 Generally, shares are paid for by way of instalments. Section 77 of


CA 2014 deals with calls on shares; its provisions apply unless the
company's constitution says otherwise. The directors of a company
may from time to time make calls upon the members in respect of
any moneys unpaid on their shares. Each member shall (subject to
receiving at least 30 days' notice specifying the time or times and
place of payment) pay to the company, at the time or times and
place so specified, the amount called on the shares.

Liens on Shares
 A company has a first and paramount lien on every share (not being
a fully paid share) for all moneys (whether immediately payable or
not) called, or payable at a fixed time, in respect of that share. The
directors can decide that this rule doesn't apply. A company's lien
on a share extends to all dividends payable on it. A company may
sell, in such manner as the directors of the company think fit, any
shares on which the company has a lien, but no sale shall be made
unless (1) a sum in respect of which the lien exists is immediately
payable; and (2) a notice in writing, stating and demanding
payment of such part of the amount in respect of which the lien
exists as is immediately payable, has been given to the registered
holder for the time being of the share, or the person entitled
thereto by reason of his or her death or bankruptcy; and a period of
14 days after the date of giving of that notice has expired.

Forfeiture of Shares
 If a member of a company fails to pay any call or instalment of a
call on the day appointed for payment of it, the directors of the
company may, at any time thereafter (during such time as any part
of the call or instalment remains unpaid), serve a notice on the
member requiring payment of so much of the call or instalment as
is unpaid, together with any interest which may have accrued.
 This notice has to specify two things: a further day, at least two
weeks' in the future, when payment is required; and it must state
that if the amount remains unpaid, the shares will be forfeited. If
the requirements of that notice are not complied with, any share in
respect of which the notice has been served may at any time day be
forfeited after the specified by a resolution of the directors of the
company to that effect.
 A forfeited share may be sold or otherwise disposed of on such
terms and in such manner as the directors of the company think fit,
and at any time before a sale or disposition the forfeiture may be
cancelled on such terms as the directors think fit. If a forfeited
share is sold the company may receive the consideration, if any,
given for it. The company may execute a transfer of the share in
favour of the person to whom the share is sold or otherwise
disposed of (the "disponee"). Once this happens, the disponee is
registered as the holder of the share.

Shareholders’ Statutory Rights


 Apart from rights which shareholders may have pursuant to the
terms of the issue of their share, the memorandum and articles,
and any resolutions passed there under, shareholders or members
will also have rights by virtue of the Companies Acts. Examples of
such rights are as follows:

(a) the right to receive a copy of the company's constitution.


(b) the right to inspect and obtain copies of the minutes
of general meetings and resolutions.
(c) the right to inspect and receive a copy of the Register
of members, the Register of directors and secretaries and
the Register of directors' shareholdings.
(d) the right to receive copies of balance sheets and directors' and
Auditors' reports.
(e) the right to exercise pre-emption rights when the
company proposes to allot new shares.
(f) the right to petition a court for the winding up of the company
(s 571(c)).
(g) the right to petition the court for relief in the case of
oppression (s 212).

Different Categories Of Shares


 Generally speaking, the company will have the power to create
different classes of shares. Traditionally, the articles of a private
company limited by shares have stated that "any share in the
company may be issued with such preferred, deferred or other
special rights or restrictions, whether in regard to dividend, voting,
return of capital or otherwise, as the company may from time to
time by ordinary resolution determine".
 Unless it is stated to the contrary, all shares will be presumed to
rank equally. Generally speaking, where no separate classes of
shares have been created, then those shares will be generally
referred to as ordinary shares. Ordinary shares, therefore, can be
distinguished from other classes of shares which have been
afforded special rights in relation to certain matters. The rights and
duties considered above will usually attach to ordinary shares.
 In this regard, they will often represent the greatest speculative
risk, as ordinary shareholders will usually fair best when the
company is doing well but will fair poorly if the company has had
poor fortune. It is for this reason that the company may issue
different types of shares which, in certain circumstances, can
provide better protection to shareholders and will involve less risk.
The most common class of this type is known as preference shares.

Preference Shares
 A preference share is effectively an ordinary share but which is
preferred in relation to a particular right. The preferment usually
relates to rights as regards dividends or the return of capital.
Preference shares are attractive to the extent that they guarantee a
degree of income and capital security.
 The exact rights and liabilities of preference shareholders will
entirely depend on the company's memorandum and articles of
association (in the case of a DAC), or its constitution (in the case of
a company limited by shares), in resolutions passed and on the
terms in which the shares were issued.

Shares Preferred as to Dividend


- Where the company’s regulations gives one class of shares
preferential rights regarding dividends, they will usually be entitled
to receive a fixed dividend expressed as a % of the nominal amount
of each share per year. However, the entitlement will still be
dependent on the dividend being declared, unless the articles
stipulate otherwise.
- To counter this however, the preferential rights as to dividends will
be presumed to be a right to a cumulative dividend. This means
that if a dividend is not declared in a particular year, when a
dividend is declared, the shareholder may claim the arrears as well.
- This presumption can be rebutted by wording which indicates that
the dividend is not cumulative, or that the dividend is to be paid
only out of the profits available for dividends of a particular year.

- Where a company has not paid a preference dividend for a no of


years and then goes into liquidation, the Q is whether the
preferential shareholders have a claim for those dividends.
Generally, once a winding up commences, no claim to undeclared
dividends can arise.
o Re Imperial Hotel (Cork) Ltd (1950) – the articles have
preference shareholders a right to an annual cumulative
dividend, including arrears. The judge construed these
provisions as giving rise to a debt owed by the company to
the preference shareholders. This debt he found, survives the
winding up of the company and was payable by the liquidator
in preference to claims for arrears by the ordinary
shareholders. However, payment would be deferred until the
claims of all other creditors had been paid.

- Generally, shares which are preferred as to dividend are presumed


to be non-participatory unless the company’s articles or the terms
of shares provide otherwise.
o Will v United Lamkat Plantations Company ( 1914) –
where it was held that where a share is expressed to be
preferred as to a particular matter, for example dividend,
then the terms of the issue must be taken as an exhaustive
definition of the rights attaching to that share.
o This means that once the preference shareholders have been
paid their fixed dividend, they are not entitled to a portion of
the surplus assets which may arise in the winding up and
therefore these assets will be divided amongst the ordinary
shareholders.

Shares Preferred as to Capital


- Shares which are preferred as to capital will mean that the
preferred shareholder will have his capital investment in the co
repaid before the other classes of shareholders.
- Also, such shares are presumed to be participatory. This means
that they will be entitled, after the capital investment has been
returned, to a portion of the surplus of the assets along with the
other shareholders. This presumption was applied in the case of
Cork Electric Supply Company v Colcannon (1932)

Shares Preferring as to Voting


 Generally, if a share is preferred to as to capital or dividend, then
those shareholders will not have a vote except for situations where
a vote is being held in relation to their specific rights. However, it
is possible for shares to be given special voting rights and in this
regard, the share would be regarded as being preferred as to
voting. This could occur for example where loaded voting rights are
attached to each particular share in respect of a particular issue
that may be raised. See for example Bushell v Faith.

Disclosure Of Interests In Shares


 The 1963 Act obliged companies for the first time to maintain a
Register of shareholdings which a director had in the company.
These requirements were then strengthened by Pt IV of the 1990
Act. These provisions are re-enacted in Chapter 5 of Part 5 of CA
2014 (from s 256 on). Section 261 states that directors and
secretaries must notify the company if they have a "disclosable
interest" in shares or debentures of the company. "Disclosable
interest" means, in relation to shares or debentures, any interest of
any kind whatsoever in shares in, or debentures of, a body
corporate (s 257).

9. Shares
Definition of a Share
 Courtney defines a share as an intangible accumulation of
rights, interests and obligations.
 Generally, private companies will issue share certificates to their
members which states how many shares the person has registered
in his name and how much is paid up on them. Important to note
that the certificates are only evidence of their contents and
evidence of ownership of the shares.
 Ultimately, it is difficult to give an exact definition of shares.
However, there are a number of legal features by which a share
can be recognised. Those are as follows:

1. A share confers no interest in the company’s assets


 Saw in Chapter 3 that a shareholder has no proprietary stake in the
assets of the company and that ownership of the company’s
property strictly rests with the company.
 This was seen in Macaura v Northern Assurance Company
(1925) and O’Neill v Ryan (1993).

2. A share is an interest in the nature of personality


 Sec 79 of the 1963 Act provides that a share, like any other piece of
personal property, is transferable in a manner provided for in the
Articles and does not face restrictions which may attach to land.
3. A share is a chose in action
 A chose in action is a tangible interest which one can only protect
by legal action rather than by taking possession of a physical thing.
Just as a chose in action can be assigned, a share can be
transferred from one person to another.

4. A share confers contractual rights and obligations


 We have already seen that most shares will carry a no of rights as
well as obligations upon which a shareholder can sue or be sued;
these are contractual rights and obligations. Sec 31 of the 2014 Act
provides that the articles and memorandum of association form a
binding contract between the shareholders and themselves, and
between the company and the shareholders.

5. A share confers an interest in the company itself


 The shareholders together own the company and together control
the destiny of the company. The extent of any individual
shareholder’s ability to influence the destiny of the company
depends on the extent of its shareholding. Thus, a shareholder will
have rights in the company as well as having rights against the
company. The former are known as rights in rem, the latter are
known as rights in personam.

6. A share will confer statutory rights and obligations


 A shareholder will have a number of rights conferred upon him by
virtue of the Companies Act 2014.

7. The ownership of a share is protected by the Constitution


 PMPS v AG (1983) – Carroll J pointed out that the ownership of
shares constitutes the ownership of private property. Therefore, if
legislation was enacted which interfered with those particular
rights, then it would be possible for a shareholder to allege there
had been an unlawful interference with his constitutional rights
protected by Art 40.3 and 43 of the Constitution.

Allotment Of Shares
 There are 3 ways in which a person could become a shareholder.
First, they could be allotted new shares. Second, shares could be
transferred to them. Thirdly, they may receive shares by way of
transmission, which usually happens on the death of a shareholder.
In this section, we examine the allotment of shares.
The Power to Allot Shares
 Section 66 of CA 2014 deals with shares.
o A company may allot shares—(a) of different nominal values;
(b) of different currencies; (c) with different amounts payable
on them; or (d) with a combination of 2 or more of the
foregoing characteristics. Without prejudice to any special
rights previously conferred on the holders of any existing
shares or class of shares, any share in a company may be
issued with such preferred, deferred or other special rights
or such restrictions, whether in regard to dividend, voting,
return of capital or otherwise, as the company may from time
to time by ordinary resolution determine. A company may
allot shares that are redeemable ("redeemable shares").
 Allotment of shares is specifically dealt with in s 69 of CA 2014.
That section states that no shares may be allotted by a company
unless the allotment is authorised, either specifically or pursuant to
a general authority, by ordinary resolution or by the constitution of
the company.
 Save to the extent that the constitution of the company provides
otherwise— (a) shares of a company may only be allotted by the
directors of the company; (b) the directors of a company may allot,
grant options over or otherwise dispose of shares to such persons,
on such terms and conditions and at such times as they may
consider to be in the best interests of the company and its
shareholders.
 Any director of a company who knowingly contravenes, or
knowingly permits or authorises a contravention of, any of the
aforementioned provisions is guilty of a category 3 offence.
Directors must make the allotments in a bona fide way, and with
the good of the company in mind. Put another way, they cannot
allot shares for an improper purpose (such as to prevent a take-
over bid).

Pre-Emption Clauses
 A company's constitution might contain provisions which (a)
require that the company, when proposing to allot shares of a
particular class, shall not allot those shares unless it makes an offer
of those shares to existing holders of shares of that class; and (b)
specify that the minimum period during which that offer may be
accepted is not less than 14 days. That is permissible. Put another
way, the Act recognises pre-emption rights.

Practical Matters for the LTD


 The regime outlined above does not apply to PLCs (for PLCs, see s
1021 etseq). The above regime applies to LTDs and DACs, and it
may be that these kinds of companies will want to disapply the
statutory presumption, making it clear in their constitutions that
(1) no ordinary resolution is ever needed to approve an allotment;
(2) the power to allot will not be subject to any time period; (3) the
directors can nominate persons who are not directors to allot
shares; (4) the presumption of a pre-emption clause will not apply;
(5) the LTD has no authorised share capital.

Director's Duty of Good Faith in Relation to Allotments


 In exercising their powers of allotment, the directors are required
to act in good faith and in the best interests of the company. This
has already been examined in the chapter on director's duties. If a
director does not act in this way, the allotment could be invalidated
even where all the requirements of CA 2014 have been observed.

Paying for Shares


 Shares may be paid up in money or money's worth (including
goodwill and expertise). Shares of a company cannot be allotted at
a discount to their nominal value. If they are, the allottee shall be
liable to pay the company concerned an amount equal to the
amount of the discount and interest thereon at the appropriate
rate. Any value received in respect of the allotment of a share in
excess of its nominal value must be credited to and form part of
undenominated capital of the company; it must be transferred to an
account known as the "share premium account". Where a company
contravenes any of the provisions of section 71, the company and
any officer of it who is in default shall be guilty of a category 3
offence.

The Flotation Of Companies


 It is almost unheard of for a company to go straight to the general
public to raise capital upon incorporation.
 An offer to the public of a large block of securities or shares is
called a flotation.
 There are a no of different ways shares can be issued to the public
and not all of these include having shares listed on a stock
exchange for trading. Examples of these methods of floating are as
follows:
1. Direct Offer
 One method is to draw up a prospectus and offer its shares directly
to the public. A prospectus is a detailed statement of the company’s
business history, its present financial situation and other matters
that investors would be concerned with. Generally, the offer would
be made at a fixed price.

2. Offer for sale


 Offering shares to the public is called the offer for sale, which
involves the company allotting its shares to some financial
intermediary, who then offers them to the public. Thus the
investing public will have to apply to the intermediary to buy the
security or shares.

3. Placing
 This involves a financial intermediary acquiring the shares and
then selling blocks of the shares to a small number of institutions
such as bank, insurance companies, pension funds etc.

The Prospectus
 Where shares are being offered to the public for the first time, the
law requires the publication and filing of a prospectus. The purpose
behind this is to ensure greater security for the public from fraud
and improper practices within the market. The law in this area is
dealt with in Part 23 of CA 2014.
 A prospectus is defined as "the document or documents required to
be publish for the purposes of a public offer or admission to trading
in accordance with EU prospectus law and includes where the
context admits any supplement thereto."
 In addition, a public offer is defined as "a communication to
persons in any form and by any means, presenting sufficient
information on the terms of the offer and the securities to be
offered, so as to enable an investor to decide to purchase or
subscribe for those securities".
 No offer of securities to the public may be made in Ireland without
the publication of a prospectus. Regulation 19.1 of the Irish
prospectus regs provides that "a prospectus shall contain all
information which, according to the particular nature of the issuer
and of the securities offered to the public or omitted to trading, is
necessary to enable investors to make an informed assessment of-
a) the assets and liabilities, financial position, profit and losses, and
prospects of the issuer and of any guarantor; and b) the rights
attaching to such securities".
 Regulation 32 of the Irish prospectus regs provides that the
persons responsible for the prospectus are to be clearly identified
in the prospectus. It must also contain declarations by those
persons that, to the best of their knowledge, the information
contained in the prospects is in accordance with the facts and that
it makes no omission likely to effect its import, save information
omitted in accordance with the regulations.
 Regulation 9 of Irish prospectus regs provides for exemptions from
the obligation to publish. Included in these exemptions are offers
addressed solely to qualified investors, such as credit and financial
institutions and offers addressed to less the 100 persons.
Furthermore, a prospectus is not required where the minimum
consideration payable is at least €50,000 per investor or where the
offer expressly limits the amount of the total consideration to less
than €100,000.
 Section 1353 of CA 2014 prohibits the publication of a statement
made by an expert in the prospectus unless the expert has given
his consent in writing to the publication of the statement. Every
person who is knowingly a party to the issuing of a prospectus in
breach of this requirement is guilty of an offence.

Remedies for Misrepresentation/Omissions in the Prospectus


 Pursuant to s 1356 of CA 2014, persons who suffer loss and
damage as a result of any untrue statement or omission in the
prospectus are entitled to recover compensation from persons
connected with the issue of the prospectus. These persons include
the issuer of the prospectus, the offeror of the shares, every person
who is a director of the company at the time of the issue of the
prospectus and every person who is authorised to issue the
prospectus.
 These persons will be relieved, however, in certain specified
circumstances. The person concerned will not be liable if he can
prove: (a) that, having consented to become a director of the
company, he withdrew his consent before the issue of the
prospectus, and that the prospectus was issued without his
authority or consent; or (b) that the prospectus was issued without
his knowledge or consent, and that on becoming aware of its issue
he forthwith gave reasonable public notice that it was issued
without his knowledge or consent; (c) that, after the issue of the
prospectus and before the acquisition of securities thereunder, he,
on becoming aware of any untrue statement or omission therein,
withdrew his consent thereto and gave reasonable public notice of
the withdrawal and of the reason therefore.
 In addition, the person concerned will also be relieved of liability
where he can prove that he had reasonable ground for believing
the statement to be true and did in fact believe it to be true at the
time of the issue of securities.
 The measure of compensation is the difference been the actual
value of the shares and the value had the statement been true.
Fraud was defined in the case of Derry v Peak (1886) where it
was held that ‘fraud is proved when it is shown that a false
representation had been made 1.) Knowingly or 2.) Without belief
in its truth or 3.) Recklessly or carelessly as to whether it be true or
false’.
 In addition, there are a no of common law remedies in respect of
misrepresentation in a prospectus. First, an investor may seek
damages for fraud.
 Aaron’s Reefs v Twiss (1895) – it was held that the concealing of
material facts from the prospectus was fraudulent and that the
authors had a duty not to conceal anything which would contradict
or even substantially alter any material representations actually
made by the prospectus.
 It is also possible to claim damage for negligent misrepresentation
or negligent misstatement – Hedley Byrne v Heller and Partners
Ltd (1964)
 Rescission might also be available if the investor can show that he
was induced to subscribe for shares by incorrect statements in the
prospectus. However, where the misstatement is not material and
is not made negligently, the investor may not be entitled to
rescission.
 The right of rescission might also be lost if the allottee of the
shares fails to repudiate the allotment as soon as he discovers the
misstatement.
 He may also lose the right to rescind where he takes some step
which in effect ratifies the contract for example, by accepting
dividends.

10. The Transfer and Transmission of Shares


 A share is a chose in action. In other words, it is a thing
recoverable only by action and not by taking possession of it.
 A share, like any other chose in action, can be assigned to a 3 rd
party. It is an essential feature of a share that it is freely
transferable, unless the articles provide otherwise.
 However, it is the essence of a private company that the right
to transfer shares will be subject to some restrictions set out
in the articles. These restrictions can take a variety of forms, but
the most common are:
(1)Giving the directors discretion to refuse to register the transfer
of a share; and
(2)Requiring the shareholder to offer any shares which he proposes
to sell to the existing shareholders first i.e. a right of pre-
emption.
 These restrictions give the company its ‘private’ status and enable
the controllers of the company to ensure that ownership is confined
to a small number of people who can be vetted before taking up
membership.

 The requirement that a transfer of shares be approved by the


directors is a peculiar feature which is unique to the assignment of
shares. If a transfer is not registered, the person to whom the share
is being assigned will not be able to enforce the rights attaching to
those shares, and the original transferor will still remain on the
Register of members.
 This creates an unusual situation because the company can only
recognise the person on the Register as being able to exercise the
rights attaching to those shares. The principle that a transferee of
shares has no legal rights concerning participating in the company
until such time as he is registered on the Register of Members was
confirmed in the case below.
 Kinsella v Alliance and Dublin Consumer Gas Company
(1982) – Baron J held that a “person entitled to stock must be
registered in the Register of Shareholders. Until they are, they are
not entitled to vote. This is a well-established principle and I would
be wrong not to follow it.”
 Important to note that an assignment of shares can be made in 2
ways; voluntarily or involuntarily.
o A voluntary assignment occurs when the shareholder
transfers his shares to another either by sale or gift.
o An involuntary assignment occurs when the shares are
vesting in another person because of the insolvency of that
person or because of the death of the particular shareholder.
An involuntary assignment which occurs in this way is usually
referred to as a transmission.
The Discretion To Refuse Registration
 Acting bona fide in the interest of the company: Section 95(1)
states that, "Save where the constitution of the company provides
otherwise— the directors of a company may in their absolute
discretion and without assigning any reason for doing so, decline to
register the transfer of any share; the directors' power to decline to
register a transfer of shares shall cease to be exercisable on the
expiry of 2 months after the date of delivery to the company of
the instrument of transfer of the share.
 If the directors refuse to register a transfer they must send to
the transferee notice of the refusal within 2 months after the
date on which the transfer was lodged with the company. 1 It is
also worth noting that he registration of transfers of shares in a
company may be suspended at such times and for such periods,
not exceeding in the whole 30 days in each year, as the directors
of the company may from time to time determine.2

 Where directors have the unqualified discretion as to registering


transfers, as set out in s 95 of CA 2014, the court will not
interfere with the exercise of this discretion provided that the
directors act in good faith and for the benefit of the
company. We have already seen in the chapter on directors
duties that it will be for the directors and not the courts to
decide what is in the best interests of the company (see, for
example, the case of Regent Crest Pic v Cohen3- a director
had waived a contractual provision which would have entitled
the co to claim £1.5 million against the vendors of land to the co.
the director claimed that he had good commercial reasons and
in determining there was no breach of duty the court held “…
Rather the question is whether the Director honestly believed
that his act or omission was in the interests of the company.”)
 Re Smith and Fawcett Ltd (1942) – where the articles
contained a similar discretion to that set out in model reg 3 of
Table A (which is where s 95 of CA 2014 used to be found; s 95
is an enactment, in the body of the statute this time, of model
reg 3 of Table A, which was found in the schedule to the 1963
Act). This company had two equal shareholders, one of whom
died and whose shares then passed on to his son. The surviving
shareholder refused to register the son's shareholding. Lord
Greene MR said of the power to refuse registration that there

1 Section 95(3) of CA 2014


2 Section 95(4) of CA 2014
3 [2001] 2 BCLC 80.
was nothing to stop a company from drafting such a wide power
in the articles of association in relation to the directors'
discretion to refuse registration. The only limitation that could
be implied into such an article would be that the power to refuse
registration must be exercised bona fide and in the interests of
the company. Otherwise, Lord Greene continued, "an Article in
this form appears to me to give the Directors what it says,
namely, absolute and uncontrolled discretion"
 This somewhat restricted discretion has been noted and applied
in some instances, more recently in the following case;
 Banfi Ltd v Moran (2006) – a number of shares were held by a
nominee company, ICT Nominees Limited who acknowledged
that it held the shares in trust for the PL. When a transfer of
these shares to the PL took place, and in the background of
complaints and improper behaviour and oppression against the
PL, the board unanimously agreed to refuse to register the
transfer. Notwithstanding the power to decline to register any
transfer, Laffoy J emphasised that this was always in light that
this must be exercised bona fide in the interests of the company.
Laffoy J felt that in light of the background, the intention was to
control and limit the remedies available to the shareholder and
that the board was merely attempting to pursue their own self-
interests, not the interest of the Company as a whole. On such
basis, it was the rectification of the register was directed to
provide for the registration thereon of the PL as the owner of
the shares.

 Refusing to give reasons: Not only are directors given a broad


discretion to refuse registration under s 95, they are also not
required to give reasons for such refusal.
o Re Hafner (1943) – the Pl’s uncles left him 500 shares in a
private company under his will. The directors refused to
register the transfer. The articles entitled the director to do
this without providing a reason. The Pl claimed that the
directors had refused to register the transfer because they
had given themselves excessive remuneration which would
starve the shareholders of dividends, and if the Pl became a
shareholder, he would be in a position to challenge this.
Black J held that, while the directors were within their legal
rights in not giving reasons, the court could infer from their
refusal that the Pl’s apprehensions were well founded. Thus,
if any invalid reason for declining registration is proved to
the satisfaction of the court, this will be taken as the motive
for such refusal unless the directors can prove an alternative
explanation.
o It should also be noted that directors are not confined to the
reasons they give at the time of the particular refusal.
Village Cay Marine v Acland (1998) – the Privy Council
held that there was no rule of law by which directors are
confined to the reasons they have given at the time of refusal,
and it is possible for directors to elaborate upon and give
additional reasons for their refusal. In this case, the Privy
Council pointed out that the new reasons appeared to be
bona fide and were not “obviously unreasonable”.
o Re Dublin North City Building Company (1895) – the
transferee was an existing member of the company and
acquired a further 20 shares in that company. The directors
refused to register, stating that, having considered the
matter carefully, the directors thought it would be
detrimental to the company and its business to register these
shares in his name. The directors did not elaborate. The
Court of Appeal quoted with approval from the case of Re
Cole Port China Company (1997) where Lindley LJ stated
‘provided there is some evidence which justifies the Court in
coming to the conclusion that they have not done their duty;
but in the absence of all such evidence the Court has no right
to presume’. In the present case the CofA held that although
it dislike mystery, it could not compel the directors to
disclose their reasons for declining the registration.
o It should be noted however that had the applicant made any
clear charge of corruption or dishonesty, then on the
authority of Re Hafner, the court might have to examine such
charge and if the evidence relating to the charge was
convincing, the court may draw an implication.

 The relevance of the director’s personal feelings: The courts


have also held that directors can still arrive at a decision in good
faith even though there may be a history of bad relations between
the relevant parties.
o Popely v Planarrive Ltd (1909) – the Pl challenged the
director’s refusal on the basis that they were close friends
with his estranged wife. The Pl had been involved in 2 extra-
marital affairs with 2 different women each of whom had
borne him a child. The Pl argued that the personal feelings of
the directors against him were so strong that they could not
be seen to have acted bona fide in the interest of the
company. The Pl argued that the directors ought to have
resigned and allowed different directors to make the
decisions. This was rejected by the court. Laddie J stated that
in Private Companies ‘No doubt if it can be shown that those
private and personal feelings have been allowed to overcome
the directors views as to what is bona fides in the interests of
the company, then a decision taken to refuse registration
may be impeached…The fact that the directors had a
personal dislike of the new Shareholder would not alter the
fact that their decisions was taken bona fides in the interests
of the company’. On reviewing the evidence, the court found
that any reasonable board would have been likely to have
taken the same decision.

 Limited discretion to refuse registration: Sometimes the power


to refuse registration is drafted in more limited terms.
o Tangney v Clarence Hotels Ltd (1933) – the articles
provided that the directors could only refuse registration
where they considered that the person in question would be
undesirable to admit to membership. In this case, the Pl had
been a shareholder and a member of the company for many
years. When he purchased further shares, the directors of the
company refused to register those shares as he was not a
“desirable person” to admit to membership. The court held
that the provision did not entitle the directors to refuse
registration of a transfer to an existing shareholder. Rather,
this particular power was intended to allow directors to
refused registration to a person who was an outsider.

 Failing to make a decision to refuse registration: Sec 84 of the


1963 Act required that the company notify the transferee, within 2
months of his application to be registered, of the director’s
decision. If the directors fail to make a decision, the courts have
held this will result in the lapsing of the director’s power to refuse
registration.
o Re Hackney Pavillion Ltd (1924)–the 2 person board
reached deadlock in relation to an application to have shares
registered. The court held that the director’s power to
decline registration must actively be exercised. Therefore,
the right of the transferee to be registered was resurrected.
 A reasonable time within which to make a decision is now
considered to be two months. This is because of the requirement
pursuant to s 95(3) of the 2014 Act that a transferee be notified of
a refusal to register within two months. In the case of Re
Swaledale Cleaners Ltd, the directors had delayed on either
effecting or declining registration for four months, and it was held
that the directors' power to decline registration had lapsed and
that the transferee was entitled to be registered as a member of
the company.
 However, it is important to make a distinction between failing to
exercise discretion and failing to inform the transferee.
o Popley V Planarrive Ltd – the directors had made a
decision not to register the PL’s shares within the requisite
time period as set down by the internal articles of association
but had failed to notify the PL of their decision to refuse. The
court held that if the directors had failed to make a decision
within the relevant time period then their power to make
such a decision would lapse. However the court went onto
say that if it happens then the decision itself is not a nullity.
The failure to notify the shareholder may well expose the
directors to civil and criminal liability.

Consequence of being Refused Registration


 If registration is refused by the directors and the transferee has
paid over the purchase price of the shares, the transferor remains
the legal owner of the shares but is deemed to be a trustee. The
transferor would be deemed the legal owner of the shares and the
transferee would be deemed the equitable owner of the shares. The
transferor remains the legal owner because the transferor will
remain on the Register of members.
 Section 66(6) states: Except as required by law, no person shall
be recognised by a company as holding any share upon any trust
and the company shall not be bound by or be compelled in any way
to recognise (even when having notice of it)—(a) any equitable,
contingent, future or partial interest in any share or any interest in
any fractional part of a share; or (b) any other rights in respect of
any share, except an absolute right to the entirety of it in the
registered holder.
 Essentially, the company, when dealing with the shares, only has to
have regard to the person who is registered on the Register of
members, and does not have to have regard to the equitable owner.
Thus, all dividends will be paid to the registered owner, namely the
transferor, and only the transferor will be entitled to vote in
respect of the shares.
 However, as between the registered transferor and the
unregistered transferee a separate relationship arises whereby the
registered transferor will have to protect the interests of the
unregistered transferee. For example, the registered transferor will
have to account and pay over to theunregistered transferee any
dividends he receives in respect of the shares. In addition, the
registered transferor will have to cast votes in accordance with the
wishes of the unregistered transferee. Similarly, if any obligations
arise upon the shares, the registered transferor will be liable for
those obligations. However, the unregistered transferee will be
liable to indemnify the registered transferor in this regard.
 Where a share transfer is not registered by the directors of a
company, this does not effect the binding nature of the
contract to sell the shares, and such is still deemed to exist. The
contract to sell the shares cannot be rendered invalid unless the
contract is expressly made conditional upon the transferee's
registration. It has been held in the case of an unlimited public
company that there exists no implied term in a contract for the sale
of shares that the transferee would be registered as a member of
the company.
o However, Courtney is of the view that in the case of a
contract for the sale of shares in a private company there is a
strong case for implying a term that the contract is
conditional upon the transferee's registration as a member of
the company.

Refusing A Transmission Of Shares – Section 96


 Where a shareholder dies, his shares will vest in his personal
representatives as executors or administrators. This will take place
automatically by operation of law. Generally, the personal
representative will have the obligation to transfer on the shares to
the persons entitled to those shares under the will.
 The articles of a company used to contain these provisions which
recognised the position of personal representatives. Now, the law
on transmission of shares is set out in s 96 of CA 2014. Section 96
applies unless the company's constitution provides otherwise. The
rules are as follows (brackets indicate the subsection numbers):
(2) In the case of the death of a member, the survivor or
survivors where the deceased was a joint holder, and the
personal representatives of the deceased where he or she
was a sole holder, shall be the only persons recognised by the
company as having any title to his or her interest in the
shares.
(3) Nothing in subsection (2) releases the estate of a
deceased joint holder from any liability in respect of any
share which had been jointly held by him or her with other
persons.
(4) Any person becoming entitled to a share in consequence
of the death or bankruptcy of a member may, upon such
evidence being produced as may from time to time properly
be required by the directors of the company and subject to
subsection (5), elect either (a) to be registered himself or
herself as holder of the share; or (b) to have some person
nominated by him or her (being a person who consents to
being so registered) registered as the transferee thereof.
(5) The directors of the company shall, in either of those
cases, have the same right to decline or suspend
registration as they would have had in the case of a transfer
of the share by that member before his or her death or
bankruptcy, as the case may be.
(6) If the person becoming entitled as mentioned in
subsection (4)-( a) elects to be registered himself or herself,
the person shall furnish to the company a notice in writing
signed by him or her stating that he or she so elects; or (b)
elects to have another person registered, the person shall
testify his or her election by executing to that other person a
transfer of the share.
(7) All the limitations, restrictions and provisions of this
Chapter relating to the right to transfer and the registration
of a transfer of a share shall be applicable to a notice or
transfer referred to in subsection (6) as if the death or
bankruptcy of the member concerned had not occurred
and the notice or transfer were a transfer signed by that
member.
(8) Subject to subsections (9) and (10), a. person becoming
entitled to a share by reason of the death or bankruptcy of
the holder shall be entitled to the same dividends and
other advantages to which he or she would be entitled if he
or she were the registered holder of the share.
(9) Such a person shall not, before being registered as a
member in respect of the share, be entitled in respect of it
to exercise any right conferred by membership in
relation to meetings of the company.
(10) The directors of the company may at any time serve a
notice on any such person requiring the person to make the
election provided for by subsection (4) and, if the person does
not make that election within 90 days after the date of
service of the notice, the directors may thereupon withhold
payment of all dividends, bonuses or other moneys payable in
respect of the share until the requirements of the notice have
been complied with.
(11) The company may charge a fee not exceeding € 10.00 on
the registration of every probate, letters of administration,
certificate of death, power of attorney, notice as to stock or
other instrument or order.
(12) The production to a company of any document which is
by law sufficient evidence of probate of the will or letters of
administration of the estate of a deceased person having
been granted to some person shall be accepted by the
company, notwithstanding anything in its constitution, as
sufficient evidence of the grant.

 What happens if the deceased shareholder was the sole member of


a single-member company where that member had been the only
director of the company? Section 97 of CA 2014 says that the
Minister for Jobs (etc) may prescribe procedures whereby the
registration of shares in a company may be validly effected in such
a case. It is important to note that personal representatives of a
deceased member, whom the directors have refused to register
can bring a s 212 petition in an action for oppression, despite
the fact they are not registered members.

The Procedure For Challenging A Refusal To Register


 Generally, where a transferee is declined registration, he will seek
rectification of the company's Register of members pursuant to s
173 of the 2014 Act.
o This provides that if the name of a person is, without
sufficient cause, entered on the Register of members or
omitted from the Register of members, then the aggrieved
person can apply to the court for rectification of the Register.
 When the application is made, the court may either refuse or order
rectification, and it may also order the payment by the company of
the compensation for any loss suffered by any party aggrieved.
Rectification can be ordered only where a members name is
entered or omitted “without sufficient cause”.

 It should always be remembered that where the directors have


exercised their powers in a manner oppressive to, or in disregard
of, a member's interests, that member may bring a petition under s
212 of CA 2014. Because the particular provision only applies to
"members", this means that the relief afforded under s 212 cannot
be applied for by persons who have been refused registration and
who are not already members of the company.
o That being said, s 212 contains an exception in relation to
persons who receive shares by way of transmission upon
death and who have not been registered as members. In
particular, s 212(8) provides that the personal
representatives of a deceased member or any trustee or
person beneficially interested in the shares of a company by
virtue of the will or intestacy of a deceased member can
apply to the court under s 212 for an order under that
section. It therefore provides a useful mechanism to those
persons to make an application for relief where they feel the
directors have acted in a manner which is either oppressive
or in disregard of their interests and, arguably, makes it
easier for such persons to challenge a refusal rather than
challenging it on the strict ground that the directors have not
acted bona fide and in the interests of the company as a
whole.

Pre-Emption Rights
 We have already seen that a pre-emption right is a right of existing
shareholders to be offered a transfer of shares before those shares
can be offered to an outsider. Pre-emption clauses are usually
found in the company's articles or in shareholder agreements, and
each clause will differ depending on its wording. Generally, the
courts will strictly interpret the wording of a pre-emption clause
o Safeguard Industrial Investments v National
Westminster Bank Ltd (1982) – pre-emption rights
attached to regular inter-vivos transactions. The question
arose as to whether a pre-emption clause would also apply to
a transmission of shares in a will. The court held that the
clause would be interpreted strictly and would not apply to
such transmission on death.
o The courts will be quick to enforce pre-emption rights, and
usually a pre-emption right can defeat a contractual right to
the share. Lee and Company v Egan (1978) – Mr Roe had
agreed to sell his shares in the company to a Mr Conroy, who
was not a shareholder. After the agreement was entered into,
both parties realise that pre-emption rights attached to the
shares. A dispute arose and Conroy sought specific
performance of the contract, saying that despite the
existence of pre-emption rights, he had a contractual right to
the shares and this took precedence over the pre-emption
rights. The court disagreed and stated that Roe must first
send notice to the other shareholders offering to sell the
shares at the price that Conroy offered. If, after a set period
there was no acceptance, then Conroy could enforce the
contract.
o There is conflicting authority on whether a pre-emption
right will attach to beneficial interest in shares. Old
authorities suggest that the restriction did not go this far.
However, in Phelan v Goodman (2001) – Murphy J stated
that the pre-emption rights guaranteed by the articles of the
company were breached by an agreement that involved the
transfer of the beneficial ownership of the shares.

Refusing Share transfer to a PR:


 See if it complies with s. 96 or under its constitution principles
says contrary
 See if the directors acted bonafide and in the interests of the
co. – s. 95 with other considerations
 Remedy – s. 173 but mostly s. 212 for transmission

11. Shareholder Protection


 It is a basic principle in company law that the company is
controlled by its members and that these persons make decisions
on behalf of the company by way of democratic rule. Clearly a
majority in a company may be guilty of behaviour which is
detrimental to the interests of the minority even though these
actions may be within their legal powers.
 Until the enactment of sec 205 of the 1963 Act,now re-enacted as s
212 of CA 2014, actions by aggrieved minorities were liable to be
dismissed by the courts on the basis that it was for the members to
decide what was best for the company. This was the principle
enshrined in Foss v Harbottle.
 The Protection Of Minorities: Section 212(1) states: Any
member of a company who complains that the affairs of the
company are being conducted or that the powers of the directors of
the company are being exercised –
o (a) in a manner oppressive to him or her or any of the
members (including himself or herself), or
o (b) in disregard of his or her or their interests as members,

may apply to the court for an order under this section.


Orders Which The Court Can Make:
 If the court is of opinion that the company's affairs are being
conducted or the directors' powers are being exercised in a manner
that is mentioned in s 212 subsection (l)(a) or (b), the court may,
with a view to bringing to an end the matters complained of, make
"such order or orders as it thinks fit". There are four kinds of orders
which the court may make:
o A) directing or prohibiting any act or cancelling or varying
any transaction;
o B) for regulating the conduct of the company's affairs in
future;
o C) for the purchase of the shares of any members of the
company by other members of the company or by the
company and, in the case of a purchase by the company, for
the reduction accordingly of the company's capital; and
o D) for the payment of compensation.

 The court has a residual jurisdiction to wind up the company.


This jurisdiction is set out under section 569(f) of CA 2014.

 The most common order which the court will make under s 212(3)
(c) is an order that the oppressed members shares be bought out,
either by the oppressors or by the company, at a fair price.
o In Greenore Trading Co, an element was built into the price
to compensate for losses that the oppressed member
previously suffered. Indeed, it is possible for the court to
order that the oppressors sell their shares to those who were
being oppressed, but an order of this nature would be made
only in very unusual circumstances.
o In Bird Precision Bellows Ltd, it was held that when the
court orders the purchase of shares, the court does not have
to apply the normal market price as determined by ordinary
valuation principles. Rather, it entirely depends on the
circumstances. The court held that an innocent minority
shareholder should not be unfairly prejudiced or penalised by
compelling him to sell his shares at a discount from the pro-
rata price or by having to pay a premium in buying out the
majority shares. This approach was endorsed by O'Hanlon J
in Re Clubman Shirts (cited above).

Orders Amending The Company’s Constitution


 Where an order under section 212 makes any amendment of any
company's constitution, then, notwithstanding anything in any
other provision of CA 2014, the company concerned will not have
power, to make any further amendment of the constitution, which
would be inconsistent with the provisions of the order without the
leave of the court (s 212(4)).
 If the court makes an order, that order has the same effect as if it
had been made by resolution of the company (s 212(5)). Within 21
days of the making of the order a copy of it must be delivered by
the company to the Registrar. If this doesn't happen, then the
company and any officer of it who is in default shall be guilty of a
category 4 offence.

Locus Standi
 Clearly, locus standi is given to "any member of a company".
Section 212(8) also gives standing to (a) the personal
representative of a person who, at the date of his or her death, was
a member of a company, or (b) any trustee of, or person
beneficially interested in, the shares of a company by virtue of the
will or intestacy of any such person.
 So, the references to a "member" in s 212 is to be read as including
a reference to any personal representative, trustee or person
beneficially interested in the shares. It was held by the Supreme
Court in Re Via Networks Ltd, that where a person has agreed to
sell his shares in a company but remains on the register until the
sale has been completed, he does not have locus standi to bring s
212 proceedings. This was, according to the Supreme Court,
because the legislature had not envisaged that persons without any
interest in the company would be entitled to present a petition
grounding on alleged oppression.

Types Of Behaviour That Warrant Relief


 The wording of s 212 envisages two categories of behaviour which
can justify the court in giving relief.
o The first category of behaviour arises where it could be said
the interests of the shareholders in question are being
oppressed.
o The second category arises where the affairs of the company
are being conducted in a way which disregards the interests
of the member.

As we shall see, the courts draw a distinction between these two


categories of behaviour.
Oppression
 There has been no attempt at a complete definition of oppression in
the Irish decisions, but in the case of Greenore Trading Co Ltd,
Keane J adopted the definition set down in the case of Scottish
Co-op Wholesale Ltd v Meyer, which described oppression as
being conduct which is "burdensome, harsh and wrongful."
o In this case the plaintiff company set up a subsidiary
company in conjunction with the defendant, who was a
minority shareholder of the subsidiary company. The purpose
of the subsidiary company was to produce rayon cloth, for
which the defendant possessed a licence under the relevant
Government regulations. Subsequent to the incorporation of
the subsidiary company, the relevant regulations were
changed so that the plaintiff no longer needed the
defendant's licence to produce the cloth. The plaintiff then
acted in such a way as to bring about the liquidation of the
subsidiary company. In particular, the plaintiff decided to
produce the rayon cloth themselves and refused to supply the
subsidiary company with the necessary raw material for it to
produce the cloth. The court classified this behaviour of the
plaintiff as being oppressive and stated that it was exercising
its majority power in the subsidiary company in a manner
which was burdensome, harsh and wrongful.

 The phrase "burdensome, harsh and wrongful" was applied in the


case of Re Greenore Trading Co Ltd(cited above). There, the
applicant originally owned one third of the shares in the company.
There were two other shareholders in the company, one of whom
decided to leave and to sell his shareholding to the third
shareholder. The third shareholder paid for the shares partly out of
his own resources and partly out of money which was provided by
the company itself. The transaction was held to be unlawful and
contrary to s 60 the 1963 Act (as it then was), which prohibits
financial assistance.
o Keane J held that the transaction constituted oppressive
conduct and ordered that the second shareholder purchase
the applicant's shares by way of relief. It should be noted that
the applicant here could have brought a derivative action
under the exception to the rule in Foss v Harbottle.
However, that would only have resulted in the transaction
being set aside. This may not have brought a final resolution
to the matters complained of because the applicant would
have remained a member of the company which, in the
circumstances would not have been in his interests.

 It has been held that fraudulent and unlawful transactions can


also be oppressive. In Re Westwinds Holding Company Ltd, a
company had two shareholders. The company sold two acres of
land to another company in which one of the shareholders had a
controlling interest. The transfer deed was fraudulently executed in
that they claimed the signature of the applicant shareholder had
been forged by the other shareholder. In addition, the other
shareholder caused the company to guarantee the overdraft of a
different company, again controlled by him on the basis of forged
minutes of board meetings. The court found that the sale of lands
in this case was at a gross undervalue and that both transactions
constituted a fraud on the applicant shareholder which was for the
benefit of the other shareholder and at the expense of the company.
The court ordered that the applicant shares be purchased by the
other shareholder at a value that they would have been had the
fraudulent transactions not taken place.
 It has been held in England in the case of Re Five Minute Car
Wash Service Ltd that a complaint of unwise, inefficient or
careless conduct is not sufficient to justify the granting of relief.
However, Keane argues that this might not apply in Ireland. He
states that if the affairs of the company are being conducted in a
manner which has seriously detrimental consequences for the
applicant, it would seem reasonable to describe such conduct as
oppressive to the applicant even though those in control may have
genuinely believed that what they were doing was right.
 The fact that conduct is not in strict compliance with the
requirements of the Companies Acts will not by itself be
sufficient to establish oppression in Re Clubman Shirts Ltd.
[1983], O'Hanlon J stated: "I would not classify as oppressive
conduct within the meaning of the Act, the omission to comply with
the various provisions of the Act referable to the holding of General
Meetings and the furnishing of information and copied documents.
These were examples of negligence, carelessness, irregularity in
the conduct of the affairs of the company, but the evidence does
not suggest that these defaults or any of them formed part of a
deliberate scheme to deprive the petitioner of his rights or to cause
him loss or damage."
 One of the important issues which arises under s 212 is the extent
to which the exclusion from management can amount to
oppression.

o The concept of oppression also includes oppression of a


member in his capacity as director - Re Murph's
Restaurants Ltd. [1979] ILRM 141. It has been held in
England that a petition cannot succeed where the oppression
complained of is not oppression of the member in his capacity
as member, but in some other capacity—for example, where
he is a director of the company. As Keane points out, this
would not apply in respect of the Irish provision, particularly
given the frequency with which Irish companies are set up in
such a way that the shareholders are actively involved in the
management of the company. If disputes break out, they
frequently will come to a head with the attempted exclusion
of one of the directors or shareholders from further
participation in the affairs of the company. This issue was in
fact addressed in the case of Re Murph's Restaurants the
respondent directors had resolved to dismiss the petitioner as
a director of the company, offering him three months' salary.
Gannon J stated that the purported exclusion of the petitioner
by the respondents was done in an irregular and arrogant
manner and undoubtedly constituted oppression. However,
these comments were ultimately obiter as the case was
decided on different grounds.

 Keane argues that the wording of s 212 lends itself to the


interpretation that members of a company can apply for relief in
respect of oppression suffered in a different capacity. This is
because S 212 appears to draw a distinction between conduct
which is oppressive and conduct which is in disregard of the
members' interests. Therefore, in respect of conduct which is
allegedly oppressive, there is no limitation in the wording of s 212
that the oppression can only be suffered by a member in his
capacity as member.
 It may be easier to prove oppression on the basis of being excluded
from management where there is a quasi-partnership subsisting
in the company. A quasi partnership exists where a company is set
up by a small number of people between whom there are strong
ties of loyalty and confidence and whose relationship is based on a
certain understanding as to how the company will operate. In
particular, one of the hallmarks of quasi partnership is the
underlying understanding between the shareholders that so long as
the company continues, all the shareholders will have an equal say
in the management of the company. Even though such
understandings may not be expressly set down in writing, if they
are found to exist the courts will more readily apply equitable
considerations and will come to the aid of a person excluded in
breach of that underlying understanding.
o However, in O'Neill v Phillips it was held that where such
breakdowns in a quasi-partnership occur without either side
having done anything seriously wrong, then the excluded
member might not be able to demand that his shares be
purchased simply because he feels he has lost trust and
confidence in the others. In this particular case the House of
Lords held that the applicant had not been excluded from
management in a wrongful manner, nor had he been driven
out.
 Generally, a director may be removed by resolution of the board of
directors, however, even if this is not provided for, it is a basic
principle of company law that the shareholders of a company can
dismiss or remove a director by passing an ordinary resolution in a
general meeting by virtue of s.146 of CA 2014.
 However, if one of the alleged grounds for the s 212 petition is the
unfair removal of a director/shareholder from the management of
the company, the petitioner can seek relief from the court to
prevent his removal. It has now been established in the Supreme
Court case of Gilligan v O'Grady that a person who is bringing s
212 proceedings in those circumstances can apply for interlocutory
relief preventing his removal from the company pending the
hearing of the action. In this case Keane J stated that if it is
desirable to preserve the plaintiff's rights pending the hearing and
the balance of convenience favours the plaintiff, there is no reason
why interlocutory relief should not be granted.

 McGovern J, in Donegal Investment Group, said that the


circumstances in Kramer closely mirrored the circumstances
Donegal Investment Group: "The evidence in this case establishes
that Mr. Ronnie Wilson was the driving force behind the company
(and its predecessor) and that he and other members of his family
have been actively engaged in the day to day management of the
company. While the petitioner has a substantial shareholding in the
company and has members on the board, the evidence shows that
the representatives of the petitioner adopted a fairly passive role in
the day to day running of the business and were content that Mr.
Ronnie Wilson would manage and largely control the business
since they were satisfied as to his competence and expertise
notwithstanding their various complaints giving rise to this
petition. There is no evidence of dishonesty or fraud, divesting of
assets, illegal use of company funds or other serious misbehaviour
by Mr. Ronnie Wilson or other members of his family." In the
circumstances of this case, the appropriate order in McGovern's
view was the purchase of the petitioner's shares by the
respondents without discount.

Disregard Of Member’s Interests


 As you have seen, s 212 envisages two categories of behaviour for
which the court can award relief under s 212. The second category
of behaviour is where the affairs of the company are conducted in
disregard of the members' interests.

 Re Sam Weller & Sons Ltd (1990) – it was stated in this context
that – “the word interest is wider than a term such as rights, and its
presence suggests that parliament recognised that members may
have different interests, even if their rights as members are the
same”. In this case, the petitioners complained that for many years
a derisory dividend was being paid even though the company had
abundant reserves to make much higher dividends. It was held that
this could amount to oppression and therefore this claim would not
be struck out for showing no cause of action.

 Re Williams Group Tullamore (1985) – the distinction


between oppression and acting in disregard of member’s
interests was elaborated upon in this case.
o The shareholders were divided into preference and ordinary
shareholders. Unusually, the preference shareholders
possessed all of the voting rights. The co was trading very
successfully and the preference shareholders passed a
resolution which entitled them to share in the profits above
and beyond the preference dividends to which they were
entitled. This meant that the ordinary shareholders’
participation in the profits was reduced. The preference
shareholders had acted within their powers set out in the
articles and Barrington J stated they had not acted in manner
which was oppressive. However, he did hold that the
preference shareholders had acted in disregard of the
interests of the ordinary shareholders as they had benefited
to the detriment of the ordinary shareholders.
 NOTE: in order to succeed on this ground, an applicant must be
able to show that he suffered in his capacity as a member of the
company and not in any other capacity. This distinguishes it from
the ground of oppression, where a member of a company can make
the argument that he has been oppressed in a different capacity i.e.
as director.

The Rule in Foss v Harbottle


 In the past, if the wrong was done to the company, then a derivate
action could be taken.
 The Rule in Foss v Harbottle, says that if the company suffers a
wrong, the proper plaintiff is the company, i.e., not an individual
shareholder. The mischief the rule sought and seeks to prevent is a
litigious shareholder.
 In this case, the Defs were promoters and directors of a company.
They bought land to sell on to the company and sold it at an
inflated price. 2 of the shareholders brought an action against the
Defs seeking to set aside the transaction and seeking compensation
for the company. The court dismissed the action, stating that it was
up to the controllers of the co (meaning the majority shareholders)
to bring such an action.

 Four recent examples illustrate this (three are Irish).

o In Connolly v Seskin Properties Limited & Ors, the


applicant sought to take an action in the company's name,
only to be rebuffed by the High Court. Similarly
o in Glynn & Anor v Owen & Ors, the applicants were
similarly rebuffed, when the Supreme Court found the
applicants' appeal grounds implausible. In Kenny v Eden
Music Ltd, the High Court found that a derivative action
would be overwhelmingly to the disadvantage of the
company. In Abouraya v Sigmund, the court held that the
claimant had failed to establish a prima facie case that the
proposed action fell within the exception to the rule in Foss v
Harbottle.

Applicability of the Rule in Foss


 the applicability of the rule in Foss was clarified in Edwards v
Halliwell (1950) – here, 2 members of a trade union complained
that the amount of the contributions they were required to pay had
increased and the change was not passed by 2/3rds of the members
as required by the articles.
o Jenkins LJ stated that the rule in Foss was not applicable
since a member of a company was always entitled to sue
where he relied on a breach of his rights as a member and
not on any damage suffered by the company. The Pls were
thus entitled to bring the proceedings since their claim was
that the contributions could be increased only in a manner
laid down by the constitution of the co. As these individuals
had become members on the face of the company complying
with the constitution, this failure amounted to a breach of
their individual rights.

 Sometimes it is difficult to distinguish between personal rights of a


shareholder and the interests of the company. However, the courts
have made it clear that a shareholder cannot sure for a diminution
in the value of his shareholding by virtue of injuries suffered by the
company.
o Prudential Assurance v Newman Industries (No.2)
(1982) – the PL co was a minority shareholder in the DEF co
and brought a derivative action and a personal action against
the DEF and 2 of its directors on the basis that the actions of
the directors had reduced the value of the PLS shares.
 The Court of Appeal stated that while directors have a
fiduciary duty to the shareholders in certain cases, this
did not mean that they are liable to the shareholders in
relation to the company losing value which causes the
shareholders to lose value in their shares. The Court
held that the loss here is the loss of the company and
the shares of the member are not directly interfered
with as a result of this loss. This case was approved in
the Irish case of O’Neill V Ryan

Exceptions To The Rule In Foss v Harbottle And The Derivative


Action
 As we have seen, minority shareholders are prevented by the rule
in Foss v Harbottle in bringing an action against a person who
causes injury to the company. This is because such an action must
be brought by the company itself and the decision to bring this
action can only be made where the majority of shareholders
approve it.
 Where an exception can be established, then one or more of the
aggrieved minority shareholders may bring what has come to be
known as a derivative action. This is an action that derives from the
injury to the company rather than the injury to the individual
shareholders. The primary criterion for bringing a derivative action
is that, unless the action is brought, a wrong against a company
will otherwise go unredressed.
 There are a number of exceptions. In fact the case law has
recognised five major exceptions although not all of these can be
classified as true exceptions. These exceptions will not be looked at
in turn.

Ultra Vires
 The rationale behind the rule in Foss is that the minority of
shareholders cannot take action on behalf of the company where a
wrong is done to the company because the majority who control the
company do not agree such an action should be taken.
 The rationale behind the rule in Foss falls down where the views of
the majority become irrelevant, for example, where the company is
or had been compelled to engage in ultra vires activity.
 Where a company acts ultra vires, such an action cannot be ratified
or approved by the shareholders as it is outside the company’s
objects.
 Not currently applicable to private co. limited by shares.

Where More than a Bar Majority is Required to Ratify the Wrong


Complained of
 An example of this exception is the case of Edwards v Halliwell,
discussed above.
 This will be section 31 matter, and the members can enforce their
rights to a special resolution by invoking the statute.

Fraud on the Minority


 This has been called as the only – true exception
 This exception permits an action to be brought where the majority
in control commit or attempt to commit a fraud on the minority.
Fraud here does not necessarily mean dishonest.
 Keane points out that the word is used where a person is entrusted
with powers to be exercised on behalf of others and those powers
are used for some other purpose, then that will constitute fraud.
 It is for the members of the company to determine what is in the
company’s best interest. If the members reach a conclusion in good
faith, then it is difficult to interfere or challenge their decision.
 One of the areas in which this arises is in the context of the
alteration of the articles of association. We saw in ch 2 that if the
majority of the shareholders alter the articles in a way that is not
for the benefit of the company as a whole, then a minority of
shareholders can take an action overturning the alterations.
Therefore, an invalid alteration could be construed as being either
a fraud on the company or a fraud on the minority. Either way, this
will amount to an exception to the rule in Foss.
 Cook v Deeks (1916) – directors of a railway construction
company secured for themselves the benefit of a contract for the
building on a railway company which should have gone to the
company itself. They then used their majority voting power to pass
a special resolution endorsing their actions. It was held that to
allow them to retain the profits they made would “be to allow a
majority to oppress the minority”.
 Daniels v Daniels (1978) – the minority shareholders sued a
director and a controlling shareholder who had brought property
from the company for significantly less than its market value. He
was accused of gross negligence as a director but not fraud. The
argument was that since fraud was not pleaded there could be no
cause of action and that the claim should be struck out.
o In rejecting this, the court held that if minority shareholders
could sue for fraud, there was no reason why they could not
sue where the action of the majority, though without fraud,
confers some benefit on those directors and majority
shareholders themselves. Furthermore it was stated that the
exceptions to Foss would not be drawn so narrowly as to
exclude situations where directors profited out of their own
negligence.

 The reach of the fraud on minority exception was examined by the


SC in the following;
 Crindle Investments v Wyms (1998) – the owners of Bula Mines
began proceedings against a number of different parties in relation
to the discovery of lead and zinc ore near Navan in the 1970s.
when the first set of proceedings came before the High Court,
settlement proposals were accepted by 2 of the 4 owners of the
Bula group. The other 2 however, who were in the majority, refused
to accept this. The minority sought relief under sec 205 of the 1963
Act claiming that the conduct of the majority in rejecting the
settlement offer was so unreasonable as to constitute oppression.
That claim succeeded and an order was made that the minority
should be in control of any future negotiations.
 However, the majority had also instituted personal claims against
the other parties from the first set of proceedings and whose
outcome would have an effect on the claims originally initiated on
behalf of Bula. The minority then instituted plenary proceedings
claiming damages to the company by the refusal of the majority to
agree a reasonable settlement, and that they were entitled to an
order restraining the majority for their personal claims. The
minority argued that the conduct of the majority constituted fraud,
which fell within one of the exceptions to the rule in Foss. The
Supreme Court rejected this pointing out that in order to
establish the exception of fraud, it was an essential pre-
condition that the majority were seeking to appropriate
benefits to themselves to the detriment of the company.
However, the action complained of was that the majority were
holding out for better terms for themselves, and if they were
successful this would also benefit the company as a whole. In those
circumstances, it could not be said that the Defs were acting
fraudulently, nor could it be said they were attempting to benefit
themselves to the detriment of the company.

Justice of the Case


 Some cases suggest there is a 5th exception; where it is necessary
to allow a derivative action in the interests of justice.
 Moylan v Irish Whiting Manufacturers Ltd (1980) – Hamilton J
expressed the view that, having regard to the provisions of the
Constitution, he was satisfied that an exception to the rule could be
made where the justice of the case so requires.

The Procedure when bringing a derivative action


 Prudential Assurance v Newman Industries (1982) – The
Court of Appeal in England stated that when a minority
shareholder wished to bring a derivative action, 2 preconditions
would need to be satisfied.
o First, that the case falls within the exception to the rule in
Foss, and
o secondly, must be established that the company is entitled to
the relief claimed.
 As Keane points out this can cause major difficulties and it is not
clear whether this would be followed in the Irish courts.
 In addition, a shareholder’s claim on behalf of the company may be
blocked if a sufficient number of entirely independent members of
the company do not want his action to proceed.
 Smith v Croft – the Pls held approx. 14.5% of the company’s
capital and sought to bring a derivative action alleging fraud on the
company on several grounds. The Defs held 62.5% of the shares. A
substantial shareholder, not directly involved in the dispute, was a
trust which held 20% but the company chairman was the trust’s
nominee on the board. Allegations were that the executive
directors were paid excessive remuneration, they dishonestly
caused the company to make substantial payments to other
companies which they controlled, they caused it to make payments
that were really gifts to themselves, and they used the company’s
money to enable another company to buy shares in it. However, the
trust was opposed to pursing the claim in the courts.
o Knox J stated that when determining the whether the
derivative action should be allowed, the views of independent
shareholders should be taken into account. If the
independent shareholders were not in favour of the derivative
action, the claim should be struck out.

 Fanning v Murtagh [2009] 1 IR 551 stated that the shareholder


will only be allowed to sue on behalf on the company if he is
bringing the action 1. bona fide for the benefit of the company, 2.
for wrongs to the company, and 3. for which no other remedy is
available.
 Crucially, the Irish courts have set a higher threshold that the
English: ‘we demand that an action have a 'realistic prospect of
success'.

12. Meeting of Shareholders


To be determined after text.

13. Borrowing by the Company


 Borrowing is a key feature of corporate life. It is one of the means
by which a company can raise finance for its activities. When a
company borrows, particularly from a bank, the document which
sets out the terms and conditions of the borrowing and which sets
out the terms and conditions of the security given by the company is
usually referred to as the debenture document.
o A debenture is effectively a document which provides
evidence of a debt. The person to whom the debenture is
issued is called the debenture holder. Therefore, if the bank
lends money to the company, the company will be said to
have issued a debenture to the bank.
 It is very important to have a clear idea of the order of priorities in
a liquidation when considering the matters in this chapter. Fixed
charges stand outside the liquidation. The order of priorities run as
follows:
o (1) the costs and expenses of the winding up (e.g. liquidator's
fees);
o (2) preferential creditors;
o (3) fixed charges over book debts;
o (4) floating charges;
o (5) unsecured creditors.

 Sometimes companies will issue debentures to the public i.e. the


company invited the public to provide loans repaid with a fixed
interest rate. In practice such an arrangement is done by issuing
what is called debenture stock. When this is done, the company
creates a loan fund and issues stock certificated stating the share
of the fund to which he/she is entitled to.

Secured Debentures
 Unless a loan is secured, the lending institution will be in the same
position as all other unsecured creditors if the company goes
insolvent and into liquidation.
 The essence of the concept of “security” is that the holder of the
security is entitled to look at certain assets which will satisfy the
debt which the company owes in case the company cannot satisfy
that debt. Generally, there are 4 types of security which companies
will create in favour of banks:
(1)A pledge;
(2)A lien;
(3)A mortgage, and
(4)A charge (most important for this course)

(1) A Pledge
 A pledge is a transaction under which a debtor delivers possession
of goods to his creditor to be retained by the creditor for as long as
the debtor has unsatisfied obligations to the creditor. A pledge
confers a power of sale upon the creditor in the event of the debtor
defaulting.

(2) Liens
 A lien is a form of possessory security. A lien is a right given to a
person who is in possession of goods belonging to another person
where that first person has provided services and is entitled to
retain possession until he is paid for those services. The primary
difference between a lien and a pledge is that in the case of a
pledge, the owner delivers the possession of the goods to the
creditor for the purposes of security. With the lien, the creditor
retains possession of the goods which have been delivered to him
for a different purpose. This was held by Millett LJ in Cosslett
(Contractors) Ltd.

(3) Mortgages
 Mortgages can be subdivided into legal mortgages and equitable
mortgages. The essence of each type of mortgage is that it involves
a transfer of ownership of either a legal or an equitable interest.
 A legal mortgage involves the formal conveyance, assignment of
demise of the legal title to real property or personal property which
is specifically identifiable at the time of creation of the mortgage.
The mortgagee becomes the legal owner of the mortgaged
property. The mortgagor will have an equity of redemption which
gives him the right to recover the property on repayment.
 An equitable mortgage involves the transfer of the equitable
interest in the property. And can be created either formally or
informally. A formal equitable mortgage involves the conveyance,
assignment or demise of the equitable title in the mortgaged
property. An informal equitable mortgage typically involves the
deposit of the title deeds of real or personal property that is
specifically identifiable.

(4) The Charge


 The essence of a charge is that the lender and the borrower agree
that certain property will be made available to satisfy a debt in the
event of the borrower defaulting in repayment. Thus, the lender
gets a proprietary interest in that piece of property.

The Distinction between Mortgages and Charges


 All charges are essentially equitable in nature. The crucial
distinction between a mortgage and a charge is that, unlike a
mortgage, a charge does not pass title or ownership in respect of
the assets which are the subject of security. Therefore, all charges
are equitable in that the charge gets an equitable right to use the
charged property for the satisfaction of the secured debt.

Charges and Debentures


 The law on charges and debentures is now set out in Part 7 of CA
2014. Section 408 opens the Part with a number of definitions:
"charge", in relation to a company, means a mortgage or a charge,
in an agreement (written or oral), that is created over an interest in
any property of the company.
 It does not include a mortgage or a charge, in an agreement
(written or oral), that is created over an interest in—(a) cash, (b)
money credited to an account of a financial institution, or any other
deposits, (c) shares, bonds or debt instruments, (d) units in
collective investment undertakings or money market instruments,
or (e) claims and rights (such as dividends or interest) in respect of
any thing referred to in any of paragraphs (b) to (d).

The Registration Of Charges


 There are two ways of registering charges:
o the "one-stage procedure" and
o the "two-stage procedure".
 If a charge is created but not registered it will be void against the
liquidator and any creditor of the company, unless one of those two
procedures are gone through. Registration is made with the CRO. If
a charge is incompletely registered, whatever part of it is left out is
rendered void as against the liquidator and any creditor of the
company, but the rest of the charge will be fine.
 One Stage Procedure - The one-stage procedure consists in
sending the Registrar the prescribed particulars in the prescribed
form, within 21 days of the creation of the charge.

 The Two Stage Procedure - The two-stage procedure requires a


company to take the following steps: (i) that there is received by
the Registrar a notice stating the company's intention to create the
charge; and (ii) that, not later than 21 days after the date of the
Registrar's receipt of the notice under paragraph (a) (the "first-
mentioned notice"), there is received by the Registrar a notice, in
the prescribed form, stating that the charge referred to in the first-
mentioned notice has been created. (If this requirement isn't
complied with within 21 days then the "first-mentioned notice" gets
removed from the register.
o The idea behind the two-stage procedure is that banks might
be more willing to advance money if they can be certain of an
enhanced security priority. The rule that priority dates from
the creation of the charge has been changed. The new rule is
that whoever gets the charge in to the CRO for registration
first is first in time. If the second step in the two-stage
procedure is taken, the day the Registrar received notice of
the intention to create the charge will be - retrospectively -
the day of its actual creation.
 No Hidden Charge - Prior to CA 2014 certain charges had to be
registered and certain charges did not. The Company Law Review
Group recommended that every charge should be made a
registrable charge. The idea is that it gives creditors the clearest
possible view of the charges on a company's assets. There are no
hidden charges.

Priority Of Charges
 The day the charge is created is not the day which matters most
anymore. The relevant date for priority purposes is the day the
Registrar receives the particulars (if a party is using the two-stage
procedure then it is the date of the receipt of the intention to
create a charge that is relevant).
 If a number of charges are registered on the same day, the earliest
in time has priority.
 The Registrar keeps a register, in relation to each company, of the
charges requiring registration, and on payment of a fee, enters in
the particulars relating to each charge in the register. Whenever a
charge is registered, the Registrar gives a certificate of the
registration to the company.
 The certificate is "conclusive evidence" that the requirements of
registration have taken place.
o The rationale behind this was elaborated upon in Re CL Nye
Ltd, where Hamilton J stated that the conclusiveness of
registration was to give security to persons relying on the
certificate. If it were possible to go behind the certificate and
show that the date of creation of the charge meant the
charge was not registered within time, then no lender on the
face of the charge could be secure and sure that it would not
be thereafter attacked by somebody else.

Extension Of Time For Registration And Rectification Of Register


 Section 417(1) states: The court may grant the following relief
where it is satisfied that the omission to register a charge within
the time required by Part 7 or that the omission or misstatement of
any particular with respect to any such charge or in a
memorandum of satisfaction—(a) was accidental or due to
inadvertence or to some other sufficient cause, or (b)is not of a
nature to prejudice the position of creditors or shareholders of the
company, or that on other grounds it is just and equitable to grant
that relief in respect of such an omission or misstatement.
 In Re Frank Bell & Sons Ltd; Shaw's application J.A. Shaw &
Co., Solicitors (the Applicants) applied by way of originating notice
of motion for an order pursuant to Section 106 of the Companies
Act 1963 extending the time for the registration of a charge
created by deed of mortgage and charge dated the 25 th April 2003
between Frank Bell & Son Limited as mortgagor and Bank of
Scotland (Ireland) Limited as mortgagee. The applicants made
serious error over a number of years failing to register Bank of
Scotland charge and failure to notifying the Companies office.
o The Court found that it was appropriate to extend the time to
register the charge in the Companies Office without prejudice
to the rights of Frank Bell, who was a director of the
Company and who had registered a charge in the Companies
Office on the 9th September 2013 which had been created on
the 28th August, 2013 for an amount of €842,925 in his
favour. The court ordered that the Shaw charge should have
priority in the Companies Office from the date of the
application to the Court, on the 13th February, 2014.
 An example of the proviso depriving a legal mortgage holder of
priority which it otherwise would have can be seen in the case of
re Manning Furniture Ltd, where First National Building
Society obtained a legal mortgage over the company's property.
After the mortgage was created the company went into
receivership, which then triggered the rights of the preferential
creditors to be repaid out of the surplus of the assets remaining in
the company. Only after the company went into receivership was it
noticed that the First National Building Society's mortgage had not
been registered within the required 21 days. Application was made
for late registration which was duly granted, subject to the proviso
discussed above. In the normal course the legal mortgage would
have taken priority over the preferential creditors, but because the
charge was registered late and because the company had already
gone into receivership by that stage the court had to determine
whether preferential creditors now had priority over the legal
mortgage. It was held that because registration had occurred after
the company went into receivership, the preferential creditors had
to take precedence.

Security Interests which Did Not Require Registration


 Certain charges were not registrable under s 99 of 1963.
o First, charges which are not created by companies, such
as those arising by operation of law, do not require
registration. Examples of this kind of security include certain
types of liens. A lien generally arises where goods or property
is retained until payment for services rendered has been
made. Certain types of liens arise by operation of law and are
therefore not registrable. The exception to this is where a
lien is created by virtue of an express contract between the
parties.
o Another example of charges which did not require
registration are charges over the proceeds of the sale of
land. In contrast with a mortgage or charge on land, a
charge on the proceeds of the sale of lands does not require
registration. A charge on the proceeds can arise where,
pending the sale of a business premises and the proposed
purchase of another, a lender advances bridging finance to
the company to enable it to purchase the other properties.
The lender's security will be based on the proposed proceeds
from the sale of the business premises. Such a charge is
therefore not registerable because there is a charge on the
proceeds of the sale of land. This was upheld in the case of
Re Rum Tong Restaurant (Dublin) Ltd.

The Distinction Between Fixed & Floating Charges


General Distinctions
 A fixed charge is usually defined as a charge on a specific asset
or class of assets. The essence of a fixed charge is that the
charger i.e. the company, cannot deal in the asset and must ensure
the asset is always readily available to the charge i.e. the bank, in
the event of the charger defaulting on the debt.
 By contrast, the floating charge does not attach to any specific
asset at the time of its creation. The floating charge is deemed to
float over the entire assembly of assets. It does not attach to any
specific asset until a certain event occurs, at which stage the
charge crystallises. This usually occurs when the company
defaults on the debt.
 The rationale behind the floating charge is that it enables a
company to offer security but still allows it to deal with the assets
which are the subject of the charge. The company will be entitled
sell or deal with the specific assets within that class unless the
company defaults.
 Floating charges became popular when companies tried to raise
finance over assets such as their stock and trade or their book
debts. The floating charge enables the borrower to go on using the
charged assets in the ordinary course of business, therefore
providing a solution to this problem.

 Fixed charges have certain advantages over floating charges:


o The holder of a fixed charge has a higher priority than the
holder of a floating charge if the company is wound up.
o In addition, fixed charge holders will rank above
preferential creditors in a winding up, such as the Revenue
Commissioner and employees. Floating charge holders rank
behind these preferential creditors. The only exception is
where there is a fixed charge over book debts, the fixed
charge will rank behind the Revenue Commissioners in
certain circumstances.
 This is provided for under section 115 of the Finance
Act 1986, as amended by section 174 of the Finance Act
1995 (restated also under section 1001 of the Taxes
Consolidation At 1997). So long as there is due
notification by the Revenue Commissioners in
accordance with the provisions of the legislation, the
fixed charge over book debts will unlike other fixed
charge rank behind the Revenue Commissioners (a
preferential creditor) in order of priority upon
liquidation of a company.
o Another disadvantage of floating charges is that they can be
invalidated if created 12 months prior to the winding
up of the company. This is because traditionally, floating
charges were created by the company when they knew that
the company was in serious financial difficulties and in
response to pressure from a major creditor. Thus, a floating
charge created at this point was deemed unfair on other
creditors. If the floating charge was given over all the assets
of the company, that creditor might be easily placated.
However, it was seen by the legislature that such an
arrangement was unfair on the other creditors in the
company. In response to this, s. 597 of the CA Act now
provides that a floating charge will be invalidated if created
12 months prior to the winding up, unless certain conditions
are met.

Identifying Floating Charges


 As we have seen, the distinction between the fixed and floating
charges on insolvency can be crucial. There is therefore must case
law concerning the different characteristics of fixed and floating
charges with a view to identifying what in fact a floating charge is.
 Re Yorkshire Woolcombers’ Association – Romer LJ said that if
a charge had 3 characteristics it would be a floating charge:
(i) If it was a charge on a class of assets of a company present
and future,
(ii) If that class is one which, in the ordinary course of business,
would be changing from time to time,
(iii) If you find the charge that, until some future step is taken by
those interested in the charge, the co may carry on its
business in the ordinary way.
 Romer LJ went on to say however, that a charge could still be
floating without having all 3 of these characteristics present.

 It has been held that for a floating charge to exist it is not


necessary that the charge be over a class of assets. See for
example the case below.
o Welsh v Bowmaker (1980) – the court held that it was
possible to create a floating charge over a piece of land. The
Supreme Court did not consider the fact that the asset was
not one which changed from time to time as sufficient to
prevent the charge from being floating.
 It has been held that the hallmark of a floating charge is the
freedom of the charger company to do what it pleases with
the charged property free from interference or restriction from
the charge bank, including the right to dispose of the property.
o Smith v Bridgend County Council (2002) – a company
entered into a building contract with a local authority and the
company received an advance payment. As security for the
payment, the contract provided that all “plant” owned by the
company when on the site would be deemed the property of
the local authority and this could be sold by the local
authority at anytime towards the satisfaction of the advanced
payment. The Court of Appeal held that the legal ownership
in the plant did not pass to the local authority, nor did the
contract create a possessory lien with a power of sale.
Rather, the contract created an equitable charge. Millett J
went on to say that the essence of a floating charge is that it
remains under the management and control of the charger….
the essence of the fixed charge is that the charger cannot
deal with the property without the consent of the chargee.
 In this case the CoA held that the chargee was not in
complete control of the charged assets. This was
because the property which was subject to the charge
was a fluctuating body of assets i.e. constructional
plant, temporary works, goods and materials which
could be consumed or removed from the site.
Therefore, whilst there was a charge in that the
contract gave a right to the County Council to sell the
assets to satisfy the advance payment if the works were
not completed, it was a floating charge because the
assets in question were fluctuating.
 The High Court and Supreme Court decisions in Re JD Brian
Limited are essential knowledge. The Supreme Court decision is
the leading Irish authority on automatic crystallization. First,
we look at the High Court.
o The case concerned s 285 of the 1963 Act (now s 621 of CA
2014), which deals with preferential payments in a winding
up. Section 285(7)(b) now s 621(7)(b) of CA 2014 - said that
certain preferential debts shall "so far as the assets of the
company available for payment of general creditors are
insufficient to meet them, have priority over the claims of
holders of debentures under any floating charge created by
the company, and be paid accordingly out of any property
comprised in or subject to that charge." It was contended
that the floating charges had crystallized prior to the
presentation of the petition to wind-up the companies simply
because notice on behalf of the charge holder, Bank of
Ireland, had been served to that effect. If that was true, the
bank would have skipped the queue and beaten the
preferential creditors in priority, the Revenue and employees.
 Finlay Geoghegan J said that when a floating charge
crystallizes, no new charge is created; it is only the
nature of the charge that changes. Finlay Geoghegan J
followed the reasoning of Barwick J in Stein v Saywell
The reasoning ran thus: A creditor who accepts a
floating charge over a company's assets allows the
business of the company to be carried on and the assets
of the company which are subject to the floating charge
to be altered, perhaps augmented, by the efforts of the
company and its employees. The holder of the floating
charge is not to be able to displace the priorities which
the legislation accords certain debts which accrue
during the carrying on of the business; amongst those
priorities is certain remuneration of employees of the
company.
 This was reversed by Laffoy J in the Supreme Court. In
Re J.D. Brian Ltd [2015] IESC 62, the Supreme
Court decided that the contractual words could bear no
other interpretation: the "crystallisation notice" had
been agreed by the parties prior to the winding up of
the relevant companies. It must be given effect. As a
result - whether fairly or unfairly - the claims of the
debenture holder to the funds realised from the assets
ranked in priority to the preferential debts of the
company.
 Therefore, the SC were saying that the charge was no
longer a floating charge and therefore did not rank
behind the preferential creditors.

Fixed Charges Over Book Debt


 One class of assets which is often offered as security for loans is
the book debts of a company.
 Book debts would be the current debts which the company is owed,
and this is a changing class of assets because as old debts are paid,
new debts will come on line. There is generally no difficulty in
creating a floating charge over the book debts of the company.
 Re Yorkshire Woolcombers – book debts possess 3
characteristics referred to by Roma LJ in this case:
o If it was a charge on a class of assets of a company present
and future,
o If that class is one which, in the ordinary course of business,
would be changing from time to time,
o If you find the charge that, until some future step is taken by
those interested in the charge, the co may carry on its
business in the ordinary way.

 However, lending institutions were attracted by schemes which


enable them to take fixed charges over book debts yet retain the
advantages of floating charges. This was achieved by allowing the
borrower to continue collecting the book debts but requiring him to
keep the proceeds in a special bank account which would be frozen
at a particular level. The validity of this device was first upheld in
the case of Siebe Gorman v Barclays Bank (1979) where a
charge was created over the book debts of the company which
required the company to pay any monies it received in respect of
the book debts in the company’s bank account. The restriction that
the company pay the proceeds into the company’s bank account
was held by Slade J to be sufficient to create a fixed charge.

 Re Keenan Brothers Ltd (1985) – this case is the leading Irish


authority in this area. It was made clear that mere terminology or
labelling would not be sufficient to make what is in reality a
floating charge a fixed charge. Rather, it would be determined on
the true construction of the debenture document. In this case, the
debenture document provided that the company should pay into a
specified account all the monies it received in respect of book debts
and could not w/o prior consent of the bank, make any withdrawals
or direct any payment from that account. The Supreme Court held
that the restrictions were incompatible with a floating charge. This
was because the proceeds had to be segregated into a separate
account and rendered frozen and virtually unusable.
 Re Wogans (Drogheda) Ltd (1993) – the debenture document
had a clause which prohibited any withdrawal of the monies from
the bank account which the proceeds of the book debts were to be
paid, w/o the consent of the lender. However, no account had been
specified into which the proceeds were actually paid. The High
Court held that as a result, the charge must be floating. However,
this was reversed by the Supreme Court which said that if a lender
delays the designation of a bank account or suspends the right to
exercise direct control, that does deprive the lender of the rights
agreed in the debenture document. Thus, it was held that the
subsequent conduct was inadmissible as an aid to construction of
the agreement that the terms of the clause had, on paper, all the
essential characteristics of a fixed charge.
 Re Holidair Ltd (1994) – the clause in the debenture, while it
required the payment of the proceeds of the collection of the book
debts into an account selected by the debenture holder, did not
specifically prohibit any withdrawals by the company. The Supreme
Court held that as a result, the charge was floating since the
company could continue to use the proceeds in the normal way for
the carrying on of their business.

 The question of whether or not it is necessary to include a


restriction in the debenture document that the company cannot
withdraw from the designated bank account, unless it gets the
consent of the lender has been the subject of recent discussion in
England in the case belwo.
 Natwest Bank v Spectrum (2005) – the company had obtained
an overdraft from the bank and it was secured by a debenture. The
debenture purported to create a fixed charge over the company’s
book debts. Under the charge, the company was prohibited from
disposing of the book debts before they were collected, and once
collected had to be paid into an account with the bank. However,
there was no restriction on the company’s ability to withdraw those
proceeds in the ordinary course of business. The House of Lords
held that the charge created was a floating charge. In coming to
this conclusion, the Law Lords overruled the decision in Siebe
Gorman; they held that it was an essential characteristic of a fixed
charge over book debts that the borrower is restricted in its use
and the proceeds in the ordinary course of business. The House of
Lords expressly approved the “substance over form” approach
adopted by McCarthy J in Re Keenan Brothers.
 One other point from the decision in Spectrum must be noted. The
HoL held that in determining whether a charge is fixed or floating,
the manner in which the charge operates in reality may be a factor.
This is the opposite to the approach which was taken in Ireland in
Re Wogans (Drogheda) Ltd.

The Effect and Operation of Floating Charges


 It is a usual feature of a floating charge that the company remains
free to deal with its property in the ordinary course of business
despite the existence of the charge until the charge crystallises.
 The company may sell, let, mortgage or otherwise deal with its
assets as if a floating charge has not been created. Thus, in the
absence of any express prohibition in the debenture, the company
may create legal and equitable mortgages prior to the
crystallisation of the floating charge and, if created, they will have
priority over the floating charge.
 As a result, it has become standard practice to insert a condition
prohibiting the company from creating any future mortgage or
charge ranking in priority to the existing floating charge; this is
called a negative pledge clause.
 However, a negative pledge clause will only deprive a future
mortgagee or charge holder of priority where it can be shown that
he was aware of the negative pledge.
o Re Old Bushmills Distillery – a floating charge was created
subject to a negative pledge clause. Further charges were
then created over the same assets. The court found that the
2nd charge holders did have notice of the prohibition of
borrowing money on the assets. Therefore, the subsequent
charge holder was not entitled to the benefit of the charge.
o Welsh v Bowmaker(1980) – an equitable mortgage was
created over part of land in respect of which there was
already an existing floating charge which contained a
negative pledge clause. The floating charge holder argued
that negative pledge clauses were common in modern
debentures and the mortgagee should be fixed with
constructive notice of the prohibitions. Henchy J found that
the mortgagees had notice of the existence of the previous
floating charge but not its terms. However, he rejected the
submission that constructive notice would be sufficient and
stated that it was “settled law that there is no duty on a bank
in a situation such as this to seek out the precise terms of the
Debenture.”
 That being said, as floating charges now must be registered
pursuant to sec 99 of the 1963 Act, subsequent mortgagees or
charge holders may well have actual notice of the existence of a
negative pledge clause.

The Crystallisation of Floating Charges


 The 2 main crystallising events are
1. the appointment of a receiver
 The receiver will be appointed when the company
defaults on the debt it owes. The appointment of a
receiver by any of the charge holders will cause the
floating charges created by the company to crystallise.
 The role of the receiver is to take control of the asset
subject to the charge and sell or realise it for the
purpose of discharging the loan or debt owed. It does
not matter which charge holder appoints the receiver.
2. commencement of the company’s winding up.
 A floating charge will also crystallise where the
company goes into liquidation.

 In Re Holdair, where a receiver is appointed, the co has 3 day


period to appoint an examiner to get protection. (recrystallise)
 Should be noted that the mere service of notice on the company
that the floating charge is to crystallise forthwith can cause a
floating charge to crystallise where such is provided for in the
debenture creating the floating charge.

Invalidation of Floating Charges


 Section 597 provides that floating charges created within twelve
months before the winding up of the company shall be invalid
unless:
1. The company immediately after the creation of the charge
was solvent or
2. Monies were actually advanced to the company at the time of
the creation of the floating charge which were commensurate
with the value of the floating charge or
 It should be noted that the time period of 12 months is extended to
two years where the floating charge was created in favour of a
connected person, a director of the company or a "related
company".

Reservation Of Title Clauses


 An effective retention of title clause (ROT clause) will ensure that
the holder of the clause can stand outside a liquidation, and will be
able to the secure the return of goods provided to the failed
company which, at the time of liquidation, had not been paid for.
 These clauses, if effective, make the suppliers of goods secured
creditors at the expense of ordinary creditors. They are known as
Romalpa clauses after the English case of Aluminium Industries
v Romalpa Aluminium Ltd (1976).Over the course of a year the
plaintiffs sold aluminium foil to the defendant. At the point when a
receiver was appointed to the defendant, it owed the plaintiff
£122,239. A clause in the contract said "the ownership of the
material to be delivered...will only be transferred to the purchaser
when he has met all that is owing to [the plaintiff]." A second part
of the clause provided that if the purchaser used the aluminium in
the manufacture of any new objects, then the seller would be given
ownership of those objects until the purchaser had paid the seller
everything it owed it. The defendant had sold some of the
aluminium foil on to a third party. The receiver found that the
proceeds of this sale, £35,152, were held in an account, and that
there was still some aluminium foil on the premises. The plaintiff's
sought a declaration that the foil was theirs and so was the
£35,152.
o The plaintiffs were successful on both counts, the Court of
Appeal finding that the ROT clause was part of the general
terms and conditions and that the defendant had only a
limited power to sell the aluminium to third parties, the
power resting on the understanding that all such proceeds
would be held in trust for the plaintiffs until the defendants
discharged the purchase price of the original aluminium
delivery.
 The next case to come before the courts was Re Bond Worth Ltd.
The product at issue was called "Acrilan", raw fibre that goes into
carpets. The sellers included a clause that stated "equitable and
beneficial ownership shall remain with us until full payment has
been received", adding that if the Acrilan became incorporated into
the carpets then they would have "equitable and beneficial
ownership in such other products as if they were solely and simply
the goods." Slade J commented that the drafting of the clauses had
been "somewhat misleading and inadequate" because the seller
had transferred the legal title but purported to retain the
"equitable and beneficial" title (properly drafted, the clause would
have provided that the legal title in the raw fibre remained with the
seller until the purchase price was paid). Because of this error of
drafting, Bond Worth could deal freely with the fibre, and even sell
it, because they were the legal owners, and the sellers had only an
equitable and beneficial title to it. Bond Worth, being the legal
owners, had given the sellers an equitable floating charge. Thus, it
appeared to Slade J that what had been created was a floating
charge. Once this was decided, the seller's claim was sunk, because
they hadn't registered the charges and so they were void.
 Borden (UK) Ltd v Scottish Timber Products is famous because
the good supplied became irreversibly mixed with a new title, and
the Court of Appeal held that in this circumstance, the ROT right
vanished.
o The defendants made chipboard. The plaintiffs supplied them
with resin. Nothing in the contract prevented the defendants
from using the resin before they paid for it. The problem was
that the resin "became an inseparable component, or
ingredient, of the chipboard." The essential consideration
was: "When the resin was incorporated in the chipboard, the
resin ceased to exist, the plaintiffs' title to the resin became
meaningless and their security vanished. There was no
provision in the contract for the defendants to provide
substituted or additional security. The chipboard belonged to
the defendants."
 Thus, Borden (UK) is the key case whenever a product which is
subject to an ROT clause has become "irreversibly mixed."

Simple Retention of Title Clauses


 In its simplest form, a retention of title clause does not create a
charge and is therefore not registerable. This is because a
retention of title clause simply reserves title pending payment.
 As pointed out by Professor Goode, a security interest or charge
can only be granted by the debtor where it has a proprietary
interest to grant. If the debtor has no proprietary interest to give,
he cannot create a security interest or charge over it. This was also
held in the analysis of Baron J in Cassidy Electrical Supply case.
 Bond Worth case – see above
 Re Charles Dougherty (1984) – animal feed was sold to the
purchaser company subject to a simple retention of title clause.
Carroll J rejected the argument that a charge was created. She said
that “if the goods delivered to the buyer who had not paid for them,
on terms that title remains with the seller until he had paid, the
buyer’s creditors cannot seize the goods…”
 The problem arises however, when a retention of title clause
attempts to retain title over goods which are subsequently mixed
with other goods or manufactured in such as way as to lose their
identity.(Borden case)
 Simple retention of title clause may not be effective to retain title
as the seller can no longer identify the goods over which he claims.
o Chaigley Farms v Crawford (1996)–the seller sold live
cattle to the purchaser subject to a retention of title clause.
Then the cattle were not paid for and the company became
insolvent, the vendor claimed that he possessed title over the
slaughtered cattle. The court rejected hits, stating that the
retention of title clause could not be construed as allowing
the vendor to claim ownership over the slaughtered cattle as
there was an inescapable difference between alive animals
and dead ones.
 Therefore, in order for a vendor to retain or attempt to have some
form of interest in the manufactured product, it is necessary for
him to stipulate that in the clause which attempts to reserve title.

Proceeds of Sale Clauses


 These clauses attempt to give the seller the right to ownership in
the goods sold but also in the proceeds if the goods are sold on.
 Proceeds of sale clauses always required to be registered. The
most notable Irish proceeds of sale clause is Carroll Group
Distributors Ltd v G & F Bourke Ltd. the plaintiff, a well- known
tobacco company, had supplied goods to the defendants
("Bourkes") as retailers. Those companies had gone into
liquidation. The contract between the parties contained a
reservation of title clause which provided that no property in the
goods would pass until all sums due to the plaintiff had been
discharged. It also gave the defendants the right to resell the goods
to a third party on their own account, but not as agents for the
plaintiff. Further, the contract included a proceeds of sale clause
which required the defendants to "hold all monies received from
such sale or other disposition in trust for the company ("Carrolls')
and undertake to maintain an independent account of all sums so
received and on request [to] provide all details of such sums and
accounts". No such account was ever established, a fact that the
High Court judge concluded was probably known to Carrolls. In the
course of the liquidation an issue arose as to the plaintiff's rights in
respect of the proceeds of sale of the goods sold on by the
defendants to third parties. The plaintiff argued that these were
impressed with a trust in its favour, thus entitling it as a
beneficiary standing in a fiduciary relationship with the defendants
to trace such proceeds into any other property acquired therewith
by the trustees.
o Murphy J concluded that it was clear from the terms of the
contract that it was envisaged that the defendants would sell
on the goods on their own account and not as an agent for
Carrols. Accordingly, he could see no basis for fiduciary duty.
He was satisfied that the parties intended that the property
could be sold at a price set by Bourkes and on the pass to the
sub-purchaser would become the full legal owner.
 In Unitherm Heating System Ltd. v Wallace, the CoA held that
a proceeds of sale clause did not give rise to a trust between
supplier and the company. It did not create a fiduciary relationship
but rather confined the seller to a charge over the funds in respect
of the resale of its goods, which required registration.
o Irvine J has held that decision in Romalpa has not been
favored in recent times and replaced by Murphy J in Carroll
case.
 McCann and Courtney, Companies Act, in dealing with proceeds of
sale clauses in the context of S.99 of the CA 1963 provide that it
was not be regarded as a registrable charge unless:
o It expressly creates a fiduciary relationship b/w seller and
buyer
o It stipulates that in any sub-sale by the buyer is to be
regarded as acting for or on behalf of the seller
o It imposes a duty on the buyer to keep the proceeds of any
sub-sale separate from buyers other moneys
o It requires the buyer to account for such proceeds to the
seller

Aggregation Clauses
 Clauses which attempt to retain title or to confer some form of
interest on the vendor over future manufactured goods are known
as aggregation of title clauses or enlarged retention of title clauses.
 When these clauses are sued, and the goods are irreversibly mixed,
the question arises as to the nature of the interest the seller has in
the mixed or manufactured finished product. (Borden UK case)
 Re Charles Dougherty – Carroll J commented that a seller can
make an effective retention of title clause to goods prior to
manufacture but if one requires security over the manufactured
goods this would require a buyer granting a proprietary interest
back to the seller. However, a transaction of this nature could only
amount to a charge and therefore would require registration.
 The rationale behind the above analysis is that it would be illogical
for the seller to be able to claim that they in fact own manufactured
goods. Rather the buyer is granting back to the seller a proprietary
interest whereby the seller is entitled to use the manufactured
goods to satisfy the debt he is owed if that debt is not satisfied.
Thus, it is a form of security which in most circumstances will
require registration.
 Different considerations will apply where the goods subject to the
retention of title clause can still be identified. See the case below.
o Hendy Lennox v Graham Puttick Ltd (1994) – diesel
engines were sold subject to a retention of title clause and
these were incorporated by the purchaser into electrical
generating sets. When the company went into receivership,
the vendor sought an injunction preventing the sale of the
diesel engines. The courts stated that although the engines
had been mixed into the generating set, they are still capable
of being readily identified as they could be removed.

“All sums due” Clauses


 Sometimes Retention of Title Clauses provides that title to the
goods will not pass until “all sums due” from the buyer to the seller
have passed. Often, sums due on foot of other contracts will also be
included.
 It was thought that these clauses would be found to constitute a
charge over the company’s book debts or alternatively a floating
charge of the company’s assets. Notwithstanding this, the House of
Lords upheld the validity of these clauses.
 Armour v Thyssen Edelstahalwerke (1990) – the House of
Lords held that the ownership of goods which were subject to an
all-sums due clause did not pass to the purchaser company and
therefore no charge arose.
 Therefore, this situation was very far removed from the situation
where a party in possession of property is seeking to create a
subordinate right in favour of a creditor while retaining the
ultimate right to himself. Accordingly in the absence of the court
finding this to amount to a charge, there was no requirement to
register the existence of such a clause.

ROT registration – proceeds of sale and aggregation clauses


No registration – simple ROT and all sums due clauses

14. Liquidation
 A company may have its legal existence cut short in two ways. First
way is being wound up. The second way is being struck off the
register.
 The expression “winding up” refers to the process by which a
company is broken up bit by bit until it is ultimately dissolved and
removed from the register of companies.
 There may be many reasons for the winding up of a company, for
example, the company may be insolvent, the members may no
longer be able to work together, the company may have served its
purpose.
 Where a company is being wound up for reasons of insolvency, the
assets of the company are collected by an officer (known as a
liquidator) and distributed among the creditors. Some creditors
such as the Revenue are entitled to priority for some of their debts
over the other creditors.
 In an insolvent liquidation, the liquidator may apply to the court for
directions in relation to the various priorities that subsist between
different types of creditors. In addition, the court may be called up
to investigate the conduct of the directors and decide whether any
such officer should be fixed with personal liability.
 Winding up is dealt with in Part 11 of CA 2014. It is essential
to realise that there are 2 main forms of winding up:
(1)Voluntary winding up
(2)Compulsory or official winding up

The essential difference between the two procedures is that in the


first, the members themselves decide to wind up the company. In the
second, the winding up is ordered by the courts.

Three Bars to a Members’ Winding Up


 The voluntary winding up of a company may, in accordance with
the Summary Approval Procedure (s.563) be a members’ voluntary
winding up unless—
(i) there is default in the making of a declaration which has to be
made in the case of a members’ winding up of a solvent
company, when the SAP procedure is being used.
a. This declaration is set out in s 207. It should state the total
amount of the company’s assets and liabilities as at the latest
practicable date before the date of making of the declaration.
It should also state that the declarants have made a full
inquiry into the affairs of the company and that, having done
so, they have formed the opinion that the company will be
able to pay or discharge its debts and other liabilities in full
within such period not exceeding 12 months after the
commencement of the winding up as may be specified in the
declaration. Similar to this is the declaration that must be
made under s 580(2) in the case of companies of fixed
duration.
(ii) a creditor applies to court to have a voluntary winding up
converted into a creditors’ voluntary winding up, as they may do
under s 582(2); or
(iii) the liquidator is of the opinion that the company will not be able
to pay or discharge its debts and other liabilities in full within
the period stated in the declaration, and he therefore calls a
creditors’ meeting as he is obliged to do under s 584, and the
winding up becomes in these circumstances a creditors’
voluntary winding up.

Members’ Voluntary Winding Up


 A company may be wound up voluntarily as a members’ voluntary
winding up. A members’ voluntary winding up must be commenced
in accordance with the Summary Approval Procedure. There are
two exceptions to this rule. In the following two exceptions the
winding up does not have to be commenced using the SAP: (a) on
the expiry of the period, if any, that is fixed for the duration of a
company by its constitution; or (b) should such happen, when the
event occurs on the occurrence of which a company’s constitution
provides that the company is to be dissolved. In either of these
cases, it should be commenced in accordance with s 580 of CA
2014 (this involves, among other things, a directors’ declaration
regarding the company’s assets and liabilities).
 Where a company has passed a resolution for its voluntary winding
up, it must, within 14 days after the date of the passing of the
resolution, give notice of the resolution by advertisement in Iris
Oifigiuil. If default is made in complying with this rule, the
company concerned and any officer of it who is in default shall be
guilty of a category 3 offence. For the purposes of the rule the
liquidator of the company is deemed to be an officer of the
company, and so capable of being fined for this breach.
 The company holds a general meeting in which it appoints, by
resolution, one or more liquidators for the purpose of winding up
the affairs and distributing the assets of the company.
 If the liquidator(s) at any time is of the opinion that the company
will not be able to pay or discharge its debts and other liabilities in
full within the period stated in the directors’ declaration he must:

(a) summon a meeting of creditors for a day not later than the
14th day after the day on which he or she formed that
opinion,

(b) send notices of the creditors’ meeting to the creditors by post


not less than 10 days before the day on which that meeting is
to be held,

(c) cause notice of the creditors’ meeting to be advertised, at


least 10 days before the date of the meeting, once in Iris
Oifigiuil and once at least in 2 daily newspapers circulating in
the locality in which the company’s principal place of
business in the State was situated during the relevant period,
and

(d) during the period before the day on which the creditors’
meeting is to be held, furnish creditors free of charge with
such information concerning the affairs of the company as
they may reasonably require.

 In this situation, the liquidator must also


o (a) make out a statement in the prescribed form as to the
affairs of the company, including a statement of the
company’s assets and liabilities, a list of the outstanding
creditors and the estimated amount of their claims,
o (b) lay that statement before the creditors’ meeting, and
o (c) attend and preside at that meeting.
 At the creditors’ meeting, the creditors may appoint a liquidator.
The appointment of the new liquidator does not affect the validity
of any action previously taken by the liquidator appointed by the
members of the company. If there is any dispute - about costs or
fees, for example - the liquidator appointed by the creditors can
apply to court to have it determined. None of the foregoing
prevents any of the creditors from going in to court on their own
and presenting a petition to wind up the company in question.

Creditors’ Voluntary Winding Up


 Section 586 provides that a company may be wound up voluntarily
as a creditors’ voluntary winding up. It may be initiated by the
company in general meeting resolving that it cannot by reason of
its liabilities continue its business, and that it be wound up as a
creditors’ voluntary winding up.
 Where a company has passed a resolution for it to be wound up as
a creditors’ voluntary winding up, it must, within 14 days after the
date of the passing of the resolution, give notice of the resolution
by advertisement in Iris Oifigiuil. If default is made in complying
with this rule the company concerned and any officer of it who is in
default shall be guilty of a category 3 offence (with the liquidator
being deemed to be an officer).
 What will trigger a creditors’ voluntary liquidation? It may be that
a meeting under s 584 has taken place (discussed above). It may be
that the court makes an order under s 582(2) in relation to the
company (that is, the court makes a winding up order on foot of an
application by a creditor, or the court, on the application of a
creditor, is of opinion that it is unlikely that the company will be
able to pay or discharge its debts and other liabilities within the
period specified in the declaration concerned referred to in section
207 or 580 (2)).
 How are the creditors’ meetings to be conducted? Section 587
provides the answer. The company causes a meeting of the
creditors of the company to be summoned for the day (or the day
next following the day) on which there is to be held the meeting at
which the resolution for a creditors’ voluntary winding up is to be
proposed. For that purpose, the company sends to each creditor, at
least 10 days before the date of the creditors’ meeting, notice in
writing of the creditors’ meeting. This notice must state the date,
time and location of the creditors’ meeting; the name and address
of the person at that time proposed for appointment as liquidator, if
any, and it may attach a list of the creditors of the company (if this
list is not attached, the creditor can inspect the list at the
registered office of the company, and the notice of the creditors’
meeting must state clearly that the creditor has the right to do
this). The creditors at the creditors’ meeting might nominate a
different liquidator to the one nominated at the members’ meeting.
As a general rule, the creditors’ liquidator will prevail. If there is a
dispute over the matter, this is what happens: Where different
persons are nominated as liquidator, any director, member or
creditor of the company may, within 14 days after the date on
which the nomination was made by the creditors, apply to the court
for an order either (a) directing that the person nominated as
liquidator by the company shall be liquidator instead of or jointly
with the person nominated by the creditors, or (b) appointing some
other person to be liquidator instead of the person nominated by
the creditors.

Jurisdiction of the Court to Wind Up


 The Court has jurisdiction to wind up a company, pursuant to s 564
of CA 2014. All the winding up rules that governed the process
prior to 1 June 2015 - which were not contained in the Companies
Acts (i.e. the Superior Courts Rules) - are altered in a manner that
brings them into conformity with Part 11 of CA 2014. As to all
matters relating to the winding up of a company, the court may
have regard to the wishes of the creditors or contributories of the
company, as proved to it by any sufficient evidence.
 For the purpose of ascertaining those wishes, the court may, if it
thinks fit (a) direct meetings of the creditors or contributories to be
called, held and conducted in such manner as the court directs, and
(b) appoint a person to act as chairperson of any such meeting and
report the result of the meeting to the court. In the case of
creditors, regard shall be had to the value of each creditor’s debt.
 Part 11 Chapter 2 applies to winding up by the court. Save to the
extent that a provision expressly provides otherwise, each provision
of Chapter 2 applies only to a winding up that is ordered by the
court. Chapter 2 ranges from s 568 to s 577. A key section is s 569,
the circumstances in which company may be wound up by the
court. There are eight of these. They are (you should note in
particular (d) and (e):

(a) if the company has by special resolution resolved that the company
be wound up by the court,

(b) if the company does not commence its business within a year after
the date of its incorporation or suspends its business for a
continuous period of 12 months,

(c) if the members of the company are all deceased or no longer exist,

(d) if the company is unable to pay its debts,

(e) if the court is of the opinion that it is just and equitable that the
company should be wound up,

(f) if the court is satisfied that the company’s affairs are being
conducted, or the powers of the directors are being exercised, in a
manner oppressive to any member or in disregard of his or her
interests as a member and that, despite the existence of an
alternative remedy, winding up would be justified in the general
circumstances of the case but court may dismiss a petition to wind
up a company if it is of the opinion that proceedings under s 212
would be more appropriate.

(g) if the court is satisfied, on a petition of the Director, that it is in the


public interest that the company should be wound up, or

(h) if an examiner is not able to secure agreement or formulate


proposals for compromise or scheme of arrangement) (see sections
535(2) and 542(5)).

Inability to Pay Debts


 Section 570 states that a company shall be deemed to be unable
to pay its debts:

(a) if—(i) a creditor, by assignment or otherwise, to whom the


company is indebted in a sum exceeding €10,000 then due, has served on
the company (by leaving it at the registered office of the company) a
demand in writing requiring the company to pay the sum so due, and (ii)
the company has, for 21 days after the date of the service of that
demand, neglected to pay the sum or to secure or compound for it to the
reasonable satisfaction of the creditor, or
(b) if—(i) 2 or more creditors, by assignment or otherwise, to whom, in
aggregate, the company is indebted in a sum exceeding €20,000 then
due, have served on the company (by leaving it at the registered office of
the company) a demand in writing requiring the company to pay the sum
so due, and (ii) the company has, for 21 days after the date of the service
of that demand, neglected to pay the sum or to secure or compound for it
to the reasonable satisfaction of each of the creditors, or
(c) if execution or other process issued on a judgment, decree or order
of any court in favour of a creditor of the company is returned unsatisfied
in whole or in part, or
(d) if it is proved to the satisfaction of the court that the company is
unable to pay its debts, and in determining whether a company is unable
to pay its debts, the court shall take into account the contingent and
prospective liabilities of the company.

Provisions As To Applications For Winding Up Locus Standi


 An application to the court for the winding up of a company shall
be by petition presented either by (a) the company, or (b) any
creditor or creditors (including any contingent or prospective
creditor or creditors) of the company,or (c) any contributory or
contributories of the company, or by all or any of those parties,
together or separately.Further to this, a winding-up petition on the
grounds mentioned in section 569 (l)(f) may be presented by any
person entitled to bring proceedings for an order under section
212 in relation to the company concerned (i.e. an oppressed
minority).

Power Of Court
 On the hearing of a winding-up petition, the court may (a) dismiss
the petition, or (b) adjourn the hearing conditionally or
unconditionally, or (c) make any interim order, or any other order
that it thinks fit.
 The Court won’t wind a company up unless it is satisfied the
company has no NAMA obligations or, if it does, that NAMA is on
notice and has been heard.
 As stated above, the court may order that the company be wound
up as if it were a members’ voluntary winding up; it may do so
based on a ground referred to in paragraph (a), (b), (c), (e) or (f) of
section 569 (1) (above). If a petitioner does not proceed with his or
her winding-up petition, the court may, upon such terms as it shall
deem just, substitute as petitioner any person who would have a
right to present a petition in relation to the company, and who
wishes to proceed with the petition.
 The court may appoint a liquidator provisionally at any time after
the presentation of a winding-up petition and before the first
appointment of a liquidator. Section 575 gives the Court power to
appoint a liquidator or liquidators, for the purpose of conducting
the proceedings in winding up a company.
 At any time after the presentation of a winding-up petition, and
before a winding-up order has been made, the company or any
creditor or contributory may apply to court for a stay on any action
which is against the company and which is pending in the’ High
Court or on appeal in the Supreme Court. If any other action is
pending against the company, the stay can be applied for in the
High Court. The Court can “stay or restrain the proceedings
accordingly on such terms and for such period as it thinks fit.”

Conduct Of Winding Up
Commencement of court ordered winding up
 The winding up of a company by the court is deemed to commence
at the time of the presentation of the winding-up petition in respect
of the company.
 Where, before the presentation of a winding-up petition in respect
of a company, a resolution has been passed by the company for
voluntary winding up, then, despite the fact that that petition is
granted, the winding up of the company shall be deemed to have
commenced at the time of the passing of the resolution. All
proceedings taken in a voluntary winding up shall be deemed to
have been validly taken, unless the court, on proof of fraud or
mistake, thinks fit to direct otherwise.
 A voluntary winding up is deemed to commence at the time of the
passing of the resolution for voluntary winding up.
 If the court orders a winding up, an officer of the court will furnish
the CRO with the details of the order and a copy of the order must
be served by the petitioner (or such other person as the court may
direct) on the company at its registered office.
 In a voluntary winding up, the liquidator of the company must
deliver to the CRO a notice of his or her appointment within 14
days after the date of his or her appointment. Failure to do this is a
category 4 offence.
 Where the court has made a winding-up order or appointed a
provisional liquidator in relation to a company, then unless the
court thinks fit to order otherwise, part of the order will state that a
statement as to the affairs of the company must be made out and
filed and verified by affidavit. This statement must show, among
other things, particulars of the company’s assets, debts and
liabilities; the names, residences and occupations of the company’s
creditors; the securities held by those creditors respectively, and
the dates when those securities were respectively given. The
statement should be filed and verified by the directors, within 21
days of the order.
 From then on, every invoice, order for goods or business letter
issued by or on behalf of a company that is being wound up, or a
liquidator of such a company, must contain a statement that the
company is being wound up. The same applies to any website of the
company, any emails sent by it to third parties. Upon the
appointment of a liquidator to a company, the liquidator takes into
his or her custody or under his or her control the seal, books and
records of the company, and all the property to which the company
is or appears to be entitled. Anyone who has these documents must
hand them over to the liquidator.

Related Company Contributing To Debts Of Company Being Wound Up


 On the application of the liquidator or any creditor of a company
that is being wound up, the court, if it is satisfied that it is just and
equitable to do so, may make an order that any company that is or
has been related to the company being wound up shall pay to the
liquidator of that company an amount equivalent to the whole or
part of all or any of the debts provable in that winding up.
 In deciding whether it is just and equitable to make such an order
the court has regard to
o (a) the extent to which the related company took part in the
management of the company being wound up;
o (b) the conduct of the related company towards the creditors
of the company being wound up;
o (c) the effect which such order would be likely to have on the
creditors of the related company concerned.
 The court absolutely cannot make this order unless it is satisfied
that the circumstances that gave rise to the winding up of the
company are attributable to the acts or omissions of the related
company. It is not be just and equitable to make this order if the
only ground for making the order is (a) the fact that a company is
related to another company, or (b) that creditors of the company
being wound up have relied on the fact that another company is or
has been related to the first-mentioned company.

Pooling Assets of Related Companies


 Where 2 or more related companies are being wound up and the
court, on the application of the liquidator, or any creditor or
contributor, of any of the companies, is satisfied that it is just and
equitable to do so, it may make an order pooling the assets of
related companies, ordering that they be wound up together as if
they were one company. In deciding whether it is just and equitable
to make such an order, the court has regard to the following
matters: (a) the extent to which any of the companies took part in
the management of any of the other companies; (b) the conduct of
any of the companies towards the creditors of any of the other
companies; (c) the extent to which the circumstances that gave rise
to the winding up of any of the companies is attributable to the acts
or omissions of any of the other companies; (d) the extent to which
the businesses of the companies have been intermingled. Similar to
the previous section, it is not just and equitable to make this order
if the only ground for making the order is the fact that a company
is related to another company, or that creditors of a company being
wound up have relied on the fact that another company is or has
been related to the first-mentioned company.
Costs In A Winding Up
 All costs, charges and expenses properly incurred in the winding
up of a company, including the remuneration of the liquidator,
remaining after payment of—(a) the fees and expenses properly
incurred in preserving, realising or getting in the assets, and (b)
where the company has previously commenced to be wound up
voluntarily, such remuneration, costs and expenses as the court
may allow to a liquidator appointed in such voluntary winding up,
are payable out of the property of the company in priority to all
other claims, and must be paid or discharged in the order of
priority set out in s 617(2) of CA 2014. The order of priority stated
there is:

(a) First — In the case of a winding up by the court, the costs of the
petition, including the costs of any person appearing on the petition
whose costs are allowed by the court;

(b) Next — Any costs and expenses necessarily incurred in connection


with the summoning, advertisement and holding of a creditors’
meeting;

(c) Next — The costs and expenses necessarily incurred in and about
the preparation and making of, or concurring in the making of, the
statement of the company’s affairs and the accompanying list of
creditors and the amounts due to them;

(d) Next — The necessary disbursements of the liquidator, other than


expenses properly incurred in preserving, realising or getting in
the assets;

(e) Next — The costs payable to the solicitor for the liquidator;

(f) Next — The remuneration of the liquidator;

(g) Next — The out-of-pocket expenses necessarily incurred by the


committee of inspection (if any).

 Subject to the preferential payments, the property of a company on


its winding up must be applied in satisfaction of its liabilities pari
passu, and unless the constitution of the company otherwise
provides, be distributed among the members according to their
rights and interests in the company.
 Section 621 sets out the list of preferential payments in a winding
up. In a winding up the following rates and taxes must be paid in
priority to all other debts—

 (i) all local rates due from the company at the relevant date and
having become due and payable within the period of 12 months
before that date;

 (ii) each tax assessable on, in relation to, or by the company under
the Taxes Consolidation Act 1997 in respect of, or apportioned on a
time basis to, a period ending on or before the relevant date, for
which the tax concerned is due and payable, but the particular
period (in respect of which priority under this subparagraph for the
tax concerned is claimed) shall not be of more than 12 months’
duration;

 (iii) any amount due at the relevant date in respect of sums which
an employer is liable under Part 18D or Chapter 4 of Part 42 of the
Taxes Consolidation Act 1997 and regulations thereunder to deduct
from emoluments to which that Part or Chapter applies paid by that
employer during the period of 12 months next ended on or before
the relevant date reduced by any amount which that employer was
under that Part or Chapter and regulations thereunder liable to
repay during that period, with the addition of interest payable
under section 991 of that Act;

 (iv) any tax and interest for which the company is liable under the
Value-Added Tax Consolidation Act 2010 in relation to taxable
periods which shall have ended within the period of 12 months next
ended before the relevant date;

 (v) any local property tax that the company is liable to remit to the
Revenue Commissioners under section 74 of the Finance (Local
Property Tax) Act 2012 during the period of 12 months next ended
before the relevant date and any interest payable in relation to that
tax under section 149 of that Act;

 (vi) an amount of local property tax payable, under section 16 of


the Finance (Local Property Tax) Act 2012, by the company at the
relevant date to the extent that such tax is payable in respect of
any one liability date (within the meaning of section 2 of that Act)
falling before the relevant date and any interest payable in relation
to that tax under section 149 of that Act.
 Section 621(2)(b) states that the following also have priority: all
wages or salary— (i) whether or not earned wholly or in part by
way of commission. or (ii) whether payable for time or for piece
work. of any employee in respect of services rendered to the
company during the period of 4 months before the relevant date.
The sums under s 62 1 (2)(b) must not, in the case of any one
claimant, exceed €10,000.
 Section 621(2)(c): all accrued holiday remuneration becoming
payable to any employee (or, in the case of the person’s death, to
any other person in his or her right) on the termination of the
employee’s employment before or by the effect of the winding up
order or resolution.
 All of the above debts rank equally among themselves and be paid
in full unless the assets are insufficient to meet them in which case
they shall abate in equal proportions, and so far as the assets of the
company available for payment of general creditors are insufficient
to meet them have priority over the claims of holders of debentures
under any floating charge created by the company and be paid
accordingly out of any property comprised in or subject to that
charge.

Liquidators
 The duty of a liquidator set out in s 624 is to “administer the
property of the company to which he or she is appointed.”
 This means ascertaining the extent of the property of the company
and as appropriate: the collection and gathering in of the
company’s property; the realisation of such property; and the
distribution of such property in accordance with law.
 The duties of a provisional liquidator are those duties provided in
the order appointing him or her or any subsequent order of the
court. Where a provisional liquidator is appointed by the court.
Then the provisional liquidator has such powers as the court
orders. Where a provisional liquidator is appointed by the court,
the court may place’ such limitations and restrictions upon the
powers of any other officers of the company as it thinks fit.
 The liquidator’s powers are set out in s 627. A non-exhaustive list
follows:
o Legal proceedings, carrying on company’s business, etc.
Power to— (a) bring any action or other legal proceeding in
the name and on behalf of the company; (b) defend any action
or other legal proceeding in the name and on behalf of the
company; (c) recommence and carry on the business of the
company so far as may be necessary for the beneficial
winding up thereof, where such business was not continuing
at the date of the appointment of the liquidator or had ceased
after such appointment; (d) continue to carry on the business
of a company so far as may be necessary for the beneficial
winding up thereof, where such business was continuing at
the date of the appointment of the liquidator and had not
subsequently ceased; (e) appoint a legal practitioner to assist
the liquidator in the performance of his or her duties.
o Payment of certain creditors, compromise of certain claims,
etc Power to— (a) pay any classes of creditors in full; (b)
make any compromise or arrangement with creditors or
persons claiming to be creditors or having or alleging
themselves to have any claim present or future, certain or
contingent, ascertained or sounding only in damages against
the company, or whereby the company may be rendered
liable.
o Ascertainment of debts and liabilities, sale of property, etc.
Power to (a) ascertain the debts and liabilities of the
company; (b) sell the property of the company by public
auction or private contract, with, for the purposes of this
subparagraph, power to— (i) transfer the whole of the
property to any company or other person; (ii) sell the
property in lots, and, for the purpose of selling the company’s
land or any part of it, to carry out such sales by grant,
conveyance, transfer, lease, sublease, or otherwise, and to
sell any rent reserved on any such grant or any reversion
expectant upon the determination of any such lease.
o Power to obtain credit, whether on the security of the
property of the company or otherwise.
o Power to— (a) take into his or her custody or under his or her
control all the property to which the company is or appears to
be entitled; (b) dispose of perishable goods and other goods
the value of which is likely to diminish if they are not
immediately disposed of; (c) do all such other things as may
be necessary for the protection of the company’s property.
o Power to do all such other things as may be necessary for
winding up the affairs of the company and distributing its
property.

Winding up the Company for an Inability to Pay Debts—s 569(d)


 This is the most frequent ground for winding up. It occurs where a
creditor of a company has not been paid debts due and owing to it
and the creditor suspects that the reason for the non-payment is
the insolvency of the company.
 In these circumstances a creditor may be concerned that if the
company is not wound up and continues to trade, this will further
undermine the company’s ability to pay the debt which is due and
owing. Therefore, if the company is not willing to voluntarily wind
itself up, the creditor can apply to the court for a compulsory
liquidation.

Proving Insolvency
 The first difficulty which a creditor faces when bringing this type of
application is to prove that the company is in fact insolvent. In this
regard, see s 570 of CA 2014 (above). The main circumstances in
which a company would be deemed to be enabled to pay its debts is
if a creditor is owed an amount in excess of €10,000 and has served
a letter at the company’s registered office demanding that the
company pay the sum due within three weeks.

Petition will be struck out if deemed an abuse of process


 The courts are wary of creditors attempting to use the compulsory
winding up procedures as a means of getting the upper hand in a
dispute they may have with the company in relation to alleged
debts owed. Where the company in good faith and on substantial
grounds disputes any liability in respect of the alleged debt, the
courts will dismiss the petition. It has been held that to petition to
have a company wound up for failure to pay a debt when that debt
is bona fide disputed is an abuse of process.
 One of the first cases which set down this principle was Re
Pageboy Couriers Ltd, where a creditor instituted a petition
seeking the winding up of the company. In fact, the petitioner had
already instituted previous proceedings against the company for
the payment of the debt and the company had strongly contested
those proceedings. Those proceedings then became dormant and
the petitioner attempted a new tactic by bringing an application to
have the company wound up.
o In agreeing that it was well established that a petition cannot
be brought where the company has a substantial and
reasonable defence to the allegation that monies are owed,
O’Hanlon J approved the following extract from the case of
Stonegate Securities Ltd v Gregory, where Buckley J
stated that “a winding up petition is not a legitimate means of
seeking to enforce a payment of a debt which is bona fides
disputed”.
 This principle was further re-iterated in the case Re Emerald
Portable Buildings Systems Ltd. where asked to consider
whether a company was unable to pay its debts in accordance with
s.214, where the facts involved a subsequently countermanded
cheque where modifications to cabins made were subsequently felt
to be defective. In querying whether the countermanding and
subsequent dishonouring of the cheque could be considered
relevant for these purposes, Clarke J. applied the test set out by
Buckley J in the Stonegate decision as follows:
o “If the company in good faith and on substantial grounds
disputes any liability in respect of the alleged debt, the
petition will be dismissed or if the matter is brought before a
Court before the petition is issued, its presentation will, in
normal circumstances, be restrained. That is because a
winding up petition is not a legitimate means of seeking to
enforce payment of a debt which is bona fide disputed.”
 The most recent case on this topic is Gleeson -v- Tazbell
Services Group. This was a petition to wind up a company called
Tazbell. The petition was brought by Mr. Patrick Gleeson. The
grounds of the petition were that the company allegedly owes Mr
Gleeson the sum of €125,000 approx; that there has been a
demand, that the demand has not been met and that therefore the
company is insolvent and cannot pay its debts. Cregan J said: “It
appears as if Tazbell is a company which is authorised by the
Courts Service to collect court fines on behalf of the Courts and the
Courts Service. It is also clear from uncontroverted affidavit
evidence that Mr Gleeson has had fines imposed on him by the
Courts (and orders for costs) of approximately €2950. These fines
arise following convictions for various offences including non-
display of tax, insurance or NCT, or failure to provide the ODCE a
report in the prescribed form in his capacity as liquidator of the
insolvent company. These fines remain due and owing.”
o In respect of these fines, the petitioner sent invoices to the
company. These invoices related to: €2000 for the cost of
reading the letters received from Tazbell; €4000 for the cost
of writing letters to Tazbell; €10000 for alleged unauthorised
use of his name which he alleges is the subject of a trade
mark and is contained in a so called “private trust”. The debt
was wholly disputed by the company. Cregan J was satisfied
that the debt was not a bona fide debt, that the demand was
not a bona fide demand, that the petition was entirely
baseless, that “that the actions of the petitioner are nothing
short of a cynical abuse of Court process designed to inflict
maximum embarrassment on the company without a shred of
justification whatsoever.”
o Cregan J dismissed a petition to wind up a company where it
was claimed the company owed the petitioner approximated
€125,000 and had misused the petitioner’s name - the subject
of an alleged trade mark, on the grounds that there was no
bona fide debt, there was no trade mark registered, and the
bringing of the petition was an abuse of process.

Jurisdiction to wind up is discretionary

 Even if it can be proved that the company is unable to pay its debts,
there is no automatic right to a winding up order. The court retains
a discretion in this regard.
 This can be seen from the case of Meridian Communications Ltd
v Eircell,
o where Eircell was owed several million pounds by Meridian
and brought a petition to have them wound up. Meridian
attempted to resist the petition and claimed that, first, it did
not owe Eircell the amount alleged and, second, that it
wished to sell its remaining assets in order to pay of its
creditors and then voluntarily wind up the company.
o McGuinness J in the Supreme Court said that the petition
could not be dismissed as the entire amount was not
disputed. However, she considered that it was just and
equitable to give Meridian time to allow to sell all its assets
and then voluntarily put the company in to liquidation. She
held that this was in the interests of the petitioner, the
company and also the general body of creditors. In those
circumstances Eircell was restrained from presenting the
petition.
 Another example of this discretion in operation can be seen in the
case of re Genport,where it was established that the company was
insolvent and was unable to pay its debts. Despite this, however,
the judge held that he would not allow the creditors to petition to
have the company wound up on the basis that the company’s
primary asset was a lease it held in Sach’s Hotel and that lease
contained a forfeiture clause. The result of the forfeiture clause
was that if the company was wound up the lease would have to be
surrendered back to the landlord, resulting in the company being
stripped of its primary assets. In those circumstances the court
refused to grant the winding up order and it was significant in this
regard that other creditors of the company had opposed the
petition.

Interlocutory injunctions to restrain the petition


 A petition to have a company wound up can pose a serious threat,
particularly if it creates a panic amongst other creditors of the
company. If other creditors become nervous and all demand to
have their monies repaid immediately, this can be disastrous for
the company’s cash flow and could result in the collapse of the
company.
 In those circumstances a company may wish to prevent a creditor
from presenting the petition in the first place. This will occur, for
example, where a company receives a 21-day warning letter and it
is decided to seek an injunction from the High Court preventing the
presentation of the petition.
 In the case of Re Truck and Machinery Sales, Keane J stated
that it was possible to restrain the presentation of a petition by way
of an interlocutory injunction. However, in order to obtain thi,s it
was necessary to establish at least a prima facie case that the
presentation would constitute an abuse of process. In this regard
Keane J distinguished between two situations.
o The first situation would be where the company denies all
liability to the creditor.
o The second would be where a company admits that it is
indebted to the creditor but not to the extent which the
creditor is claiming.
 Keane J pointed out that only in the former scenario would the
petitioner be restrained in bringing the application to wind up a
company.

 In the case of Coleport Building Company v Castle Contracts


(Ireland) Ltd, where the Plaintiff sought an injunction restraining
the defendant from advertising or in any way publicising a petition
seeking the winding up of the company. The plaintiff disputed the
alleged debt owed and had told the creditor this on receiving the
21-day letter. The plaintiff argued that the defendant should litigate
the dispute in the normal way and indicated to the court that it
would lodge the amount of monies alleged to be owed in court as
security for the alleged debt. In this way the plaintiff had
demonstrated that the reason for non-payment of the monies was
based on its view that the monies were not owed rather than on
any question over the company’s insolvency.
Winding up the Company where it is “Just and Equitable” -s
569(e)
 Pursuant to s 569(e) of CA 2014, a court can wind up the company
where it is just and equitable to do so. This gives the court a wide
discretion in relation to the types of situations where a company
can be wound up and allows the court to liquidate a company in
circumstances which fall outside the other categories set out in s
569.
 One of the most common sets of circumstances which give rise to
an application under the “just and equitable” provision is where a
private company is run on the basis of a “quasi partnership”.
Quasi partnerships usually arise in small private companies which
are founded on a personal relationship involving mutual trust and
confidence between the shareholders. Such a company is more akin
to a partnership because it possesses that extra element of mutual
trust whereby the shareholders in the company act more like
partners. In these types of cases, it may be sufficient for a winding
up order if it can be shown that some of the shareholders in the
company have acted in such a way which destroys that mutual trust
or which undermines the confidence between the parties.
o The leading Irish case in this area is Re Murph’s
Restaurant Ltd, where three men began a snack bar
business. Two of the men were brothers and the third man
was a friend. All three were actively concerned in the
management of the company. The business was successful
and the company acquired a delicatessen and a restaurant in
Dublin and Cork, the latter being run by the friend. At all
times, great care was taken to ensure equality between the
three men and the business was successful. The two brothers
then acquired a hotel which was part- financed through loans
from the company. They then set about developing this hotel
into three houses for use by the brothers for themselves and
their families. The friend was unaware of this loan. The
brothers then decided that they did not want their friend
working in the company any longer and sent him notice of a
meeting to be held where it was intended to remove him from
office. The friend then petitioned to have the company wound
up on the basis of oppression under s 212 and also on the just
equitable ground under s 569(e).
o Gannon J found that it would be inappropriate to make an
order under s 212 in view of the fundamental breakdown in
the relationship. Gannon J then explored the full facts. He
found unconvincing the reasons proposed by the brothers for
the removal of the friend in that there was no evidence of the
friend being unsatisfactory in his work.
o Gannon J referred to the judgment of Lord Wilberforce in the
case of Ebrahimi v Westbourne Galleries Ltd, where Lord
Wilberforce considered the nature of the quasi partnership.
Lord Wilberforce pointed out that a quasi partnership could
exist where there was an association formed or continued on
the basis of a personal relationship involving mutual
confidence, an agreement or understanding that all of the
members in the company would participate in the
management of the business and where there is restriction on
the transfer of shares. Lord Wilberforce went on to point out
that if a quasi partnership exists and neither partner no
longer has any confidence in the other so that they cannot
work together in the way originally contemplated, then the
relationship should be ended. He stated that the courts
should not be unduly fettered by matters of form and should
look to the true nature of the relationship between the
parties. Importantly, Lord Wilberforce pointed out that the
“just and equitable” provision allows the court to restrain a
party from invoking their strict legal rights where that would
undermine the relationship of mutual trust and confidence.
o In the present case Gannon J determined that the company in
question did possess sufficient characteristics to amount to a
quasi partnership. He then found that the decision to remove
the friend from the company was a “deliberate and calculated
repudiation by [the brothers] of that relationship of equality,
mutuality, trust and confidence between the three of them
which constituted the very essence of the company”.
o Gannon J recognised that the Companies Acts confers the
right upon shareholders to remove directors from the board.
However, he said there was a special underlying obligation
between the three men that so long as the business
continued, they were entitled to management participation
and that this obligation was so basic that, if broken, the
association between the men must be dissolved. Thu,s he felt
it was appropriate in the circumstances that the company be
wound up on just and equitable grounds.

 It has also been held that a company can be wound up on the just
and equitable ground where there is complete deadlock between
the shareholders. In these circumstances the activities of the
company can be paralysed, to the detriment of both the members
and the creditors. In the Irish case re Vehicle Buildings and
Insulations Ltd, two equal shareholders were unwilling to
cooperate with each other and Murphy J spoke of the objective fact
that the shareholders could not legally nor practically administer
the company without the cooperation of each other, and therefore
the business had to be wound up.

 It is also possible to wind up the company on the just and equitable


ground where there has been a failure of substratum. Failure of
substratum is where the purpose for which the company was
formed is no longer pursued or whether the company pursues a
different venture to that original envisaged. In Re Fuerta Ltd, the
HC wound up a company on this ground for the first time, on foot of
a creditor petition. The bank sought the company be wound up on
this ground in an attempt to protect its asset which was a nursing
home.

The Effect of a Winding Up Order


 If the winding up order is granted by the court, the following
consequences can ensue:
(1) The order dates back to the date of presentation of the
petition.
(2) The company is then analogous to a trustee of its assets.
(3) No proceedings can be taken against the company without
the court’s consent.
(4) Irrespective of who initiates a winding up petition, once an
order is made to wind up a company, it will operate in favour of all
creditors and all contributories, as if made on their joint petition.
(5) The liquidation of a company renders the board of directors
defunct, although individual directors are not discharged from
office. Such directors may in fact be asked by the liquidator to
supply him with information or assistance.
(6) The subsequent appointment of a liquidator over a company
whose property is under the control of a receiver does not
automatically affect receivership. However, the 2014 Act gives the
court the power to terminate or limit the receivership of the
application of the liquidator.
(7) In relation to contracts with the company, where the
liquidator decides the company cannot fulfil its contractual
obligations on a pre-liquidation contract, the other party must
make a claim for damages for breach of contract and prove his debt
as an ordinary creditor in the liquidation process.
(8) An order for the winding up of a company operates in law as
notice of dismissal to its employees. (Re Forster & Co Ltd 1887-
1888) However, employees may not be automatically dismissed if a
provisional liquidator is appointed who is ordered to carry on the
company’s business. Dismissed employees enjoy some statutory
protection as preferential creditors in respect of at least part of
their arrears of salaries, wages and redundancy payment
entitlements.
(9) The separate legal personality of the company will only
disappear when the company is dissolved.
(10) Invoices must state that the company is being wound-up.
(11) The liquidator assumes the powers of the directors and the
directors become powerless.

Distribution of Corporate Assets on a Winding Up


 Once the liquidator has realised all the corporate assets, his task
then is to distribute those assets in accordance with the Companies
Act.

Priorities on Distribution
 The liquidator must distribute the assets in accordance with said
priorities. We have considered this above. In general, the main
priorities in respect of distribution are as follows:
o ROT clauses
o property held on trust
o set-off
o fixed charges
o Super preferential debts that are trust monies
o The costs and expenses of winding up
o Preferential creditors
o Fixed charges over book debts
o Floating Charges
o Unsecured Creditors
o Members and Contributories

Briefly, some of the foregoing topics which have not been looked at so far
in this chapter (or course) are set out here:
 Property held on trust: Property that is not beneficially owned by
a company is not available for distribution by the liquidator.
Accordingly, when properties are held by the company in trust, the
beneficial owner is entitled to the property and does not have to
prove with other creditors. In Re Shanaghans Stamp Auctions
Ltd it was found that where a company held postage stamps in
trust for the investors, the investors were entitled to the stamps as
of right and did not have to prove in the winding up of the
company.

 Set-off: The right of set-off in liquidations arises by virtue of


bankruptcy law which states that where there are mutual debts as
between the insolvent person and any other person claiming as a
creditor, one debt or demand may be set-off against the other.

 Super preferential debts that are trust monies : PAYE and PRSI
employment contributions that have actually been deducted from
employees’ remuneration or which have not been paid over to the
Revenue Commissioners are deemed to have a “super
preferential” status. This is by virtue of s 16(2) of the Social
Welfare (Consolidation) Act 1993. The effect of this provision is to
create a statutory trust on certain monies in the company’s
possession of which the Revenue Commissioners are deemed to the
beneficial owners.

 Fixed charges over book debts: As we have already seen, fixed


charges generally rank in priority to preferential creditors.
o However, an exception exists in relation to fixed charges over
book debts by virtue of s 115 of the Finance Act 1986, as
amended by s 174 of the Finance Act 1995 (restated also
under s 1001 of the Taxes Consolidation Act 1997). This
provides that a holder of a fixed charge on book debts will
have to pay the company’s liabilities to the Revenue out of
monies realised from those debts so long as certain
notification requirements have been complied with.

Striking off the Company Register


 The Registrar of Companies may dissolve a company by striking it
off the register of Companies, either on the grounds that it is
defunct or that it has failed to make annual returns for one or more
years.
 If a company fails to make a return, the Registrar may write to the
company and state that unless the returns are made a notice will
be published with a view to striking the company off the register. If
no response is received or no adequate explanation is given, the
Registrar may proceed to strike the company off the register. The
Registrar may also strike the company off the register where he
has reasonable grounds to believe that the company is being wound
up but no liquidator appears to be acting or where the company
has been fully wound up but the relevant returns required to be
made with the liquidator have not been made.
 The Registrar of Companies power to strike a company off the
register is found in section 725 of CA 2014. The Registrar exercises
its power either at his own initiative – involuntary strike off -
725(1), or upon the application of the company to the Registrar –
voluntary strike off - 725(2)

Involuntary strike off


 Grounds for this laid down in 726 and the Registrar has followed
the procedure set out in 727, 728, 730 and 733(1).

Voluntary strike off


 Conditions laid down in 731 and the Registrar has followed
procedure laid down in 732 and 733(2).

Restoration of a company
 S. 737 lays down grounds for restoring a company that is dissolved
or struck off the register
 In any other grounds, application to court under s. 738(1) and
satisfies its condition.
 The notice provision of 738 and 739 must be complied with.
 Just and equitable will vary from case to case
 In the matter of Allenton Properties Limited, the court
considered the matter of an application under s. 738 to restore the
named company to the Register of companies so that the applicant
might appoint a receiver to enforce a security over the company.
o The court considered the just and equitable requirement and
put the onus on the applicant to satisfy the court that the
order it seeks is fair and proportionate to all whose rights
and interests may be affected by such restoration.
o In this case, the application was refused in light of the
potential prejudice to a third party, namely the purchaser.
 Once a company is put back in the register, it is deemed to have
continued in existence throughout the period during which it was
struck off. In Re Amantiss Enterprises, it was held that a
restoration order has retrospective effect and therefore all acts
done in the name or on behalf of the company during its dissolution
and restoration are retrospectively validated.

15. Realisation of Corporate Assets


 The Jurisdiction to Validate Dispositions: One of the main
functions of the liquidator is to ascertain, secure and gather in the
company’s assets. Liquidators have a statutory obligation to take
the company’s property under their control pursuant to s 596(1) of
the 2014 Act. In realising the company’s assets, a liquidator may
find that some or all of the company’s assets have been diverted
away from the company through unlawful dispositions, either
before or after the commencement of the winding up. For example,
he may find that certain creditors were preferred over other
creditors or that certain persons were recently granted floating
charges allowing them to leapfrog others in the queue for
distribution of the company’s assets. Furthermore, certain
transactions may have taken place since the commencement of the
winding up and before the liquidator had taken control over the
company. This chapter explores the powers of the liquidator to
restore assets which have been disposed of in this fashion back to
the company.

Unfair Preferences - 604


 When a company goes into liquidation, all the assets of the
company are frozen with a view to the liquidator then distributing
those assets in accordance with law.
 It follows from this that to allow an insolvent company on the verge
of being wound up to freely dispose of its assets would create a
loophole in the law of corporate insolvency. The rationale behind
this was explained in Detastet v Carroll, where it was stated by
Lord Ellenborough that it would be “unjust to permit a party on the
eve of bankruptcy to make a voluntary disposition of its property in
favour of a particular creditor, leaving the mere husk to rest”.
 The first issue we deal with in this chapter is the law of “unfair
preferences” (it used to be known as fraudulent preferences’). This
concerns a preference to one creditor over another by the
company, in the run-up to the company’s liquidation. This is dealt
with in s 604 of CA 2014.
o The net is cast wide. Section 604 applies to any: (a)
conveyance; (b) mortgage; or (c) delivery of goods, payment,
execution or other act, relating to property made or done by
or against a company, which is unable to pay its debts as they
become due, in favour of (i) any creditor of the company, or
(ii) any person on trust for any such creditor.
o An unfair preference is the giving of any of the foregoing to a
creditor “done with a view to giving” that creditor a
preference over the other creditors of the company, and s
604 makes it invalid.

 Subjective Element: The inclusion of the phrase “with a view to”


is the Achilles heel in s 604, because it introduces a subjective
element: the liquidator must prove the intention of the company to
make the unfair preference (in trying to prove this, the liquidator
can point to the intention of a director of the company, but still the
problem remains - it is very difficult to prove subjective intent).

 Time Element: Crucially, there is a time element. For any of the


above to be invalid, it must be the case that (a) a winding up of the
company commences within 6 months after the date of the doing of
the act, and (b) the company is, at the time of the commencement
of the winding up, unable to pay its debts.
o If the unfair preference is do in favour of a connected person,
the time element is broadened out. In the case of connected
persons, if the preference is made within 2 years before the
commencement of the winding up of the company then it
shall be deemed to have been an unfair preference (unless
the contrary is shown). A connected person is defined as a
person who was either:
(1) a director or shadow director of the company;
(2) a director’s spouse, parent, sibling or child;
(3) a related company; or
(4) any trustee of or surety or guarantor for the debt due to
any person referred to above.

The Intention to Prefer


 In order for a disposition to be a fraudulent preference, it must be
proved that the disposition was made with the intention of
preferring one creditor over another. This means that it must be
shown that the preference arose from the free volition of the
company. In this regard, it is well accepted that where a creditor
exerts such pressure on the debtor company so as to overbear the
free volition of the company, there will be no fraudulent
preference.
 An example of this can be seen in Parkes and Sons Ltd v Hong
Kong & Shanghai Banking Corporation. Here a company’s
controller caused the company to enter into a guarantee and
provide a mortgage in respect of the debts of another company.
The controller stated that the reason for entering into these
transactions was because of the pressure he had been placed under
by the bank. He had been pressed by the bank for information, had
many meetings with the bank and had been threatened with the
appointment of a receiver. Blayney J held that the correct inference
to draw from these facts was that the controller was concerned to
save the claimant company and this was his dominant motive in
giving the mortgage. He held that in view of the threat by the bank
to put in a receiver, he had no alternative but to comply with their
demand for further security. Importantly, it was also established
that by causing the company to give the mortgage he had taken
some pressure of his own personal guarantees in respect of the
debts. However Blayney J stated that on the facts it was not
established that this was the controller’s dominant motive.
 Another example of a fraudulent preference can be seen in Corran
Construction Company v Bank of Ireland Finance Ltd, where
the plaintiff company gave an equitable mortgage to the defendant
bank but the mortgage was not registered pursuant to s 99. When
the bank became aware that the mortgage was not registered, it
persuaded the company to give a fresh mortgage which was then
registered. However, within six months of giving this fresh
mortgage the company was wound up. The court held that there
was no intention to make a fraudulent preference. McWilliam J
stated that the intention of the controller was not necessarily to
prefer the defendant bank over the other creditors, but rather he
thought he was merely remedying a defect in a security which he
had already given to the company.
 It is usually easier to establish fraudulent preference where the
effect of the disposition in favour of a creditor is to reduce the
personal liability or exposure of a person connected with the
company. A classic example of this can be seen in Station Motors
Ltd v Allied Irish Bank Ltd. In this case a husband and wife were
the controllers of a company which had a large overdraft with the
defendant bank. They had also personally guaranteed the
company’s overdraft. Before the company went in to voluntary
liquidation, the controllers caused certain payments to be made
into the company’s overdraft which reduced the company’s
indebtedness and also their own personal exposure. Carroll J
looked at the facts and inferred from them that there was an
intention to prefer. These facts were that the disposition had the
effect of reducing the controllers’ personal exposures, the
disposition took place at a time when they knew the company was
insolvent, and of all the cheques presented to the bank, only those
which were to pay off the company’s overdraft were honoured by
the bank.
o In relation to the point that there was no direct evidence of
an intention to prefer, Carroll J followed the decision in Re
Kushler Ltd where Lord Green held that “where there is no
direct evidence of intention there is no rule of law which
precludes a court from drawing an inference of an intention
to prefer, in a case where some other possible explanation is
open.”
o Carroll J went on to state, quoting again from Re: Kushler,
that: “It must, however, be remembered that the inference to
be drawn is of something which has about it, at the least, a
taint of dishonesty, and, in extreme cases, much more than a
mere taint of dishonesty. The court is not in the habit of
drawing inferences which involve dishonesty or something
approaching dishonesty unless there are solid grounds for
drawing them.”

 That this “taint” of dishonestly must be present is also evident from


Le Chatelaine Thudichum Ltd v Conway. Here when company
ran into trading difficulties owing many debts, including unpaid
invoices, as well as rent, to the respondent. The applicant
“returned control of the premises” to the respondent and
performing a stock take on the same day. The respondent therefore
took possession of cash and stock present on the premises, totalling
just over €122,000, as well as control again over their rented
premises. The liquidator subsequently challenged this, bringing an
application for a declaration that the aforementioned transaction
was a fraudulent preference, or a fraudulent disposition, of
company assets.
o Having regard to the evidence of the managing director,
Murphy J was not satisfied that a fraudulent preference had
taken place as he was not satisfied that the dominant
intention behind the transfer was to prefer the respondent.
Assessing the ‘intention’ of the company, Murphy J.
considered the managing director’s evidence of his mindset
at the time of the transaction, which was that his intention
to hand over the stock and cash to the respondent was done
so on the basis that he understood at the time that he, the
respondent and the company accountant would arrive at a
compromise arrangement with the other creditors of the
company such that no individual would be left unduly
exposed to an unfair share of uncompensated loss in the form
of bad debts owed by the company. Therefore, Murphy J was
satisfied that there was no such ‘taint’ or inappropriate
inference arising and consequently that there was no
intention to prefer the respondent by allowing him to take the
monies and stock.
 Speaking about Kushler, Charleton J in Kennington (Official
Liquidator) v McGinley [2014] IEHC 356 stated:
o Station Motors, drawing on Re M Kushler, establishes four
propositions as to the appropriate approach. These are that:
(a) firstly, dominant intention is required;
(b) secondly, an intention to prefer must be proven as of
the time of the relevant disposition;
(c) thirdly, circumstantial evidence is to be assessed as to
its probability, the fact that there might be another
explanation for a payment is to be assessed as to the
competing proofs and is not necessarily an answer;
(d) fourthly, since what is involved here is a fraudulent
preference, solid grounds are needed since what is
required is an inference of something which has the
taint of dishonesty about it at the very least and which
in extreme cases may be very much more than that.
 The Onus of Proof: In proving all of the above factors, the general
rule is that the onus will fall on the liquidator. However, in the case
of a disposition in favour of a connected person, there is a
presumption that the disposition was made with a view to giving
that person a preference, unless the contrary is shown.
 The Beneficiary of the Disposition Must be a Creditor: It is
crucial, in order to establish fraudulent preference, that the
beneficiary of the preference is actually a creditor of the company.
This point is illustrated in the case of Parks & Sons Ltd v Hong
Kong & Shanghai Banking Corporation (cited above), where
the controller of a company caused the company to guarantee and
give a mortgage in respect of the debts of another company. It was
held that this could not be an unfair preference because the
beneficiary of the mortgage was not a creditor of the first company.
However, it should noted that this may constitute a fraudulent
disposition.

Fraudulent Dispositions - 608


 Under the old company law, applications which sought a
declaration that an unfair preference had taken place would usually
be brought together with an application that a “fraudulent
disposition” had taken place.
 The idea behind fraudulent dispositions was that what was
important was the effect of what had happened, i.e. it didn’t matter
what the subjective intention of the director or the company was.
Fraudulent dispositions is now at s 608 of CA 2014 (now under the
heading “Power of the court to order return of assets which have
been improperly transferred”).
 Section 608(1) states: The court has the following power where, on
the application of a liquidator, creditor or contributory of a
company which is being wound up, it can be shown to the
satisfaction of the court that— (a) any property of the company of
any kind whatsoever was disposed of either by way of conveyance,
transfer, mortgage, security, loan, or in any way whatsoever
whether by act or omission, direct or indirect, and (b) the effect of
such disposal was to perpetrate a fraud on the company, its
creditors or members.
 That power of the court is to order, if it deems it just and equitable
to do so, any person who appears to have (a) the use, control or
possession of the property concerned, or (b) the proceeds of the
sale or development of that property, to deliver it or them, or pay a
sum in respect thereof, to the liquidator on such terms or
conditions as the court thinks fit. In deciding whether it is just and
equitable to make an order under this section, the court must have
regard to the rights of persons who have bona fide and for value
acquired an interest in the property the subject of the application.
 Section 608 merely requires that the effect of the disposition is to
perpetrate a fraud on the company, its creditors or members,
depriving them of something to which it is, or to which they are,
lawfully entitled.
 Accordingly, there is no mens rea element per se. This, in addition
to the broader basis of such provision, makes this a useful remedy
in the event that an unfair preference is not found. Thus was seen
recently in the decision in Le Chatelaine Thudichum Ltd v
Conway, where though Murphy J was not satisfied that a
fraudulent (unfair) preference had occurred, he was of the view
that the transfer of the cash and stock to the respondent,
amounting to a ‘leap-frog’ of other creditors, constituted a
fraudulent disposition, saying: “I am satisfied that the disposition in
favour of the respondent had the effect of perpetrating a fraud on
the applicant in depriving it of its assets, and on the creditors in
diminishing the pool of assets available for distribution upon
liquidation. The creditors were thus denied the possibility of having
a portion of the debts owed to them repaid, and were accordingly
deprived of a benefit to which they were lawfully entitled.”
 The important distinction between fraudulent preferences and
fraudulent dispositions was noted by Warner J. in Clasper Group
Services Ltd. [1989] BCLC 143, when he said:“... There is a
distinction between a payment to a creditor as such and a payment
which, albeit made to a person who is a creditor, is the sheer
misapplication of the company’s money’.

 Hunt J, in Tucon, observed the following points: “The courts in


Ireland have held that the following behaviour has had the effect of
constituting a fraudulent disposition for the purposes of s. 139:-
(1) Entry on to company premises and the taking of possession of
a cash sum and the entire stock of an insolvent company in
lieu of rent owed: Le Chatelaine Thudichum Ltd. v.
Conway [2010] 1 I.R. 529.
(2) Personal expenditure by company directors which had been
recorded as business expenditure on behalf of the company:
Devey Enterprises Ltd. v. Devey [2012] 11.R. 127.
(3) Payment of the proceeds of company sales at a restaurant to
a related company: Kirby (as liquidator of Citywest Hire
Limited v. Petrolo Limited and Stokes [2014] IEHC 279.
(4) The use of company funds to settle the private debts of a
company director: Kirby (as official liquidator of MPS
Global .Limited) v. Muldowney [2014] IEHC 318.
(5) The courts have equally held that where the company has
received a benefit from a disposition, such as where sums
were used to discharge the liabilities of the company to
employees or suppliers, such sums do not fall to. be repaid
under the section, on the basis of the “just and equitable”
provision therein. In Petrolo Limited Finlay Geoghegan J.
stated as follows “On the evidence before the court, I find ...
that the sum of €29,334.92 was paid out of the Petrolo
account to the employees of Citywest for the period up to and
including 9 June 2013, in which they were employed by and
worked for the benefit of Citywest. It appears just and
equitable that such sum should be excluded from any order
for payment now to be made.”

 Hunt J, in Tucon, summarized the above: “The principles to be


discerned in relation to s. 139 from these cases are that improper
dispositions or misapplications of company property will be caught
by the section, but payments or dispositions in favour of creditors
or employees for the benefit of the company concerned will not be
included in an order made under the section. A simple payment
made to an unsecured creditor when the company is insolvent will
not, without more, trigger the operation of the section. It is not the
case that every otherwise lawful payment made by an insolvent
company to a legitimate unsecured creditor will automatically
amount to a fraudulent disposition. The type of additional
ingredient necessary to trigger the application of the section is
illustrated by the features of the cases listed above. The additional
ingredient must amount to an impropriety before the provisions of
the section are engaged.”

THE VALIDATION OF FLOATING CHARGES


 The old rule which presumed that floating charges were invalid if
they were created (1) to secure past debts, (2) within 12 months of
the liquidation, and (3) not supported by fresh consideration, has
been re-enacted in s 597. Section 597(1) states: “Where a company
is being wound up, a floating charge on the undertaking or
property of the company created within 12 months before the date
of commencement of the winding up shall, unless it is proved that
the company immediately after the creation of the charge was
solvent, be invalid.”
 This rule does not apply to money actually advanced or paid, or the
actual price or value of goods or services sold or supplied, to the
company at the time of or subsequently to the creation of, and in
consideration for, the charge. Where a floating charge on the
undertaking or property of a company is created in favour of a
connected person, the rule in s 597(1) applies to the charge as if
the period of 12 months mentioned in that subsection were a
period of 2 years.
 Section 598(1) states that where
(a) a company is being wound up,
(b) the company was, within 12 months before the date of
commencement of the winding up, indebted to any officer of the
company or a connected person,
(c) such indebtedness was discharged whether wholly or partly by the
company or by any other person, and
(d) the company created a floating charge on any of its assets or
property within 12 months before the date of commencement of the
winding up in favour of the officer or connected person to whom
such company was indebted,
 then such charge shall be invalid to the extent of the repayment
referred to in paragraph (c) unless it is proved that the
company immediately after the creation of the charge was
solvent. “Officer” includes a spouse, civil partner, child or nominee
of an officer and the reference in this subsection to a child of an
officer shall be deemed to include a child of the officer’s civil
partner who is ordinarily resident with the officer and the civil
partner.

Post-Commencement Dispositions
 The property of a company at its winding up must be applied
in satisfaction of its liabilities pari passu.
 The central principle behind this is that on liquidation all assets
which belong to the company at the commencement of the winding
up should be applied and distributed in accordance with the
priority determined by law.
 As we have already seen, the commencement of a winding up is
deemed to occur at the time of the presentation of the petition in
an official winding up.
 If there is a disposition of assets after this point in time then,
pursuant to s 602 of CA 2014, that disposition will be deemed to be
void unless the court otherwise orders.
 Section 602(1) states: This section applies to each of the following
acts in any winding up of a company: (a) any disposition of the
property of the company; (b) any transfer of shares in the company;
or c) any alteration in the status of the members of the company,
made after the commencement of the winding up.
 Section 602(2) says that any of the above “shall, unless the court
otherwise orders, be void” if they were done without the sanction
of the liquidator of the company. Nothing in section 602 makes a
person who does an act which is rendered void by s 602 liable for
doing the act, if it was done by the person at the request of the
company, unless it is proved that, prior to the person’s doing the
act, the person had actual notice that the company was being
wound up. If a company that is being wound up makes a request of
a person to do an act that is prohibited by s 602 and the company
does not, at or before the time of making the request, inform the
person that it is being wound up, the company and any officer of it
who is in default is guilty of a category 2 offence.

The Meaning of “Disposition”


 Any transfer of the company’s assets will constitute a disposition,
whether or not consideration was paid for those assets. This will
include gifts, payments, sales, conveyances, guarantees, charges
etc.
 The question of whether the appointment of a receiver after the
commencement of the winding up could constitute a disposition for
the purposes of s 602 was addressed in the case of re Motor
Racing Circuits Ltd
o Here the Supreme Court rejected the argument that the mere
power of the receiver to take possession of the assets meant
there was an alteration or reduction of the assets after the
company was wound up. In the Supreme Court’s view, the
alteration in respect of the assets of the company had already
taken place on the execution of the debenture, which was
prior to the winding up.
Banking Transactions after the Commencement of a Winding up
 Payments on cheques: It is established law that the signing of a
cheque does not constitute a disposition in that the disposition does
not occur until the cheque is honoured by the bank. In Re
Ashmark Ltd (No 2),Blayney J stated that the fact that a cheque
was drawn before the commencement of a winding up was
immaterial. The only relevant fact was whether the cheque was
honoured after the commencement of the winding up, and if it was
so honoured, then payment on foot of the cheque would be invalid
unless the court decided to uphold it.

 Lodgments in to an overdrawn account : Where a company has


an overdraft with the bank, then the company is indebted to the
bank to the amount of the overdraft. Therefore, any payments into
the overdrawn bank account would constitute a repayment of the
debt. In the case of Re Gray’s Inn Construction Ltd, a company
paid certain sums into its overdrawn bank account after the
commencement of the winding. In the Court of Appeal, it was held
that these were dispositions whereby the sums of money paid into
the account discharged the company’s indebtedness to the bank,
and that such payment constituted a disposition.

 Payments out of a company’s accounts : As already stated, a


compulsory winding up is deemed to commence at the time of the
presentation of the winding up petition. In practice, notice of this
petition is received by the bank and the proper course for the bank
to adopt upon receiving such notice is to freeze the company’s
existing accounts, whether in credit or overdraft, in order that no
further dealings on them may take place save in accordance with
the instructions of the court. If, however, a payment is made out of
the account to the credit of the company, the question arises as to
whether or not the liquidator should seek to recover those monies
as against the bank or as against the recipient of the monies.
o This question was addressed in the Court of Appeal in
England in the case of Hollicourt v Bank of Ireland. The
Court of Appeal found that the provision, which was the
equivalent of s 602, was not intended to impose liability on
the bank in those circumstances. The purpose of the
provision could be accomplished without impinging upon the
validity of the intermediate steps in the disposition by
cheque. In particular, Mummery LJ rejected that there had
been any disposition by the company to the bank and said
that the beneficial interest of the property represented by the
cheque was never transferred to the bank. In particular,
Mummery LJ quoted from the Australian case of re Mai
Bower’s Macquarie Electrical Ltd, where Street CJ held that
the equivalent of s 602 operated to render the disposition
void so far as concerns the recipient of the property. It did
not operate to affect the agencies interposing between
the company and the recipient. He said the purpose of
the legislation was to enable the liquidator to recover
the property from the ultimate recipient.

 The law in Ireland in this regard is the reverse. In Re Industrial


Services Company (Dublin) Ltd, Kearns J rejected the reasoning
in both Hollicourt and Re Mai Bower’s Macquarie Electrical Ltd
(cited above). He said the meaning of s 602 is plain and
straightforward and had the legislature intended that some
qualification would apply in the case of banks, it would have been
easy to specify such. He stated that the bank had a very special
role in winding up situations, and that there was a large
commercial benefit to ensuring that banks excised vigilance.
o In rejecting the reasoning of Hollicourt, Kearns J preferred to
rely on the cases of re Pat Ruth Ltd and re Gray’s Inns
Construction. Kearns J held that these cases were authority
for the proposition that payments into and out of a company
bank account constituted disposition.
 However, as Courtney points out, this reasoning can be criticised
on the basis that in the present case the payments made were out
of an account in credit, whereas in the above cases the payments
made where in relation to monies lodged in to overdrawn accounts.
As Courtney points out, there is a material difference between
both, and he states that the interpretation given by Kearns J to the
term disposition operates to perpetrate an injustice on a person
who has not benefited from the transaction and that the payment
into a bank account is only a disposition where that account is
overdrawn.
 In the case of Re Worldport Ireland Ltd, Clarke J looked at this
issue from a different perspective. In this case the sum of money
was paid out of the company’s bank account after the
commencement of the winding up. This sum was paid out by the
bank in favour of the company’s parent. At all material times, the
bank account was in credit so that the bank obtained no
commercial advantage from the transfer. The bank argued that the
parent should be liable as the ultimate recipient of the monies. The
parent relied on the case of Re Industrial Services (cited above).
Clarke J held that it would be unrealistic to say that the parent
company was not a recipient. He preferred the view therefore that
both the parent and the bank were equally liable as dual
recipients of the money. He said if the bank has a dual role,
following the reasoning of Kearns J in Industrial Services, then it
seemed to him that he must regard the case before him as being
one where there were “dual disponees”.
 Debiting of Interest: In the case of Re Ashmark Ltd, a company
had an overdraft account with AIB which, on the date of the
commencement of the winding up, stood in credit. However, the
interest on the account, which had accrued whilst the company had
been overdrawn, was debited from the account after the
commencement of the winding up. This resulted in the credit
balance of the company’s bank account being reduced. Lardner J
held that the debiting of this interest was not a disposition within
the meaning of s 602. However, where interest accrues after the
commencement of the winding up, it cannot be debited but will
remain as a liability due to the bank.

The Jurisdiction to Validate Dispositions


 The principle here was succinctly set down in the case of re
McBirney& Co Ltd, where Murphy J stated that in order for a
disposition to be validated: “the making of the payment must be
shown to be for the benefit of the company or at least desirable in
the interests of the unsecured creditors as a body”.
 A good example of this can be seen in the case of RE AI Levy
(Holdings) Ltd. In this case a disposition was validated where,
after the presentation of the petition, it sold its leasehold interest in
a property because the lease was liable to be forfeited if it the
tenant was wound up. By reason of this, the company sold the lease
at market value before this happened. A further disposition was the
payment of arrears of rent to the landlord, this being a condition to
the landlord’s consent to the assignment of the lease. Such
dispositions were clearly to the benefit of the creditors of the
company and therefore the disposition was validated.
 In Re Industrial Services Company (Dublin) (No 2), the bank had
effected withdrawals from an account in credit after the
commencement of the winding up which, as we have already seen,
Kearns J held to be voidable. The validation application was heard
by McCracken J. McCracken J stated that he would validate any
payments in respect of current debts which were made in the
ordinary course of business, whether or not these debts arose
before or after the winding up, as these were payments which
the liquidator would probably have to make in any event.
o However, he would not validate any payments which were
not made in the ordinary course of business. Therefore, he
did not validate payments to directors or persons connected
with the Directors. These latter payments were made out of
the company’s bank account and, McCracken J made clear,
that to avoid any form of double accounting, if the liquidator
would recover the money from the bank (as Kearns J held it
could do), the liquidator could not also seek to recover the
monies from the ultimate recipients and could not do
anything to hinder the bank from seeking to recover such
monies from those recipients itself.

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