In our Spring e-zine, we reported on a decision of the Australian High Court which examined the elements of a shadow directorship (view previous article here). The Irish High Court has since delivered a judgment in which it found that the former secretary/book-keeper of an insolvent company was not a shadow director of the company: In Re Devona Ltd: Pyne v Van Deventer IEHC 263 (Unreported, High Court, Dunne J, 18 May 2012).

Facts
The applicant, the official liquidator of D & K Partnership, sought an order pursuant to section 150 of the Companies Act 1990 against three directors of the company and the company’s former secretary/book-keeper. The issue before the Court was whether the company secretary/book-keeper was a “shadow director” for the purpose of a section 150 restriction application.

Section 150 of the Companies Act 1990 enables a liquidator to apply to the High Court to restrict a director or shadow director from acting as a director or secretary of any company for a period of five years.

The liquidator submitted that the secretary/book-keeper was a shadow director as he had a central role in directing the financial dealings of the company and had effectively instructed the directors in this regard. He advised the Court that the secretary/book-keeper had:

• On one occasion amended the company’s statement of affairs after he noticed a number of material inaccuracies in the statement. The liquidator submitted that the fact that the directors allowed the amendments demonstrated that the secretary/book-keeper was the person with financial control and that he exerted a considerable level of influence over the directors
• Prepared a report in 2008 titled ‘Company Development and Economics’, which addressed the difficulties the company was facing at that time and suggested possible steps that could be taken in order to help it survive
• Executed contracts with Xerox in 2006 for the lease of two pieces of equipment, involving significant sums of money
• For a particular period of time been the company’s point of contact with the Revenue Commissioners

High Court Decision
Dunne J cited the decision of McKechnie J in Hocroft Developments Limited (In Liquidation), Dowall v. Cullen & Ors IEHC 580, which provided that before a person can be declared to be a shadow director, two requirements must be met, namely: (i) directions or instructions must have been given by the person in question; and (ii) the true directors (or a majority of them) must have been accustomed to acting upon such instructions or directions.

McKechnie J also set out a number of general principles derived from the case-law on this issue, including:

• The making of a communication by the person in question and the reliance thereon by the true directors must have been by habitual force of habit giving rise to “a well established practice or pattern” of behaviour. The communication, reliance or both cannot have been infrequent, rare or occasional
• Advices given by a person in a professional capacity (including those upon which directors are accustomed to act) are to be expressly excluded
• The nature of the affected business must be of a type in respect of which the directors would as a matter of course act executively
• Where the involvement of the person in question is explicable, or at least equally explicable, by the exercise of a role other than that of director, a positive finding of a shadow directorship should not be made

Dunne J believed that despite the altering of the statement of affairs at the behest of the secretary/book-keeper it was impossible to say that there was an element of “force of habit” in relation to the conduct of the directors vis-à-vis the secretary/book-keeper as a general proposition. The judge found that there was simply no evidence before the Court of anything that fell into the description of habitual communication and reliance thereon and that consequently the altering of the statement of affairs did not satisfy one of the key criteria set out by McKechnie J in Hocroft.

She also noted that while the report prepared by the secretary/book-keeper was an important document in relation to the company, it did not, even when taken in conjunction with the altering of the company’s statement of affairs, establish that the making of such communications and reliance thereon was habitual.

In relation to the contracts with Xerox in 2006 and the communications with the Revenue Commissioners, Dunne J decided that the secretary/book-keeper’s dealings were explicable by reference to his role within the company and did not point to him being a shadow director.

Finally, in relation to the liquidator’s contention that the secretary/book-keeper had been in financial control of the company Dunne J considered it significant that he had no authority to sign cheques on behalf of the company and nor was he ever considered by the company’s bank as someone from whom security should be taken in respect of loans to the company.

Accordingly, Dunne J rejected the liquidator’s application and concluded that the secretary/book-keeper was not a shadow director of the company.

This decision is under appeal to the Supreme Court.

Contributed by Delia McMahon