Congil Construction Limited & Companies Acts: Mannion -v- Connolly & Anor IEHC 544

On the 28 November 2013 the High Court restricted two directors of an insolvent construction company, Congil Construction Limited, for a period of five years.

The directors, a husband and wife, were the sole directors of the company which had been wound up on 26 April 2010. The Court found that the directors had failed to act responsibly in relation to the affairs of the company and its creditors on the basis that they had allowed the company’s assets to be treated for the benefit only of secured creditors of a parent and other related companies and the directors themselves.

The company had carried out construction projects for a number of related companies, the directors and third parties.  For each project undertaken by it funds were advanced to it by the directors or a related company with the intention that such advances would be repaid by the company out of the proceeds of the building contract. This had the consequence that at any given time one of its most valuable assets was its work in progress (WIP) under such contracts. The lands upon which works were carried out were in the ownership of other contracting parties and were mortgaged by those parties as security for bank borrowings used to finance the construction works. The WIP was captured by the terms of these mortgages in favour of the secured bank and the bank could therefore appropriate the WIP upon realisation of its security. When the units in question were sold the proceeds of sales reduced the borrowings of the parent company and of the directors without any appropriate or commensurate benefits accruing to the company or its own distinct creditors.

The Court acknowledged that while the conduct of the directors fell short of what could be described as blatantly or grossly reckless, they failed to reach the standard of “suitable responsibility” required of company directors in such circumstances. 

The Court concluded that by continuing to trade in late 2008 the directors should have known that they were running the risk of trading while insolvent and the point had been reached at which, acting responsibly, they were obliged to take steps to protect the distinct position of the company’s creditors.

The Court took the following factors into account:

• A number of transactions in 2008 were interpreted by the Liquidator as effectively preferring related companies over other creditors of the company.
• The company had unsecured trade creditors in the amount of €3.629m at 30 April 2009. This figure was €5.113m 12 months later and had further increased to €5.129m at winding up.
• There were a number of transactions carried out for the benefit of the directors and/or related companies which were billed at material or subcontractor cost. There was no allowance or provision made for overheads. This resulted in a loss of profit for the company that could have been realised.
• Rental income received in respect of units owned by the company were not apportioned to it.

The Court acknowledged that one of the directors took no active part in running the company and had entrusted it entirely to her husband but emphasised that it is well settled that inactivity or non-involvement on the part of a director is no answer to an application for restriction.  Precedent caselaw has established that an individual, who accepts the position of director of a company, even if only to fulfil the legal requirement of two directors, must accept the responsibilities and potential consequences that accompany such a position.  The Court stated that a director who has played no part whatsoever in the conduct of the affairs of an insolvent company cannot claim to have acted responsibly in relation to them.

The Court restricted both directors pursuant to Section 150(1) of the Companies Act 1990 for a period of 5 years.

Contributed by Niamh Cacciato.